FIN 230 Ch. 14 Outline

Single premium annuity contract

An annuity contract purchased with a lump-sum payment.

Installment premium annuity contracts

An annuity contract purchased through periodic payments made over time.

Defined benefit plan

A pension plan in which the formula for computing benefits is stipulated in its provisions. Company guarantees retirement benefit regardless of pension fund performance. (They can't keep this funded.)

Defined contribution plan

A pension plan specifying the contributions that both employer and employee must make; it makes no promises concerning the size of the benefits at retirement.

Thrift and savings plans

A plan to supplement pension and other fringe benefits; the firm contributes an amount equal to a set proportion of the employee's contribution.

Individual retirement arrangement (IRAs)

A retirement plan, open to any working American, to which a person may contribute a specified amount each year.

Keogh plans

An account to which self-employed persons make specified payments that may be deducted from taxable income; earnings also accrue on a tax-deferred basis. It allows self-employed individuals to set up tax-deferred retirement plans for themselves and their employees. •These accounts can be opened at banks, mutual funds, and other financial institutions. • The individual decides which investments to buy and sell. • Once the individual begins to withdrawal, all withdrawals are treated as ordinary income and are subject to normal income taxes.

Salary reduction plan (401k)

An agreement by which part of a covered employee's pay is withheld and invested; taxes on the contributions and the account earnings are deferred until the funds are withdrawn. These plans are generally viewed as attractive tax shelters that offer not only substantial tax savings but also a way to save for retirement.

Fixed-rate annuity

An annuity in which the insurance company agrees to pay a guaranteed rate of interest on your money. (Your principal is always secure since the interest rates will not rise or fall.)

Variable annuity

An annuity in which the monthly income provided by the policy varies as a function of the insurer's actual investment experience. (Nothing is guaranteed, not even the principal since the market can do really well or really bad.) You can choose different investments like stocks, bonds, real estate, etc

Guaranteed-minimum annuity

An annuity that provides a guaranteed minimum distribution of benefits. If the annuitant dies soon after the distribution begins, then his or her beneficiaries receive the monthly benefits for the balance of the "period certain."

Annuity certain

An annuity that provides a specified monthly income for a stated number of years without consideration of any life contingency. Eg. An annuitant selecting a 10-year annuity certain receives payments for 10 years, regardless of whether he or she lives for 2 or 20 more years.

Profit-sharing plans

An arrangement in which the employees of a firm participate in the company's earnings. Employees benefit from company's earnings, so it encourages them to work harder since they benefit when the firm prospers.

Annuity

An investment product created by life insurance companies that provides a series of payments over time. •Tax-sheltered investment vehicles administered by life insurance companies. • Make contributions now in return for a series of payments later. • No special tax treatment is given to the capital contributions.

Life annuity with no refund

An option under which an annuitant receives a specified amount of income for life, regardless of the length of the distribution period. The estate or family receives no refunds when the annuitant dies.

Social security

Benefits provided by payroll taxes employee and employer pay. • Amount of benefits may not be sufficient at retirement. • See it as an insurance system not a retirement plan. • Normal retirement age is 67 if born in 1960 or later. • You must have been paying in for at least 10 years. • Early retirement results in a lower percentage of total benefits while later retirement results in an increased benefit.

Basic plans (Employer-sponsored programs)

Employees automatically participate after a certain period of employment.

Traditional Tax-Deductible IRA

It can be opened by anyone without a retirement plan at his or her place of employment, regardless of income level or by couples filing jointly who have adjusted gross incomes of less than $90,000.

Non-Deductible (after-tax) IRA

It is open to anyone regardless of their income level or whether they're covered by a retirement plan at their workplace. The earnings do accrue tax free and are not subject to tax until they are withdrawn after the individual reaches age 59 ½.

Distribution Period for Annuities

The period during which annuity payments are made to an annuitant (Insurance company makes payments to annuitant.) Portion not returned to annuitant prior to death goes to beneficiaries. (It is like life insurance.)

Accumulation Period for Annuities

The period during which premiums are paid for the purchase of an annuity.

SEP plans

These are just like Keogh plans except they are aimed at small business owners, particularly those with few or no employees, who want a plan that's simple and easy to administer.

Roth IRA

They can be opened by couples filing jointly with adjusted gross incomes of up to $169,000, whether or not they have other retirement or pension plans. This is a great plan since you don't have to pay taxes ever, provided that the account has been open for at least 5 years and the individual is past the age of 59 ½.

Supplemental plans (Employer-sponsored programs)

Voluntary programs that enable employees to increase the amount of funds being set aside for retirement.