Quiz Show

Donna M. Kesot, CPCUCPCU 556 Personal Financial Planning

May 2, 2012

Taxes & Retirement 2

Principal

Original value of an investment or a debt

Generally, creation of a formal irrevocable trust into which the donor (as grantor of the trust) places property that is subject to the trust

Charitable Remainder Trust

Aka CRT2 types:1. CRUT Charitable Remainder Unitrust(5-50% of each

year’s current value, up to 20 years)2. CRAT Charitable Remainder Annuity Trust (5—50%,

calculated on the initial value of the property)

TRUE or FALSE?TRUE or FALSE?These plans allow individuals to invest pre-tax and provide tax-deferred earningsTraditional IRA401(k) plans, other than Roth403(b) plans, other than Roth457 deferred compensation plans

Total ReturnSum of capital appreciation (or losses) on the principal and

Tax implications: Tax rate applied to gains from capital appreciation is often lower than those applied to gains through investment

The income earned on an investment over a specified period

Match the concept

Capital Gain

Like Kind Exchange

Principal

Rate of Return

Realized Capital Gain

Profit earned when sold

Original value

Selling Prices exceeds Purchase Price

1031

Annual Profit or Surplus

Retirement Income Sources• Individually Provided (IRAs, cash values of Life ins, nonqualified

annuities, savings)• Social Security – guaranteed income floor, available at age 62

Retired Worker’s Benefits - equal to worker’s primary insurance amount (PIA) at age 65-67.

Spouse of Retired Worker (50% of retired worker’s PIA) COLA tied to CPI

• Employer-Provided Retirement Plans Qualified pension plans Profit-sharing plans Savings Plans

A.

B.

C.

D.

E.

Dollar Cost Averaging

A & B

Diversifying the bond and CD portions (fixed income) of an investment portfolio by staggering the maturity dates of instruments.

Systematic investing of the same amount of money in the same stock or group of stocks over a period of time

Investing in the same volume of stock or group of stocks over a period of time, regardless of the changing share prices

Systematic investing of the same amount of money in the same stock or group of stocks over a period of time, regardless of the changing share prices

Right Answer: D Systematic investing of the same amount of money in the same stock or group of stocks over a period of time, regardless of the changing share prices

Method used to estimate needed retirement income based on a percentage of expected final average earned income.

Income Replacement Ratio

60-80% because1. Taxes usually decline2. Certain work related expenses may end or reduce3. Home-ownership expenses may decline if mortgage

debt is eliminated4. Support for dependent children may have ended5. Senior discounts (Go AARP)6. General expenses may decline as the aging individual

become less active/more sedentary

Laddering

Protects against interest rate risk

Diversifying the bond and CD portions (fixed income) of an investment portfolio by staggering the maturity dates of instruments in the portfolio

Asset Allocation

The apportioning of investments among categories of assets

Asset Allocation FundA category of hybrid funds that are

Required to maintain a fixed weighting (assets allocation) of stocks, bonds, and perhaps money market instrumentsMay enable investors to implement an asset allocation strategy through the purchase of one mutual fund, rather than several funds or other assets

AKA Life-Cycle Fund

3 Risk Characteristics of Bonds

Inflation Risk

Default Risk

Interest Rate Risk

Long term bond investors minimize these risks compared to real estate and stock investments

Statutory Definition-Life Insurance

Meets Section 7702 IRC via

1. Cash value accumulation test• A test that limits cash value relative to death benefit.

2. Guideline premium and cash value corridor test• A test that limits premiums paid relative to the death

benefit.

Match the stock concept

Growth Stock

Penny Stock

Defensive Stock

Cyclical stock

Value Stock

Undervalued

Not tied to economic cycles

Faster than general Economy

Trades at <$1

Industrical producers

A 403(B) is a qualified retirement plan that for employees of local, state, or federal governments and agencies.

TRUE or FALSE?FALSE

Real Answer:A 403(b) PLAN IS A TAX FAVORED RETIREMENT PLAN FOR EMPLOYEES OR CERTAIN NONPROFIT ORGANIZATIONS

The development and implementation of strategies designed to reduce, change the timing of, or shift income tax liabilities

Income Tax Planning

The use of legal methods to reduce or eliminate taxes

Tax Avoidance

e.g. Shifting assets to children, Charitable remainder trusts, investing in tax free

munis, using normally taxable distribution from nonqualified deferred annuities to pay charges for long-term

care insurance tax-free, and taking qualified distribution from a Roth IRA

Tax planning strategy that enable taxpayer to delay the recognition of income for tax purposes

Tax Deferral

e.g. 401 (k) plans, IRAs, Deferred annuities

Qualified Dividend• A dividend paid by a U.S. corporation, a

corporation incorporated in a U.S. possession , a foreign corporation located in a country eligible for certain U.S. tax treaty benefits, or a foreign corporation whose stock can be readily traded on an established U.S. tock market and which meets applicable holding period requirements.

TRUE or FALSE?TRUE or FALSE?

Deduction = Amount that reduces an individual’s income subject to tax.

Gain realized on the sale of a capital asset held for one year or less

Short Term Capital Gain

In contrast a long term capital gain is a capital asset held longer than 1 year.

AGI functions in this way

Adjusted Gross Income

Functions as the base amount on which certain limits are calculated (floors for medical expense, mortgage interest, personal casualty/theft losses, and miscellaneous itemized expense deductions

Determines charitable contribution limitations

Gross EstateProperty owned at death

Life Insurance on the Decedent’s life

Joint Tenancies (gross estate of first joint owner to die includes ½ of the value of property jointly held or the full value of a property jointly held with someone other than a spouseGeneral Powers of Appointment –Property held by the decedent with a general POA

Annuities, Revocable Transfers, Transfers taking effect at death, Transfers within 3 years of death

Modified Endowment Contract (MEC):

Meets statuatory definition of life insurance in IRC but

Fails to meet the seven pay test

Does not affect death benefits but living benefits lose preferential tax treatment

Premiums in 1st 7 years exceed sum of net level premiums that would have been paid if the policy provided for paid-up future benefits