Chapter 10

What is an IRA rollover?

A tax-free distribution of cash or other property from one retirement plan, which is deposited into another retirement plan.

How can the IRA be set up?

As either an individual retirement account or an individual retirement annuity.

How are distributions from traditional IRAs treated?

As ordinary income. Any nondeductible contributions are received income-tax free.

Why is longevity insurance a low-cost annuity?

Because there are no cash values or death benefits in the policy.

What is an early withdrawal from a traditional IRA?

Distributions from a traditional IRA before age 59½ are considered an early withdrawal, and subject to a 10% tax penalty unless certain conditions apply.

What are the major types of annuities sold today?

Fixed annuity, varied annuity, equity-indexed annuity.

What are the disadvantages of longevity insurance?

Heirs lose money if the person dies during the deferral period, i.e., no death benefit. Once purchased, funds are locked up, so no access to emergency funds.

What fees and expenses are contained in a variable annuity?

Investment management charge, Administrative charge, Mortality and expense risk charge, Surrender charge

How does an annuity compare to life insurance?

It is the opposite of life insurance in that life insurance protects against dying too soon and an annuity protects against living too long.

What is a fixed annuity?

It pays periodic income payments that are guaranteed and fixed in amount. Payouts are a fixed amount.

What is a disadvantage of a fixed annuity?

Little or no protection against inflation.

What happens if you cancel an annuity; are there fees involved?

Most annuities have a surrender charge if the annuity is surrendered during the early years of the contract. It is usually a percentage of the account value and declines over time.

What is a variable annuity?

Pays a lifetime income, but the income payments vary depending on common stock prices.

What is a nondeductible IRA?

The full IRA tax deduction is gradually phased out as a person's modified gross income increases. Taxpayers with incomes that exceed the phase-out limits can contribute to a nondeductible IRA.

What does an annuity provide protection against?

The risk of excessive longevity.

What is the purpose of a variable annuity?

To provide an inflation hedge by maintaining the real purchasing power of the payments.

What are the 2 types of IRA?

Traditional and Roth

Are IRA funds adequate?

Unless a life annuity is purchased, retirees face the risk of still being alive after the IRA account is exhausted. Financial planners recommend that the initial withdrawal rate should be limited to 4 to 5% of IRA assets.

What is longevity insurance?

A generic name for a single-premium deferred annuity that begins paying benefits only at an advanced age, typically age 85.

What is an annuity?

A periodic payment that continues for a fixed period or for the duration of a designated life or lives.

What is a spousal IRA?

Allows a spouse who is not in the paid labor force, or a low-earning spouse to make a fully deductible contribution to a traditional IRA.

What is a traditional IRA?

Allows workers to take a tax deduction for part or all of their IRA contributions The investment income accumulates income-tax free on a tax-deferred basis.

What is an individual retirement account?

Allows workers with taxable compensation to make annual contributions to a retirement plan up to certain limits and receive favorable income-tax treatment.

Under what conditions can you withdraw from a traditional IRA?

Distributions are used to pay for unreimbursed medical expenses in excess of 10% of adjusted gross income, health insurance premiums paid while unemployed, disability of the IRA owner, distributions to the beneficiary of a deceased IRA owner, distributions are part of a series of substantially equal payments paid over your lifetime or lives of you and your beneficiary, distributions are not more than your qualified higher education expenses, distributions to buy, build, or rebuild a first home, distributions due to an IRS levy on the qualified plan, qualified reservist distributions.

What is the exclusion ratio used to determine the taxable and nontaxable portions of the annuity payment?

Investment in the contract/ expected return

How is traditional IRA taxed?

Investment income accumulates income-tax free on a tax-deferred basis. Distributions are taxed as ordinary income.

What is an annuity unit?

It is an accumulation unit, a sub-account of the retiree's total accumulated annuity. These units represent a fixed share of ownership of the insurer's accounts portfolio.

What are the advantages of longevity insurance?

Monthly benefits kick in when other assets may be diminished. Low cost. Can be purchased with an inflation hedge.

What is an accumulation period?

Period prior to retirement when premiums are credited with interest.

What is a guaranteed death benefit?

Protects the principal against loss due to market declines.

How does a Roth IRA provide substantial tax advantages?

The annual contributions are not tax deductible. The investment income is income-tax free. Qualified distributions are not taxable. Contributions can be made after age 70½. Generous income limits. A traditional IRA can be converted to a Roth IRA.

What is the downside of a fixed annuity?

There is little or no protection against inflation.