federal tax considerations

material change

A "material change" is defined as any increase in the death benefit under the contract.

IRA spousal beneficiary withdrawls

Although spousal beneficiaries on an IRA may make withdrawals sooner, they must start withdrawals no later than April 1st of the year after they turn age 70 1/2.

Proceeds of life insurance

Although the amount of life insurance that a customer has is included in the value of their estate upon death, the proceeds payable to a designated beneficiary are paid free of taxes and probate. If there is no designated beneficiary, the proceeds will be payable to the insured's estate, which is subject to probate, and their assets will be distributed according to the terms of their will, if any.

Internal Revenue Code Section 1035 exchange

An Internal Revenue Code Section 1035 exchange does not avoid taxes, it just defers them until the second policy is surrendered. When the second policy is surrendered for more than the client's original cost basis, any gain is taxable as ordinary income. Life insurance products and retirement plans are not eligible for capital gain tax treatment.

tax deductible IRA distributions

Distributions made from a tax deductible IRA to pay for qualified higher education expenses are taxable, but the 10% premature distribution penalty is waived.

luxury taxes

Luxury taxes are not levied upon death

IRC Section 1035 exchanges

On an IRC Section 1035 exchange, taxes are deferred until the second policy is surrendered, but they are not avoided. The rules state that an exchange may be made with the same insurance company or a different company, but if the exchange involves life insurance, both policies must be on the life of the same person. Life insurance may be exchanged for life insurance or annuities, and annuities may be exchanged for other annuities, but annuities may not be exchanged for life insurance.

How is a ROTH IRA different from a Traditional IRA

ROTH IRAs are not subject to the required minimum distribution rules.

Roth IRA withdrawal penalty

Since contributions to a ROTH IRA are never tax deductible, the client's cost basis consists of the amount of after-tax dollars they contributed, which in this case was $20,000. IRS rules state that on a ROTH, a client may withdraw the amount of after-tax dollars they invested at any time, without tax or penalty.

maximum lifetime distribution of IRA

The maximum lifetime distribution that can be made from an IRA for qualified first-time home buyer expenses is $10,000. Although such distributions are taxable, the 10% premature distribution penalty is waived.

Which of the following is true when a person with an IRA dies and their surviving spouse is the beneficiary

The spouse is entitled to the marital deduction

annuities

although annuities do not offer life insurance protection, they do contain a death benefit, which consists of the amount of premiums paid, or the cash value in the contract, whichever is more.

The gift of a life insurance policy to a charity

reates an income tax deduction at the time of the gift

What can a surviving spouse do if a IRA participant dies before distributions begin

they May roll the account over to another IRA

individual contributions to Roth IRA

voluntary and are not tax deductible

modified endowment contract

Cash value life insurance policies that fail the seven-pay test, which is administered when the policy is first issued, are considered to be Modified Endowment Contracts (MECs) and as such lose some of their favorable tax treatment. Although a policy may initially pass the seven-pay test, making a "material change" to the policy later on could cause the seven-pay test to be administered again, thereby causing the policy to be considered an MEC from that point on.

modified endowment contracts

The IRS considers them to be a type of investment product

Roth IRA early withdrawal penalty

The IRS levies a 10% IRS early withdrawal penalty on distributions taken from IRAs by an individual under age 59 1/2. However, this penalty is waived under certain circumstances, such as distributions due to: death of the IRA owner, disability of the IRA owner, medical expenses that exceed 10% of the individual's adjusted gross income, made to an IRA owner who is unemployed for payment of health insurance premiums, made for qualified higher education expenses for the IRA owner, the IRA owner's spouse, or children or grandchildren of either, made for first time home buyer expense ($10,000 lifetime limit), but NOT for bankruptcy.

taxability of Premiums paid by an employer for group life insurance

IRS rules specify the premium cost for the first $50,000 of life insurance coverage provided under an employer-provided group term life insurance plan does not have to be reported as income and is not taxed to an employee. However, amounts in excess of $50,000 paid for an employee by an employer will trigger taxable income for the "economic value" of the coverage provided to the employee.

Modified Endowment contract distributions

MECs have tax implications that differ from other types of life insurance policies. MECs are policies that fail the seven-pay test, which means that the cash value is building too rapidly within the policy. Once a policy is classified as a MEC it will remain a MEC for the life of the contract. In general, when an insured takes cash surrender of a life insurance policy they are only taxed to the extent that the amount they withdraw exceeds the amount they paid in, since life insurance cash surrenders are taxed first-in-first-out (FIFO). However, MEC distributions are taxed as a withdrawal of interest first and return of premium second, or last-in-first-out (LIFO). MECs are also subject to a 10% penalty tax on the interest withdrawn, if taken when the insured is under age 59 1/2.

annuity partial withdrawal

On partial withdrawals from annuities, the first money out is considered to be the interest earnings, so in this case, the entire $5,000 would be taxable as ordinary income. In addition, since the client is under age 59 1/2, a 10% premature distribution penalty would also be levied by the IRS.

tax implication on a non-qualified tax-deferred annuity

they must pay taxes on the difference between the premium paid and the cash value ( premiums paid +interest accrued).

A 1035 exchange

A 1035 exchange is very similar to a rollover of a qualified plan. If an insured takes cash surrender of their life insurance policy or annuity they must pay ordinary income tax on any interest they received. The IRS will allow the insured/annuitant to defer paying this tax if they execute a 1035 exchange. The 1035 exchange guidelines state that the new life insurance policy must be written on the life of the same person and the new annuity benefits must be payable to the same person. The exchange does not have to be done with the same insurance company, and there is no limit on the amount that can be exchanged. Certain exchanges are not allowed, such as an exchange of an annuity for a life insurance policy. This is not an allowable 1035 exchange since it will put the individual in a better tax position (annuity death benefits are taxable and life insurance death benefits are not). 1035 exchanges are usually utilized to obtain a policy with a higher rate of return. A viatical settlement is utilized when a terminally ill insured sells their life insurance policy to an investor for cash.