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funds can be withdrawn in a lump sum or in installments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