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withdrawal is made from a Traditional IRA prior to age 59 1/2

10% penalty is due, unless an exception applies. The 10% is assessed on the amount withdrawn.

Defined benefit plans

100% funded by the employer. They promise to pay each participant an income benefit at retirement age. participants bear the investment risk. If investments perform poorly, participants' accounts will be worth less and provide less retirement benefits.

Diego is a single person, age 75, who has an income of $25,000 from Social Security, $15,000 from investment interest, and $3,000 from part-time work. What is the maximum contribution he can make to a Roth IRA?

3000 Contributions can be made to Roth IRAs at any age, provided the worker has compensation that does not exceed the MAGI threshold. The contribution is limited to 100% of compensation from active work - not passive sources such as Social Security or investments.

owner of a nonqualified variable annuity age 56, wishes to surrender her contract. Surrender charges no longer apply. What are the tax consequences of cashing in the contract?

A penalty of 10% applies on withdrawals prior to age 59 1/2 on top of the tax that applies to the contract gains. The gains in the contract are taxed as ordinary income.

Federal income tax deductions are not available to participants of Roth IRAs.

All Roth contributions are made with after-tax money. Unlike a Traditional IRA, there is no federal income tax deduction available.

accumulation phase of a variable annuity

All dividends, interest, and capital gains earned during the accumulation period may be reinvested tax free. as the investor continues to make contributions into her variable annuity contract, the number of accumulation units purchased will increase, while the value of these units will fluctuate, based on the performance of the assets in the insurance company's separate account, which is its investment portfolio.

Payout phase

Annuity units are associated with the payout, or annuity, phase of a variable annuity contract.

minimum distributions never required during the owner's lifetime

Qualified withdrawals from Roth IRAs are not taxable, so there is no requirement to withdraw money during the owner's lifetime.

trad ira benefic

Beneficiaries pay ordinary income tax on withdrawals from Traditional IRAs. But withdrawals by a beneficiary after the account owner's death is one exception to the 10% penalty. The exception is not available to a spouse beneficiary who elects to treat the IRA as his/her own

qualified (tax-free) Roth distribution

first is a five-year clock, which starts when he makes his first contribution to any Roth - in 2014 in this case. The second condition is that the withdrawal be made after age 59 ½.

non-qualified retirement account

funded with after-tax dollars.

Vesting

ERISA plan participant's right to receive benefits from the plan, without a risk of forfeiture, such as the participant's dismissal from work

only part of his Traditional IRA contribution is deductible this year.

For those covered by a retirement plan at work, their income level determines whether a Traditional IRA contribution is fully deductible, partially deductible or non-deductible. If their income level falls in a certain range, the contribution is partially deductible.

Keogh Plan

HR-10 plans, are available for self-employed persons only.

If Jack turns 70 on May 1, 2017, how many Required Minimum Distribution (RMDs) must he take before the end of 2018?

He must take his first RMD by his Required Beginning Date of April 1, 2018. He must take his second RMD by December 31, 2018. This is always the case.

Jeff owns three Traditional IRAs. How many must he use for purposes of calculating the Required Minimum Distribution (RMD) for each year?

If a person owns multiple Traditional IRAs, the RMD may be taken from any one, or any combination. But the RMD amount must be calculated by combining the prior December 31 value of all Traditional IRAs.

In which case does a gain on mutual fund shares held in an IRA qualify for long-term capital gains treatment?

In which case does a gain on mutual fund shares held in an IRA qualify for long-term capital gains treatment?

catch-up contribution to a Traditional IRA

Individuals age 50 or over may

deductible contributions to a Traditional IRA

One is based on whether the IRA owner, or the owner's spouse, is covered by a retirement plan at work. In this case the contribution would not be tax deductible. The other is based on their income. If neither spouse is covered at work, then both may make deductible contributions.

three Traditional IRAs that he wishes to consolidate into one

Only one rollover from one IRA to another is allowed during any 12-month period. However, there is no limit on direct transfers between IRAs. He can complete a direct transfer from IRA B to C.

An annuity owner, age 65, has chosen to annuitize a qualified annuity. Each monthly income payment will be

Qualified annuities are funded with pre-tax dollars. Since neither the purchase payments nor the earnings in these annuities have been taxed, monthly payments from qualified annuities are fully taxable.

employer-sponsored IRA plan

SIMPLE IRAs and SEP-IRAs

suitability determination for a variable annuity purchase

Surrender period and surrender charges Potential tax implications for early distributions Death benefits NOT Credit rating of the insurance company

Jim wants to know if he can take a penalty-free withdrawal from his Traditional IRA at age 50 to pay for his child's college tuition.

The exception to the 10% penalty for higher education expenses is fairly liberal. Expenses must only be qualified - i.e., used to pay for tuition, fees, books, supplies or equipment required to attend an eligible institution.

On the advice of her financial professional, Meredith opens a 529 plan with Virginia's CollegeAmerica program. She is a resident of Alabama. When must the advisor give her an out-of-state plan disclosure notice?

The out-of-state disclosure must be delivered to the customer at or prior to the sale of securities involved in an out-of-state 529 plan.

Nilda set up a 529 plan several years ago for her daughter. Then, Nilda became unemployed and needed to distribute all of the money, when her daughter was only 16 years old. Nilda has no qualified educational expenses. Must she pay a penalty?

The penalty is 10% of the taxable distribution, and there are no hardship withdrawals from 529 plans. Since she has no qualified educational expenses, all of the earnings portion of the distribution is taxable, and she also must pay a 10% penalty on this portion.

In which case can Maurice take a qualified distribution from his Roth IRA before he meets the five-year holding period requirement, measured from his first Roth IRA contribution?

There are no exceptions to the five-year holding period requirement. It must be met to take a qualified distribution from a Roth IRA.

Walter, age 40, wants to sell his home and buy a new one right away, using his Traditional IRA to make the down payment. As a homebuyer, can he qualify for an exception to the 10% penalty on Traditional IRA withdrawals before age 59 ½?

This exception is only available to a first-time homebuyer. The new home is considered a first home if neither the IRA owner nor a spouse had an interest in a main home in the two years before the home's purchase. He would have to wait at least two years between transactions to qualify.

withdrawals from a Traditional IRA are not fully taxable

Those representing a return of non-deductible contributions Earnings accumulate in a Traditional IRA on a tax-deferred basis, and withdrawals are fully taxable, unless they represent a return of non-deductible contributions.

Trad ira

account may be opened and contributions may be made by anyone who: 1) has earned income; and 2) is under age 70&½ at the end of a tax year. Each account owner may contribute to the plan the greater of 100% of earned income or up to $6,000 per year, and owners who are age 50 or older may add an extra $1,000 as a catch-up contribution. Note that the contribution limit was increased to $6,000 from $5,500 on January 1st, 2019. personal accounts, always held in individual name - never joint. A non-working spouse with no compensation can open a Traditional IRA and contribute to it if the couple files a joint tax return and the combined contributions of both spouses does not exceed their reported taxable compensation. withdrawals from a Traditional IRA must begin by the year following the year in which the owner turns age 70 ½. The maximum contribution to an IRA is $6,000. The IRS allows catch-up contributions of $1,000 for individuals age 50 or above. Additionally, withdrawals can begin after the investor reaches the age of 59 ½. contrib in cash

Trad ira contrib

age-blind, up to age 70 ½. The same rules apply to people of all ages. The maximum contribution is limited to 100% of compensation, up to a dollar limit.

Profit-sharing plans

allow employers to make contributions in profitable years (or whenever they wish) and make little or no contributions in other years. The key requirement is that the same percentage of salary must be contributed for all eligible plan participants.

pre-paid tuition plan for college savings

allow for the prepayment of future tuition at one or more designated colleges, which are typically public colleges within the state.

individual who has made an initial payment for an immediate annuity contract owns

annuity units contracts are immediately in the payout phase. They skip the accumulation phase of the contract, so do not own accumulation units

joint and last survivor

annuity will provide payments over the course of two lives. Upon the death of the investor, the insurance company will continue to make payments to the named beneficiary until their death. As a result, the payouts on the joint and last survivor annuity will have the smallest payouts. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.

Gift taxes

apply to plan donors if annual gifts exceed gift tax limits (currently $14,000 for individuals; $28,000 for married couples)

ERISA plans

at least 21 years old with one year of work service with the employer.

SS IRA contrib

can contribute to an IRA until they turn age 70 1/2, whether or not they receive Social Security. Their Social Security is not counted as compensation for this purpose, only salary, wage or self-employment income. The contribution can be up to 100% of compensation.

Required Minimum Distributions (RMDs) from his Traditional IRA

continue from the Required Beginning Date for the rest of the account owner's life, until all Traditional IRA accounts are depleted.

Roth ira

contributions are available only to taxpayers who work, earn compensation, and have income below a certain dollar amount. always made with after-tax dollars. They do not reduce the taxable income that owners must report.

Roth v tradit ira

dollar limits on annual contributions to Traditional and Roth IRAs are the same. This is true for both regular and catch-up contributions. AGE LIMIT for contrib:70 ½ in a Traditional IRA; no limit in a Roth

Elizabeth has one Roth IRA, which she started at age 50. She is now age 62 and wants to distribute $10,000 for retirement income. What is the tax consequence of her distribution?

his is a qualified distribution. She has met both requirements: five-year holding period and after age 59 ½. The withdrawal is tax-free and there is no penalty.

life option.

life annuity will make payments for the investor's lifetime. Upon their death, no payouts will be made to any beneficiaries. This option is expected to have a shorter duration and is therefore riskier to the investor, resulting in a higher payout.

municipal fund securities

local government investment pools (LGIPs) and higher Section 529 plans.

contributions may employers make to a 401(k)

matching all or part of each employee's deferrals, in addition to any profit-sharing contributions they might make.

variable annuity

may not represent or imply that they meet short-term or liquidity needs. Discussions regarding liquidity must be balanced by disclosures about sales and redemption charges, tax liabilities and penalties. not be suitable for an individual who has significant cash needs and in unable to set aside funds today for retirement. Annuity units in variable annuity contracts fluctuate in value based on the performance of separate account assets. The number of units is fixed but their value continues to fluctuate. funds contributed into a variable annuity are after-tax dollar representative should ensure that the transaction would benefit the customer

IRA contributions

must be made by the due date of the individual's federal income tax return, which usually is the next April 15 SO CAN ADD MORE

Required Minimum Distribution

must pay an excise tax of 50% on the under-distribution. Her under-distribution is $2,000 and the excise tax is $1,000. Required Beginning Date is April 1 of the year following the year in which a Traditional IRA owner turns age 70 ½. denominator of the RMD calculation is a life expectancy factor taken from a set of IRS tables.

An investor is interested in making annual payments to purchase an annuity that will provide income in 10 years.

n annuity terminology, multiple payments are called periodic payments. Deferred annuities pay income in the future.

Traditional IRA min age

none

maximum age at which the account owner may contribute to a Roth IRA

none

At age 57, Daniel started a Roth IRA. He is now age 60 and takes a $20,000 distribution for retirement income. What is the tax consequence of his distribution?

not a qualified distribution, because it doesn't meet the five-year test. But it is made after age 59 ½, so there is no 10% penalty. The earnings portion is subject to ordinary income tax.

457(b)

participant-directed ERISA deferred compensation plans sponsored by state or local government entities, and also tax-exempt 501(c) organizations.

403b

participant-directed ERISA plans sponsored by non-profit organizations and educational institutions. Like 401(k)s, they allow participants to make elective deferrals and manage their own investment

deferred life only annuity

payments begin in the future. They will last for the life of the annuitant if a life only option is selecte

qualified annuity

purchase payments made into a qualified annuity have not been taxed. Both the portion of each payment that represents purchase payments and the amount that represents earnings will be taxed as ordinary income.

Accumulation units

represent an ownership interest in the separate account, and fluctuate in value based on the performance of the underlying subaccounts. They are converted to annuity units when the annuity owner begins to take income, or annuitize, the contract.

separate account of an insurance company

separates purchase payment for variable life and annuity products from purchase payments for fixed products (general account products). The separate account is designed to offer growth to keep pace with inflation for purchasers of variable products. In exchange for growth potential, purchasers take on investment risk. separated from the general assets of the insurance company. It resembles an investment company in structure and must be registered under the Investment Company Act of 1940.

ERISA fiduciaries

standard of conduct requires fiduciaries to act solely on behalf of the plan's participants and beneficiaries.

Nonqualified withdrawals from Section 529

subject to full federal and state income taxation on the entire amount of the distribution that is attributable to earnings, plus a 10% penalty tax on this amount. Because the contributions to these accounts are made with after tax dollars, only the earning are subject to taxation and the penalty.

529 Plan

taxable to the extent that the distribution exceeds Qualified educational expenses not used for qualified education expenses are subject to ordinary income tax as well as a 10% federal penalty. Distributions from a 529 Plan that are used to pay for the beneficiary's qualified college education costs are federally income tax-free. These include fees for room and board. any adult may set up MSRB regul owner of a 529 plan may change the designate beneficiary at any time, provided the new beneficiary is a qualified family member. contrib limit:Subject to each state's individual plan contribution limits Many states offer favorable income tax treatment to residents when they participate in the state's own 529 plan 1 beneficiary None of the basis portion of a gross distribution from a 529 plan is taxable. Only the earnings portion is subject to income tax(if > gross) Contributions can be made by multiple contributors to the account of a beneficiary All money contributed to a 529 plan is post-tax for federal purposes. However, some states offer income tax deductions, for state income tax purposes. $ LIMIT SET BY STATE

Employee deferrals

to the regular 401(k) are pre-tax. Deferrals allocated to the Roth account are post-tax.

ABLE accounts

type of municipal fund security designed to help ease the financial strain of individuals with disabilities by permitting the opening of tax-free savings accounts that can cover certain qualified expenses. Contributions to the plan are always after-tax and the investments in the plan grow tax-free. Distributions for qualified expenses such as housing, transportation, and wellness services is tax-free.