SIE Chapter 8
What's the maximum contribution that can be made to a 529 plan without being subject to gift taxes?
$160,000 from a married couple if no additional contributions are made for the next five years. For Section 529 plan contributions to not be subject to gift taxes, a person must adhere to the maximum allowable gift rules. The current amount is $16,000 per person, per year. Alternatively, a person can front-load a 529 plan with five years of contributions without being subject to gift tax consequences. This amounts to $80,000 (5 x $16,000) per person, or it's doubled to $160,000 for spouses. Prior to 2022, the maximum amount was $15,000 per person, per year, or $75,000 front-loaded.
A customer wants to transfer her annuity investment from a fixed annuity to the growth and income separate account of the ABC variable annuity. Which of the following steps should be taken?
A Section 1035 exchange should occur Since the customer is transferring money out of one annuity and into a different annuity, he should execute a 1035 exchange to avoid taxes. There are no specific fees associated with a 1035 exchange; however, the customer may be required to pay a surrender fee. If a customer wants to move funds from one subaccount into another subaccount of the same variable annuity, he may simply contact the broker-dealer that sponsored the annuity. The Automated Customer Account Transfer Service (ACATS) is used to transfer securities positions (e.g., stocks and/or bonds) from one broker-dealer to another broker-dealer.
Which of the following statements is TRUE concerning periodic payment variable annuities?
A client's number of annuity units never changes During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.
Which of the following calculations describes the payout on a variable annuity?
A fixed number of annuity units multiplied by a variable dollar amount When a variable annuity is annuitized, the annuitant will be assigned a fixed number of annuity units based on several factors, including the value of the investment, assumed interest rate, age and gender of the annuitant, and payout option chosen. This fixed number of annuity units is then multiplied by the net asset value of the separate account at each payout period to determine the dollar amount the annuitant will receive each pay period.
A 529A or ABLE account is permitted for which of the following persons?
A person who has a significant disability Similar to 529 college savings plans, 529 ABLE (or simply referred to as 529A) accounts are savings accounts that are created and administered by states under the Achieving a Better Life Experience (ABLE) Act. These accounts are designed to supplement the support of persons who are disabled or who meet the government's definition of disabled and are receiving Social Security disability, Medicaid, or private insurance payments.
A 529A or ABLE account is permitted for which of the following persons?
A person who is disabled Similar to 529 college savings plans, 529 ABLE (or simply referred to as 529A) accounts are savings accounts that are created and administered by states under the Achieving a Better Life Experience (ABLE) Act. These accounts are designed to supplement the support of persons who are disabled or who meet the government's definition of disabled and are receiving Social Security disability, Medicaid, or private insurance payments.
The earnings in Section 529 Savings Plans:
Accumulate on a tax-deferred basis as long as the money stays in the plan The earnings generated from the investments in a Section 529 Savings Plan accumulate on a tax-deferred basis as long as the money remains in the plan. Qualified withdrawals that are used for higher education expenses will not be subject to federal taxes.
The growth in the value of a variable annuity is:
Allowed to accumulate on a tax-deferred basis The growth in a variable annuity is automatically reinvested and grows tax-deferred. Any tax implications apply when distributions begin.
An accumulation unit in a variable annuity contract is:
An accounting measure used to determine the contract owner's interest in the separate account An accumulation unit in a variable annuity contract is an accounting measure used to determine the contract owner's interest in the separate account. The separate account is the portfolio in which the customer's contributions are invested. Some separate accounts consist of several subaccounts, with differing objectives and portfolios.
Which of the following amounts may a customer contribute each year to a 529 college savings plan without incurring any taxes?
An amount equal to the annual gift tax exclusion States that offer 529 plans determine the specific plan rules, such as allowable contributions, investment options (e.g., mutual funds), and the deductibility of contributions for state tax purposes. On an annual basis, a person may contribute to a 529 college savings plan an amount that equals the federal annual gift tax exclusion ($16,000) without paying a gift tax. Alternatively, a contributor is able to make a single, lump-sum gift of up to the five-year cumulative limit ($80,000) for tax-free gifting. However, please notice that the question asks for what amount may be contributed each year; therefore, the answer is an amount that's equal to the annual gift tax exclusion.
If an individual is considering moving to the payout phase of a variable annuity, she should understand that the payments will:
Be based on the performance of the subaccount products in the separate account When a person purchases a variable annuity, she assumes the investment risk. Once annuitized, the number of annuity units on which payments are based remains the same, but the payments will be influenced by the performance of the subaccount products in the separate account as well as the settlement option chosen. If the value of the separate account falls below the investor's cost basis, the payments may amount to less than the cost basis.
Which of the following statements is NOT a characteristic of a 529 plan?
Contributions are unlimited Contributions to a 529 plan are not unlimited. Instead, each state determines the dollar value that may be contributed.
Which of the following features applies to a variable annuity, but not to a mutual fund?
Death benefit A variable annuity may have a death benefit which provides a payment if the annuitant dies during the accumulation period. The amount of the death benefit is the greater of the value of the annuity on the day of the annuitant's death or the total amount contributed.
Which of the following is TRUE concerning a 529A or ABLE account?
Earnings will not be taxed if they're used for any qualified expense One of the benefits of a 529A or Achieving a Better Life Experience (ABLE) account is the tax-deferred growth. Actually, the earnings are tax-free if they're used for qualified expenses, including basic living expenses, education, employment support, housing, financial management, legal fees, transportation, and wellness for disabled persons. However, unlike 529 plans, withdrawals from 529A accounts are not required to be used for qualified education expenses.
A person who invests in a fixed annuity is most concerned with the performance of the insurance company's:
General account The insurance company's general account is what backs an insurance company's fixed annuities and traditional (guaranteed) insurance products. On the other hand, the performance of a variable annuity is related to the performance of the insurance company's separate account.
Which of the following statements concerning a tax-qualified annuity is TRUE?
It has a zero cost basis and grows tax-deferred Tax-qualified annuities are employer-sponsored plans that are available to certain nonprofit organizations, public school, and/or state/city university/college employees. These annuities, sometimes referred to as TSAs may be placed into a 403(b) or a 501(c)(3) plan. Since these plans are funded on a pretax basis, contributions are deducted from an individual's taxable income. An investor's cost basis is considered to be zero since none of the contributions have been recognized for tax purposes. Income grows tax-deferred not tax-free. Upon distribution, every dollar is taxable as unearned ordinary income. Tax-free growth means that none of the distributions will be subject to taxation. This is not the case with these types of plans.
Which of the following statements is NOT TRUE regarding an equity-indexed annuity (EIA)?
It is considered a security Equity-indexed annuities (EIAs) are a type of fixed annuity that provide a guaranteed minimum rate of return (unlike variable annuities), but may potentially provide a greater rate of return. An EIA's return is tied to the performance of a stock market index to which it is linked. As with standard annuities, they also provide tax-deferred growth. However, EIAs are not currently considered securities; instead, they are categorized as a life insurance product.
A 72-year-old grandfather wants to buy an annuity for his son (age 45) and his grandchild (age 15). Which payout option BEST satisfies the grandfather's intentions?
Joint and last survivor life annuity A joint and last life survivor annuity will best satisfy the grandfather's intentions. In this payment option, benefit payments are made to the persons in the joint account, then to the survivor, as long as the survivor lives.
For variable annuities, which of the following payout options provide the highest payout?
Life annuity Annuitants will receive the greatest cash flow from the life annuity payout option. This option allows an annuitant to receive payments for his lifetime. At death, the payments cease since no beneficiary is designated and, therefore, the insurance company is relieved of its obligation to make payments. The annuitant assumes the greatest degree of risk with this type of payout.
The beneficiary of a Section 529 plan may make qualified withdrawals from the plan for:
Paying the tuition for an out-of-state college Qualified higher education expenses include tuition, books and supplies, as well as room and board while attending college. Although not referenced in this question, on an annual basis, up to $10,000 in distributions from 529 plans can be used to pay for private school tuition and books for grades K through 12. The other withdrawals are subject to federal tax liabilities.
Which of the following statements is TRUE about variable annuities?
Payout is based on a number of annuity units, which remains fixed for the duration of the payout period A variable annuity does not give an annuitant a fixed-dollar return over a fixed number of years. Variable annuities give the annuitant a variable return based on the value of the securities in the separate account of the annuity. Payout is based on the number of annuity units that an investor receives upon annuitizing. The number of units remains fixed for the duration of the payout period. The investor takes on all investment risk since payments are not guaranteed. Investors are allowed to vote on certain issues.
When discussing the purchase of a variable annuity with a client, the RR is not required to disclose:
Probate fees Probate fees and costs are associated with establishing the validity of a will, which is not a disclosure item for annuities. However, surrender, mortality, and administrative fees must be disclosed.
A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences?
Proceeds in excess of cost are taxable as ordinary income to the beneficiary. When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income.
A person who invests in a variable annuity would be MOST concerned with the performance of the insurance company's:
Separate account The performance of a variable annuity is related to the performance of the separate account. The insurance company's general account backs the company's fixed annuities and traditional (guaranteed) insurance products.
One of your clients is looking to annuitize a contract and wants a payout option that will provide income for the later of 10 years or death. Which of the following choices is most suitable for this investor?
Straight life with period certain A period certain payout guarantees that a minimum number of payments will be made even if the annuitant dies before the period certain has elapsed.
The main disadvantage of 529 Prepaid Tuition Plans compared to 529 Savings Plans is that:
The account owner may lose financially if the student does not attend a public school in that state The main disadvantage of a prepaid tuition plan is that the investor may suffer financially if the beneficiary attends an out-of-state or private college. Unlike 529 Savings Plans, prepaid tuition plans do not have distributions. Instead, the account owner purchases credits toward tuition at a state university or college. Prepaid tuition plans generally may not be used to save money for other educational expenses such as room and board. The advantage of a prepaid tuition plan is that the investor is guaranteed a certain number of credits toward the beneficiary's tuition.
All of the following statements are TRUE about 529 Prepaid Tuition Plans, EXCEPT
The beneficiary may use the tuition credits purchased at virtually any college or university in the United States An investor who purchases a prepaid tuition plan is buying tuition credits that may be used for the beneficiary's education at a public school in the state that administered the plan.
When determining the suitability of the recommendation of a 529 college savings plan, which of the following should a registered representative consider?
The deductibility of contributions from state income taxes Contributions to a 529 plan are non-deductible at the federal level; however, if an investor uses his home state's plan, contributions are often deductible for state income taxes. If an investor uses assets from a 529 plan for qualified education expenses, the earnings are tax-free at the federal level (i.e., like a Roth IRA). Unlike an UGMA or UTMA account, 529 plan assets don't need to be transferred when the beneficiary reaches the age of majority.
A customer has a variable annuity and wants to transfer from the XYZ growth separate account to the ABC growth separate account. To do this, who should the customer contact?
The insurance company that sponsors her account A customer who wants to change subaccounts within a variable annuity can contact the insurance company that sponsors the variable annuity. It's not unusual for a variable annuity to have many different subaccounts which could have different names, objectives, and portfolio managers.
An investor has annuitized a variable annuity and has realized that the payments he's receiving are falling below market return. If the investor wants to reallocate a portion of the investment portfolio within the separate account, which of the following statements is TRUE regarding this situation?
The investor is permitted to change the allocation of the investments within the separate account. Although some limitations may apply, the investor is permitted to reallocate their investments within the separate account. Keep in mind, both the decision to annuitize and the chosen settlement option are final.
Which of the following factors will impact the value of a variable life insurance policy?
The performance of the separate account. The cash value of a variable life insurance policy is primarily based on the performance of the separate account.
While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a:
Varying number of accumulation units When investors purchase a variable annuity contract, they are purchasing accumulation units. Once a contract has been annuitized, distributions are made by liquidating annuity units. Since the value of the subaccounts will fluctuate, a client investing $1,000 per month will purchase a different number of accumulation units with each purchase.
