Unit 2 (3 Of 3)

Front 1

What are qualified plans?

Back 1

When a corporate retirement plan meets the requirements of the Employee Retirement Income Security Act (ERISA) and is approved by the IRS.

Front 2

What is a non-qualified plan?

Back 2

When a corporate retirement plan does not meet the requirements of the Employee Retirement Income Security Act (ERISA) and is not approved by the IRS.

Front 3

What are the characteristics of a qualified plan?

Back 3

They are funded with before-tax dollars, the money grows tax-deferred, and everything is taxed as ordinary income at distribution. Trustee has to watch over the plan's assets. No discrimination allowed.

Front 4

What are the characteristics of a non-qualified plan?

Back 4

They are funded with after-tax dollars, the money grows tax-deferred, and only the earnings are taxed as ordinary income at distribution. They allow discrimination as to who can or cannot participate.

Front 5

What is the Employee Retirement Income Security Act of 1974 (ERISA) aka Pension Reform Act?

Back 5

Passed to protect the retirement assets of persons in the private (nongovernment) sector of the economy.

Front 6

What are the types of nonqualified plans?

Back 6

1) Payroll deduction plans - money deducted from employee's paycheck (after-tax deductions)

2) Deferred Compensation plan - defers receipt of current compensation in favor of a payout at retirement, death, or disability.

3) fixed or variable annuity - on the individual level

Front 7

What is the golden handcuffs clause?

Back 7

A list of conditions and circumstances under which some or all of the benefits may be forfeited in a non-qualified deferred compensation plan.

Front 8

Are the members of the Board of Directors (who serve in that capacity only) eligible to participate in the deferred compensation plan?

Back 8

No, because they are not considered to be employees for the purpose of establishing eligibility.

Front 9

What is a Section 457 Plan?

Back 9

1) Deferred Compensation plan

2) Used by state & local gov't employees & tax exempt organizations

3) Do not follow non-discrimination rules

4) Tax-exempt option only covers highly compensated employees

5) No 10% penalty for early w/d

6) Distributions may be rolled back into IRA but 10% penalty then applies

Front 10

What are the characteristics of a Individual Retirement Arrangement (IRAs)?

Back 10

Considered a qualified plan for anyone with earned income. May open and contribute to a traditional IRA. May include pre-tax contributions.

Front 11

When is an Individual Retirement Arrangement (IRA)?

Back 11

If the investor is under age 70 1/2, covered by a qualified plan, and his income is above a threshold level. May be partially or fully deductible. Contributions may be made up to April 15 of the year following the tax year.

Front 12

What is included in earned income?

Back 12

All taxable income and wages you get from working either for yourself or someone else. This excludes distributions from pensions, social security payments, portfolio income (dividend and interest payments), child support, and passive income (from rental property or direct participation program).

Front 13

What is allowed for a non-participating (noncovered) employee?

Back 13

A taxpayer who does not actively participate in an employer-sponsored pension or proit-sharing plan may continue to make tax-deductible contributions to a self-funded personal IRA.

Front 14

Who is an IRA custodian?

Back 14

A person of their choice that the taxpayer appoints. They can chose from B/Ds, banks & savings institutions, insurance carriers, credit unions, and mutual fund distributions.

Front 15

What are the maximum annual IRA contribution?

Back 15

100% of earned income up to an indexed maximum, whichever is less. If age 50 or older, additional money may be contributed, called up a catch-up contribution. Only permissible contribution is cash.

Front 16

What is a spousal IRA?

Back 16

Must file join income tax return. Can have separate IRA accounts. A spouse with little or no income can contribute to a separate retirement account established for that spouse. No more than the maximum in each account.

Front 17

What is an excess contribution?

Back 17

Annual contributions exceeding the maximum allowed are subject to a 6% penalty tax if the taxpayer does not w/d the excess by April 15 of the following year. The 6% applies to each year the money remains in the account. Only way to avoid the penalty is to w/d the excess.

Front 18

How do you move funds in an IRA?

Back 18

1) Rollover - takes place when an individual takes possession of the funds and roles them into an IRA. May occur once every 12 months. To avoid penalty of paying income tax or 10% if younger than 59 1/2.

2) Transfer - takes place when individual directs custodian to wire funds to another custodian. No tax or penalty. Unlimited transactions.

Front 19

What is the percentage of funds to withheld when an indivdual receives funds from an employer-sponsored qualified plan?

Back 19

20% of the distribution as a withholding tax. May apply to the IRS for a refund or apply for a tax credit.

Front 20

What is the criteria around IRA withdrawals?

Back 20

IRA earning are tax deferred until the money is received. Random w/d's may not begin w/out penalty before age 59 1/2 and must begin by April 1st of the year after the year when the account owner reaches age 70 1/2.

Front 21

What is the penalty for an individual that fails to begin w/d by age 70 1/2?

Back 21

50% tax penalty imposed on the amount that, according to IRA tax tables, should have been w/d.

Front 22

When is the 10% penalty avoided for a premature withdrawal (before 59 1/2)?

Back 22

1) Death or disability

2) First-time primary home ($10,000)

3) Qualified higher education costs

4) Used to pay medical expenses or health insurance premiums

5) Done under IRC Rule 72(t)

Front 23

Who is eligible for an ERISA plan?

Back 23

1) 21 years of age

2) 1 year of service

3) 1,000 hours/year

Front 24

What is Section 72(t)?

Back 24

IRA holder under the age of 59 1/2 may avoid the 10% penalty for early w/d if he receives the payments as part of a series of substantially equal periodic payments made for the life expectancy of the individual. The chosen method may not be altered unless going from the amortization or annuitization to an MDO for 5 years from the date of the first payment, or age 59 1/2.

Front 25

How are payments computed for Section 72(t)?

Back 25

1) Minimum Distribution Option

2) Amortization Method

3) Annuitization Method

Front 26

What are ineligible investments to an IRA?

Back 26

1) Collectibles (does not include US-minted gold and silver coins)

2) Life insurance contracts

3) Commodities

4) Tax free municipal bonds or municipal bond funds

Front 27

What are ineligible investment practices?

Back 27

1) No short sales

2) Speculative option strategies

3) Margin account trading

* Covered call writing is allowed

Front 28

What is a ROTH IRA?

Back 28

1) After-tax contributions w/ same limits and catch-up provision as a traditional IRA

2) Tax-free payments after 5 years or age 59 1/2

3) No required withdrawals at age 70 1/2

4) Must comply with earnings limits

Front 29

What is Coverdell Education Savings Account (also known as Education IRA)?

Back 29

1) Used for education funding

2) 2,000 after-tax contribution per bene until 18

3) Money grows tax-deferred

4) Distributions tax-free to pay for education

5) Must be used by age 30 or passes to bene unless re-designated

6) Has earnings limits for donor

Front 30

What is a Section 529 plan (state sponsored for post secondary education funding)?

Back 30

1) Donor retains control of the asset

2) Allow greater amounts than a Coverdell ESA

3) Anyone can open acct for future college student

4) No income limitations on making contributions

5) Contributions of up to $250K or more made with after-tax dollars

6) Qualified w/d are exempt from fed taxes

7) Most states also allow tax-free w/d's if organized in that state

8) Allows donor to front-load plan

9) Contributions subject to gift tax

Front 31

Who can contribute to an Educational IRA?

Back 31

Anyone, but total for one child is $2,000

Front 32

What are the types of Section 529 plans?

Back 32

1) Prepaid tuition plans - allows donors to lock in current tuition rates by paying now for future education costs

2) College savings plans - residency not required; no lock on college costs and no age limits

Front 33

What is a Simplified Employee Pension Plan (SEP IRA)?

Back 33

1) Easy to administer (small businesses)

2) Employer funded through IRA

3) Employee immediately vested

4) Employe must be 21 years of age, worked 3 out of the 5 years, and received a minimum amount of compensation

Front 34

What is a Savings Incentive Match Plan (SIMPLEs)?

Back 34

1) Small business (no more than 100 employees)

2) Employees earned $5,000 or more in comp. during the preceding calendar year

3) Employee does not contribute to another plan

4) Two contribution options: 2% non-elective employer contribution (2% of their comp.) or dollar for dollar match up to 3% of comp.

5) Subject to indexed annual limits plus the emp contribution

Front 35

What are tax-sheltered annuities (TSAs)?

Back 35

1) offered through public school systems (403b)

2) offered through nonprofit org. (501(c)3)

3) Money allocated from paycheck before tax

4) Investments include variable annuities, mutual funds, stocks, bonds, CDs

Front 36

What are Keogh (HR-10) plans?

Back 36

1) for self-employed or unincorporated businesses (not incorporated businesses)

2) planholder - 25% of post-contribution income up to indexed maximum

3) employers must make contributions to plans of eligible employees (proportionately)

4) insurance allowed within the plan

Front 37

What is a defined contribution plan?

Back 37

Qualified retirement plan that benefits younger employees because it shelters contributions of otherwise taxable income w/out the promise of specific future benefits.

Front 38

What is a defined benefit plan?

Back 38

Qualified retirement plans that benefits older employees because it promises a specific retirement benefit but do not specify the level of current contributions. Plan must use an actuary.

Front 39

What are the types of defined contribution plans?

Back 39

1) 401K plans

2) profit-sharing plans

3) money-purchase pension plans

4) thrift plans

5) stock plans

Front 40

What is a profit-sharing plan?

Back 40

A plan where the contribution depends on the corporate profits.

Front 41

What are the different types of 401K plans?

Back 41

1) corporate 401(k)

2) Roth 401(k) plan

3) Self-employed 401(k) plan

Front 42

What is a Roth 401(k) plan?

Back 42

1) After tax contributions and w/d's are tax-free if 59 1/2

2) 5 year holding period

3) Employer-matching contribution must go into Traditional 401(K)

4) must have both Trad and Roth 401(K)

5) No income limits

Front 43

What is a self-employed 401(k) plan (also known as individual 401(k) or solo 401(k) plans?

Back 43

1) used by sole proprietorships

2) No full-time employees except for owner and his spouse

3) Business loans may be taken from account, with no adverse tax consequences, provided the loans are paid off in time

Front 44

How long is permanent life insurance designed to last?

Back 44

Until age 100 or the death of the insurance, whichever comes first.

Front 45

What are the characteristics of whole life insurance (WL)?

Back 45

It is the foundation for all permanent insurance, has a level premium, and the death benefit and cash value is guaranteed for the life of the policy. It is not a security, therefore, only a insurance license is required for sale.

Front 46

What are the characteristics of variable life insurance?

Back 46

1) Part insurance, part security (premium split in 2 ways) - General acct (guaranteed)/Separate acct (not guaranteed)

2) Requires securities & insurance license - prospectus delivered

3) Suitability required

5) Subject to state and federal regulations

6) Must be advertised as insurance, not a security

7) Deductions from the premium-admin, state premium tax, sales load

8) Deductions from separate acct - mortality risk fee, expense risk fee, investment management fee

Front 47

What are the features of variable life insurance death benefits?

Back 47

1) minimum guaranteed death benefit

2) increases if separate account performance exceeds assumed interest rate (AIR) for the year

3) does not change if the same as AIR for the year

4) Goes down if below AIR for the year

5) never below minimum guaranteed

6) calculated annually

Front 48

What are policy loans?

Back 48

Allows insured to borrow a percentage of the cash value that has accumulated in the contract. At least 75% of the cash value must be made available after the policy has been in force for 3 years. Outstanding loan amount is subtracted from the death benefit at death or the cash value when surrended. Borrower has 31 days to make negative cash value positive or the policy lapses.

Front 49

What is a contract exchange?

Back 49

Can exchange a variable life insurance contract for a traditional fixed-benefit whole life contract for the first 2 years. No medical questions or physical exam. New policy has original issue date.

Front 50

What are the voting rights for contract holders?

Back 50

They receive one vote per $100 of cash value funded by the separate account. Changes in investment objectives & other important matters can only be accomplished by a majority vote.

Front 51

What are the refund provisions?

Back 51

1) The insurer extends a free look for 45 days or 10 days from receipt (refund all premiums paid)

2) 45 days - 1 year: refund is cash value plus part of the sales charges deducted (30%)

3) 1-2 years: cash value plus less of sales charges deducted (10%)

4) After 2 years: cash value only

Front 52

What is a universal variable life product?

Back 52

Combination of a variable death benefit and variable cash value with a universal life product. Policyowner may adjust the premium payments and death benefit to fit changing needs.

Front 53

What are the regulatory elements for continuing education?

Back 53

1) Within 120 days of 2nd anniversary and every 3 years thereafter for all registered personnel

2) If rep leaves the business & reaffiliates w/in 2 years, the date is based on the original date; after two years, it is based on the reassociation date

3) Significant disciplinary action restarts the program

Front 54

What are the firm elements for continuing education?

Back 54

1) Annual training that includes updates

2) Training for individuals that deal with clients or ones who supervise these individuals

Front 55

What is the annual compliance meeting?

Back 55

A meeting where all representatives and principals must attend. Must be interactive or at least assure answers to questions. Answers must be prompt.