Ch. 14 Annuities and Individual Retirement Accounts
For a Deferred Annuity... during the accumulation period...
(which is the period prior to retirement), premiums are credited with interest... ->guaranteed rates ->current rates
Traditional IRA pt.2
-> investment income accumulates income tax free on a tax-deferred basis. -> distributions are taxed as an ordinary annuity ->participants must have earned income during the year -> must be under 70.5
In a Traditional IRA, a full deduction for contributions is allowed if...
-worker is not an active participant in employer's retirement plan -worker's modified adjustment gross income is below certain thresholds
Taxation of Individual Annuities
3 things to know
Investment income is tax _________________
Deferred
Fixed Annuities
Pays periodic income payments that are guaranteed and fixed in amount.
An individual annuity purchased from a commercial insurer is...
a non qualified annuity
Annuity
a periodic payment that continues for a fixed period or for the duration of a designated life or lives.
Spousal IRA
allows a spouse who is not in the paid labor force to make a fully deductible contribution to a traditional IRA
Flexible-Premium Annuity
allows the owner to vary the premium payments
Traditional IRA
allows workers to take a deduction for part or all of their IRA contributions. -> $6,000 year limit that can be put in
Individual Retirement Account (IRA)
allows workers with taxable compensation to make annual contributions to a retirement plan up to a certain limit and receive favorable income-tax treatment
Premiums in Variable Annuities...
are used to purchase accumulation units during the period prior to retirement. ->the value of an accumulation unit depends on common stock prices at the time of purchase
Cash option ~Fixed Annuity~
funds can be withdrawn in a lump sum or in installments
Roth Ira, does not...
get tax deduction today like traditional .
Annuities can be attractive to investors who...
have made maximum contributions to other tax advantage plans
Equity-Indexed Annuities
is a fixed deferred annuity that: ->allows the owner to participate in the growth of the stock market ->provides downside protection against the loss of the principal and prior interest earnings if the annuity is held to term
Guaranteed Rate (deferred annuity)
is the min int. rate that will be credited to the fixed annuity
Liquidation period (deferred annuity)
is the period in which funds are paid out, or annuitized
Fundamental purpose...
of an annuity is to provide a lifetime income that cannot be outlined
Guaranteed Death Benefits (Variable Annuities)
protects the principle against loss due to market declines
Life Annuity (no refund) Option ~Fixed Annuity~
provides a life income to the annuitant only while the annuitant remains alive
Deferred Annuity
provides income payments at some future date
The number of annuity units...
remain constant during the liquidation period, but the value of each unit changes with common stock prices.
At Retirement (Variable Annuities)...
the accumulation units are converted into annuity units
Typically, if the annuitant dies before retirement....
the amount paid to the beneficiary will be the higher of 2 amounts: 1)amount invested in the contract or 2)value of the account at the time of death
Purpose of Variable Annuities
to provide an inflation hedge by maintaining the real purchasing power of payments
Fixed annuity owner choice of annuity settlement offers:
~listed largest to smallest payout~ 1)Cash Option 2)Life Annuity (no refund) Option 3)Life Annuity with Guaranteed Payments 4)Installment Refund Option 5)Cash Refund Option 6)Joint-and-Survivor Annuity 7)Inflation-Indexed Annuity Option
Roth IRA contribution limits
-> $122,000 or less for single ->$193,000 or less for married/jointly
Cash Refund Option ~Fixed Annuity~
pays the beneficiary a lump sum
About the Roth IRA taxes
->annual contributions to Roth IRA are NOT tax deductible ->investment income accumulates income tax free ->qualified distributions are not taxable under certain conditons
Distributions from a traditional IRA before...
59.5 are consider premature and subject to a 10% tax penalty unless certain conditons apply i.e. death or disability
Inflation-Indexed Annuity Option ~Fixed Annuity~
option provides periodic payments that are adjusted for inflation
Installment Refund Option ~Fixed Annuity~
pays a life income to the annuitant -> after annuitant's death, payments continue to the beneficiary until they equal the purchase price
Life annuity with Guaranteed Payments ~Fixed Annuity~
pays a life income to the annuitant only while the annuitant remains alive
Variable Annuities
pays a lifetime income, but the income payments vary depending on common stock prices
Joint-and-Survivor Annuity ~Fixed Annuity~
pays benefits based on the lives of two or more annuitants. The annuity income is paid until the last annuitant dies.
Annuitant
person who receives the payments
An annuity....
provides protection against the risk of excessive longevity
Single Premium Deferred Annuity
...a deferred annuity purchase with a lump sum
2 types of IRA's
1)Traditional IRA 2)Roth IRA
Premiums are Not income-tax deductible (T/F)
True
Roth IRA
is another type of IRA that provides substantial tax advantages -can't touch before 59.5 and no rule that forces you to take out at 75.5
Current Rate (deferred annuity)
is based on the current market conditions, and is guaranteed only for a limited period
Immediate Annuity
is one where the first payment is due one payment interval from the date of purchase
Participation Rate (Equity-Indexed Annuities)
is the % of increases in the stock index that is credited to the contract
Major types of annuities sold
•Fixed Annuity •Variable Annuity •Equity - Indexed Annuity
