Quiz Show

Donna M. Kesot, CPCUCPCU 556 Annuities

April 25, 2012

Taxes & Retirement

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)

Contribution Base

Adjusted Gross Income without allowance for net operating loss carryback.

Cash Contributions to public charities–50% of the contribution base

Long-Term Capital Gain Property—full value up to 30% of contribution base, e.g. stocks/bonds, real estate

Private Foundations—full value up to 20% of contribution baseShort-Term Capital Gain Property-50% of the contribution baseTangible Personal Property- full fair market value up to 30% of

contribution base

Match the tax section

Section 1031

Section 1041

Section 721

Section 351

Section 354

Mergers

Partnerships

Like-Kind Exchanges

Between Spouses\Divorce

Corporations

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

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

Tax Avoidance Strategies(3):Step Up in Basis at Death

Gifts to charity

Use of exclusion provisions in the tax law, e.g. sale of primary home, corp exclusion of up to 50% gain on QUALIFIED small business stock from start up

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

Tax Deferral Strategies(3):Like Kind Exchanges

Tax free corporate reorganizations

Equity Collars with monetizing the hedged stock, e.g. puts on hedged stocks from employee stock options (other examples p. 294)Exchange Funds

A.

B.

C.

D.

E.

Qualified Retirement Plans

A, B & C

Nonqualified Annuity

Pension Plans, Profit Sharing Plans, Savings/Thrift Plans, HR-10

Stock bonus plans, Employee Stock Ownership Plans (ESOP), Keogh Plans

A & B only

Right Answer: Qualified Retirement Plans are spelled out in 401 (k). Correct answer (d) A& B. Pension Plans, Profit Sharing Plans, Savings/Thrift Plans, Stock bonus plans, Employee Stock Ownership Plans (ESOP), Keogh Plans

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

The parties to an annuity?

Insurer, Contract Owner & Annuitant

•Insurer

•Contract Owner: the party who purchases the annuity from the insurer and who makes premium payments. May be the annuitant.

•Annuitant: the person insured under the annuity

Qualified Retirement Plan

A retirement plan that meets the requirements established by the IRS for favorable tax treatment

Traditional IRAA retirement savings plan

By which an individual can use tax-deductible

And tax deferred methods

For accumulating wealth.

4 Retirement funding ‘vehicles:’

Tax deductible

Tax Free

Tax deferred

Currently taxable

Match the tax section

Section 1035

Section 1036

Section 1042

Section 351

Section 1031

Like-Kind

Emp Stock Option Plan

Life to Annuity

Corporate Stock Options

Corporation Formation

Nonforfeitable right to his/her account balance under a defined-contribution plan or to an accrued benefit under a defined=benefit plan that results for employer contributions to the plan

Vesting

Qualified Annuity

• An annuity that is used as a funding vehicle in a qualified plan, such as an individual retirement account, a tax-sheltered annuity, or a 401(k) plan.

• 10% tax penalty for early withdrawal (age 70.5)

TRUE or FALSE?TRUE or FALSE?

A Qualified 401(k) plan meets the IRS rules in section 401(k) & participants may choose to contribute to the plan with before-tax dollars

Highly secure, liquid investment that investors commonly use for the liquid portion of their investment portfolios

Money Market Mutual Fund

2 features & examples for Money Market Account

Relatively safe

Liquid investment

Such as securities issued or guaranteed by the federal government, certificates of deposit, banker’s acceptances, euro dollars, and commercial paper