question

Megan has covered medical expenses of $15,500. Her health insurance policy has a $1,000 calendar year deductible, 20% coinsurance and $2,500 stop loss. What amount will her Insurance Company pay?

answer

$12,000 ($15,500 - $1,000) = $14,500 $14,500 x 0.2 = 2,900 2,900 > 2,500 14,500 - 2,500 = 12,000

question

Withdrawals from an HSA account are: a) taxable b) tax free c) a deductible medical expense

answer

b) tax free

question

Employer has 75 FTE employees - Employer offers coverage but employee premium is deemed unaffordable - 10 employees opt out and purchase insurance through Exchange and receive subsidy - What is employer penalty? a) 90,000 b) 30,000 c) 20,000

answer

b) 30,000

question

All of the following are required ACA coverages except: a) maternity b) nursing home c) mental and behavioral d) prescription drugs

answer

b) nursing home

question

NC Exchange Operated by: a) federal government b) state government c) No N.C. Exchange

answer

a) federal government

question

Scott, age 35, is not married and participates in an employer sponsored plan. He will earn $64,000 in 2017. Is he eligible for an IRA? If Scott is eligible, what amount may he contribute?

answer

a) yes b) 4400

question

Henry earns $170,000 and Henry's spouse, Ellen is not working. Henry also participates in a retirement plan at work. The couple files a joint return. What is the maximum deductible amount that Henry can contribute to his IRA? Is Ellen eligible for an IRA? If yes, what is the maximum deductible amount that Ellen can contribute to her IRA?

answer

a) 5500 b) yes c) 5500

question

Which of the following are subject to the 10% penalty for withdrawal for IRA? a) death b) disability c) lump sum at 55 d) higher education expenses

answer

c) lump sum at 55

question

Scott and Allison are married. Scott is an insurance company underwriter. Allison is a high school teacher. Their joint income is $122,000. Both Scott and Allison participate in their employer's 401K retirement plan. Are they eligible for a traditional IRA? Are they eligible for a Roth IRA?

answer

a) no b) yes

question

Roth distributions are tax free if the Roth IRA has been in force at least: a) 10 years b) 5 years 3) 2 years 4) 1 year

answer

b) 5 years

question

Advantages of Roth include all of the following except: 1) tax deductible contributions 2) investment accumulations tax free 3) contributions and accumulations may continue indefinitely 4) distributions after 59.5 and 5 years are tax free

answer

1) tax deductible contributions

question

Fred has a 401(k) with his employer. He has decided to start his own business as a Personal Financial Advisor, and he wishes to move the vested balance in his 401(k) to an IRA. The best option for Fred is to: 1) roll over the 401k balance to his IRA 2) transfer the 401k balance directly to his IRA 3) leave the money in the 401k account indefinitely 4) roll over the 401k balance to a personal savings account

answer

2) transfer the 401k balance directly to his IRA

question

Which employer sponsored IRA allows employee contributions? a) SEP b)SIMPLE c) Neither SEP nor SIMPLE

answer

SIMPLE Plans

question

Which employer sponsored IRA allows discretionary funding by the employer on annual basis? a) SEP b) SIMPLE

answer

SEP (Simplified Employee Pension)

question

Which employer sponsored IRA permits the largest employer deposit to the employees amount? a) SEP b) SIMPLE

answer

SEP (Simplified Employee Pension)

question

Integrity Insurance Brokerage has 260 employees of which 65 are highly compensated (HC), and all 65 (100%) of the HC employees participate in the retirement plan. In order for the plan to be non-discriminatory, how many non-HC employees must participate? 1) 46 2) 137 3) 183 4) 260

answer

2) 137 (260-65)*(1)(.7) multiplied by 1 because 100% of the HC employees participate

question

In defined contribution plan, all of the following are correct except: a) individual employee accounts b) no investment risk to participating employees c) benefit based on accumulated value in employee account d) employer and employee contribute to the account

answer

b) no investment risk to participating employees

question

In defined benefit plan, all of the following are correct except: a) employer manages the investments b) benefit based on salary and years of service c) benefits guaranteed by FDIC d) funded primarily by employer

answer

c) benefits guaranteed by FDIC

question

Life annuity payments from a 401k after age 55 are taxed as: 1) ordinary income 2) ordinary income plus 10% penalty 3) tax free

answer

1) ordinary income

question

Which of the following would qualify as a 401k hardship distribution? 1) purchase of a second home 2) remodeling of primary home 3) college expenses 4) insurance premiums

answer

3) college expenses

question

A revocable living trust (RLT) is usually established as an income tax shelter? a) true b) false

answer

b) false

question

Which of the following is true a) a RLT provides a tax shelter b) RLT is used to minimize probate fees c) RLT has no effect on estate tax d) property can not be transferred to trust at death

answer

b) RLT is used to minimize probate fees

question

Benefits of a RLT include all of the following except: a) continuity of management b) grantor retains control of property c) eliminate need for will d) flexibility in distribution

answer

c) eliminate need for will

question

Disadvantages of RLT include all of the following except: a) potential legal fees b) potential increase in income tax c) time and expense to transfer assets d) potential fees to corporate trustee

answer

b) potential increase in income tax

question

The grantor of the RLT can also be the trustee? a) true b) false

answer

a) true

question

The grantor of the RLT can also be the beneficiary? a) true b) false

answer

a) true

question

Megan has covered medical expenses of $15,500. Her health insurance policy has a $1,000 calendar year deductible, 20% coinsurance and $2,500 stop loss. What amount of the medical expense will the insurance company pay?

answer

12,000 (15,500-1,000) = 14,000 14,000*.2 = 2,900 which is greater than 2,500 stop loss Insurance will pay 15,500 - 1,000 - 2,500 = 12,000

question

Employer Sponsored Group Health Insurance Advantages

answer

1) Employer subsidizes the premium 2) Employee premium contributions are not included in taxable income 3) Employer provides incentives for health and wellness programs

question

Employer Sponsored Group Insurance Best Practices

answer

1) Avoid "autopilot" of your health insurance program 2) select best preferred provider option (PPO) --> these are doctors, hospitals, and other health care providers who have contracted with the insurance company to provide health care at reduced rates, including lower deductible, copay, and coinsurance 3) Annual review of deductible, coinsurance options 4) Participate in Assessment, Screening, or Wellness Programs 5) Consider a Health Savings Account

question

Health Savings Account

answer

1) personal tax-exempt account for paying qualified medical expenses 2) Eligibility - must have high deductible health policy (HDHP), must not be covered by Medicare 3) HSA balance may accumulate 4) Max annual contributions: --> single: 3400 --> family: 6750 5) HDHP Policy Required --> single: min deductible = 1300, max deductible + copay = 6550 --> family: min deductible = 2600, max deductible + copay = 13100

question

HSA Tax Status

answer

1) contributions are tax deductible 2) investment earnings are tax free 3) distributions to pay qualified medical expenses are tax free

question

Health Care Reform - HSA

answer

1) ACA - individuals: deductible contributions of 3550 annually 2) American Health Care Act - deductible contributions of 6550 for individuals and 13,100 for families; qualified medical expenses paid from the HSA expanded to include over-the-counter medications

question

Health Care Reform - HI availability and underwriting rules

answer

1)ACA --> dependents covered under parent's policy to age 26 --> no deductible or copay for preventive services --> no lifetime limits on policies --> no cancellation based on illness or claims --> insurers can not exclude pre-existing conditions 2) American Health Care Act - no changes to ACA

question

Health Care Reform - Coverage Mandate

answer

1) ACA - coverage mandated for individuals and groups. Individual and employer tax penalties apply 2) American Health Care Act --> eliminate tax penalties --> impose late enrollment penalty (30% of applicable premium) for 60 day lapse in coverage

question

Health Care Reform - Health Care Exchanges

answer

1) ACA --> State or Federal exchanges --> provide refundable tax credits based on income --> individuals must purchase insurance through exchange to get tax credit 2) American Health Care Act --> retain exchanges --> provide flat (non-refundable) tax credits adjusted for age and family size --> purchase of individual insurance though exchange is not required to qualify for tax credit

question

Health Care Reform - Premium Tax Credits

answer

1) ACA --> tax credits up to 50% of premium for individuals and families with individual income up to 46,680 and family of 4 income up to 95400 --> tax credits available if health insurance purchased through exchange 2) American Health Care Act - --> income based tax credits replaced with flat tax credits based on age and family size. Individual credits range from 2000 (under 30) - 4000 (over 60). Credits phased out at income levels between 75000 (individuals) and 150000 (households. Max family credit is 14000 --> tax credits available for purchase of any non-group health insurance

question

Health Care Reform - Rating Rules

answer

1) ACA - rating factors include only: plan category, age (variation of 3 to 1), geographic location, tobacco use, individual or family 2) American Health Care Act - retain ACA market rules except modify age rating to permit variation of 5 to 1

question

Health Care Reform - Medicaid

answer

1) ACA - expand medicaid to 138% of federal poverty level at State option 2) American Health Care Act --> state may apply for Innovation Grants and Stability Programs to provide financial help to high risk individuals --> eliminate ACA medicaid expansion as of January 1, 2020

question

Health Care Reform - Government Revenue

answer

1) ACA --> tax penalties related to individual and employer mandates --> tax on high value employer sponsored group plans --> 3.8% tax on investment income --> taxes on health insurers, pharmaceutical manufacturers, medical devices 2) American Health Care Act --> repeal medicare health insurance payroll tax increase, and repeal other ACA revenue provisions

question

Health Care Reform - Minimum Essential Coverages (MEC)

answer

1) ACA --> must cover 10 essential health benefit categories --> must be comprehensive. Plans that are not acceptable include: stand alone dental or vision, accident only, disability income, hospital plan daily indemnity only, workers compensation 2) American Health Care Act - same as above

question

ACA Required Coverages

answer

1) maternity care 2) rehabilitative and habilitate services 3) pediatric services 4) mental and behavioral health treatment 5) preventive and wellness services 6) hospitalization 7) laboratory services 8) prescription drugs 9) ambulatory patient services 10) emergency services

question

Health Care Exchanges

answer

1) established in each state (NC uses a Federal Exchange) 2) four tiers - 60, 70, 80, 90% coinsurance 3) individuals and small employers are eligible

question

Affordable Health Care Coverage

answer

1) annual employee contribution for self only coverage must be less than 9.69% of household annual income

question

Health Insurance Employer "Play or Pay" Mandates

answer

1) Employer doesn't offer any MEC for "substantially all" full-time employees AND at least one employee obtains subsidized coverage --> $2,000 annual fee per full-time employee (exclude the first 30 FT employees) 2) Employer offers MEC but it is either "unacceptable" or "unaffordable" --> $3,000 annual fee per each FT employee that receives premium tax credit

question

Factors Affecting Retirement Planning

answer

1) budgeting 2) savings and investing 3) shift from defined benefit to defined contribution 4) income tax planning 5) life expectancy 6) inflation 7) medicare supplement insurance and long term care 8) projected social security

question

Budgeting Tools

answer

1) set priorities --> savings and investing 2) on-line banking tools --> quicken --> assign category to each payment --> set automatic payments

question

Ideal Budget

answer

10% fun 15% savings 30% tax 45% foundation

question

Investments - Tax Strategy

answer

1) tax deferred - 401k - payroll deduct with employer contribution - IRA - personal account with 5,500 annual maximum 2) tax free -state 529 college savings plan - Roth IRA - 5500 annual maximum - health savings account - 22250-6650 annual - life insurance cash value 3) tax planning at retirement - goal is to diversify - tax free - tax deferred - capital gains and dividends - taxable as ordinary income

question

Health Insurance Terms

answer

1) Deductible - per benefit period 2) Coinsurance (20-80%) - applies after the deductible 3) Stop Loss Limit - dollar cap on insured's coinsurance payment 4) Copay - flat fee paid to provider at time of service

question

ACA Premium does not consider:

answer

Gender

question

Assisted living costs for those confined to nursing home are covered by medicare?

answer

False

question

Solutions to the Social Security funding crisis includes all of the following except?

answer

Reduce Retirement Age

question

First step in retirement planning process:

answer

Budgeting

question

Best tax option for retirement income:

answer

Tax Free

question

Most common employer sponsored retirement plan:

answer

401K

question

Stanley purchases a single premium immediate annuity for $210,000. The Annuity monthly incme is $1,075 with a 20 year minimum guarantee. Stanley's life expectancy is 25.2 years based on IRS charts. What is Stanley's Exclusion Ratio?

answer

65% 12 x 1075 x 25.2 = $325,080 210,000 / 325,080 = 0.65

question

In order to provide a lifetime income, Stanley and Ellen are considering rolling their 401K accumulations to an annuity at their age 67 retirement Should the 401K accumulations be rolled to an immediate or deferred annuity at age 67?

answer

Immediate

question

What annuity settlement option would you recommend to the Johnson's beginning at age 67?

answer

Life-20 year

question

Ben, age 65, purchases an immediate annuity for $108,000 with a life income of $1,000 monthly. Based on IRS table, Ben's life expectancy is 20 years. What is Ben's exclusion ratio?

answer

.45, i.e. he receives 12,000 a year and 5400 will be tax free, 6600 is taxable Total payout = 1,000*12*20 = 240,000 Exclusion ratio = 180/240 = .45

question

Stanley purchases a single premium immediate annuity for $210,000. The annuity monthly income is $1,075 for life with a 20 year minimum guarantee. According to the IRS life expectancy table, Stanley's life expectancy is 25.2 years What is Stanley's exclusion ratio?

answer

.65 Total payout = 1075*25.2*12 = 325,080 Exclusion ratio = 210,000/325,080 = .64599 ~ .65

question

In a defined contribution plan all of the following are correct except:

answer

No investment risk to contributing employees

question

In defined benefit plan all of the following are correct except:

answer

Benefits are guaranteed by FDIC

question

Life annuity payments from a 401K after the age of 55 are:

answer

Taxed as ordinary income

question

Disadvantages of Revocable Living Trusts include all of the following except:

answer

Potential increase on income tax

question

The Grantor of the RLT can also be the trustee?

answer

True

question

The Grantor of the RLT can also be the beneficiary?

answer

True

question

In the absence of legal will, property at death is distributed to:

answer

Beneficiaries based on state law

question

Current annual gift tax exclusion:

answer

$14,000

question

Assets in taxable estate include:

answer

All assets

question

Property eligible to be place in trust includes:

answer

LI, Investments, and Secondary Home

question

Life Insurance company assets are invested primarily in:

answer

Bonds

question

The primary safety net for policy holders in event of LI company insolvency is:

answer

State guaranty fund

question

NC guaranty fund limit per claim

answer

300,000

question

Primary LI Rating Agency is:

answer

A.M. Best

question

Which costs index includes the policy cash value?

answer

Surrender cost

question

Which cost index includes time value of money?

answer

Net payment and surrender cost

question

General power of attorney is necessary in addition to a health care power of attorney

answer

True

question

Benefits of Revocable living trusts include all of the following except:

answer

Eliminate need for a will

question

Revocable living trusts are used to:

answer

Minimize probate fees

question

Which of the following would qualify as a 401K hardship distribution:

answer

College expenses

question

Integrity Insurance Brokerage has 260 employees of which 65 are highly compensated (HC), and all 65 (100%) of the HC employees participate in the retirement plan. In order for the plan to be non discriminatory how many must participate?

answer

137 (260-65)(0.7) = 137

question

Retirement income from a nonqualified variable annuity is:

answer

Taxable as ordinary income based on the exclusion ratio

question

What annuity option would you recommend the Johnson's purchase?

answer

Life - 20 years

question

In order to provide lifetime income Stanley/Ellen are considering an Annuity. Should they purchase an Immediate or Deferred Annuity at age 67?

answer

Immediate

question

Primary purpose of an annuity is to protect against:

answer

Longevity risk

question

What is Dollar Cost Averaging

answer

Investing without regard to market cycle

question

Retirement Planning Process

answer

1) Establish objectives (85% of pre-retirement income) 2) Determine income from current retirement resources - investments and other liquid assets - retirement plan accumulation - social security - life insurance cash value 3) objectives minus income should be zero or negative

question

Retirement funding options

answer

1) participate in an employer sponsored qualified retirement plan 2) purchase a traditional or Roth IRA 3) establish a private (non-IRS qualified) savings or investment program

question

Develop a Comprehensive Retirement Program

answer

1) retirement funding 2) life insurance 3) disability income insurance 4) long term care 5) medicare supplement (medigap) 6) will 7) trust 8) health care power of attorney 9) general power of attorney

question

What is an annuity?

answer

1) provides lifetime income guarantee - risk management for longevity risk 2) two general types: - regular annuity - variable annuity 3) accumulation phase and payout phase - accumulation phase includes premium plus interest or investment income - payout phase provides for systematic liquidation of principal and income over annuitant's lifetime

question

Regular annuity: accumulation phase

answer

1) premiums paid to insurance company - single or multiple (flexible) premiums 2) investments in general account of insurance company 3) insurance company credits interest at current rate subject to minimum guarantee - interest accumulation is tax deferred - withdrawals prior to age 59.5 taxed as ordinary income plus 10% penalty

question

Regular Annuity: payout phase

answer

1) immediate annuity - payout begins immediately 2) deferred annuity - payout begins at a specified future age 3) payout options for life with guarantee options

question

Annuity: payout options

answer

1) life annuity with no guarantee 2) life annuity with fixed period guarantee 3) refund annuity - life annuity with refund of premium 4) joint and survivor annuity - life annuity to cover two lives

question

Variable Annuity: Accumulation Phase

answer

1) Investments in separate accounts of insurance company with funds selected by owner of annuity - may include minimum guaranteed return with restrictions on withdrawals

question

Variable Annuity: Payout Phase

answer

1) payments fluctuate based on performance of underlying investment account 2) potential hedge against inflation 3) may add guaranteed withdrawal benefit (GWB) and death benefit

question

When is the fixed annuity indicated?

answer

2) annuitant wants no responsibility for investing and managing the assets (automatic pilot) 2) safety of principle 3) guaranteed interest

question

When is the variable annuity indicated?

answer

1) annuitant wants some investment discretion 2) potential inflation hedge

question

Disadvantages of annuities

answer

1) fixed annuity offers no inflation hedge 2) 10% penalty tax on withdrawals prior to age 59.5 3) annuity payments are subject to ordinary income tax rates (based on non-qualified or qualified status) 3) capital gains tax rate not available 4) management fees and mortality charges - variable annuity 5) back-end surrender charge

question

Taxes: non-qualified and qualified annuities

answer

1) non-qualified (after tax) - tax deferred earnings - life annuity payments are taxable as ordinary income based on exclusion ratio - withdrawals pre-59.5 subject to tax plus 10% penalty - withdrawals are considered as interest out 2) qualified (pre-tax) - IRA funds and other IRS qualified retirement plans - deposits and earnings are tax deferred - withdrawals pre-59.5 subject to tax plus 10% penalty - annuity payouts after age 59.5 taxed as ordinary income

question

Alternatives to Annuities

answer

1) municipal bond funds - tax free income - no life income guarantee - potential investment risk 2) mutual funds - provides advantage of capital gains tax on capital appreciation - no life income guarantee - potential investment risk

question

Two types of IRAs

answer

1) tradition 2) Roth

question

Taxation - Traditional IRA

answer

1) annual contributions are tax deductible - subject to limits 2) investment earnings are tax deferred 3) distributions are taxable 4) max distribution: under age 50 = 5500, over age 50 = 6500

question

Traditional IRA Eligibility

answer

1) under age 70.5 2) employee or self-employed person with earned income 3) maximum income guidelines apply for those participating in employer sponsored plan 4) employees participating in employer-sponsored plan are eligible if income is below --> 72,000 (individual) --> 119,000 (married - both spouses participating --> 196,000 (married - one spouse participating) 5) those not participating in employer-sponsored plan are eligible without regard to income limits

question

IRA Phase-out Ranges

answer

1) individual: 62,000-72,000 2) married filing jointly (both participating): 99,000 - 119,000 3) married filing jointly (one spouse is a participant): 186,000-196,000

question

Spousal IRA

answer

1) up to 5500 annual contribution for non-working spouse

question

Traditional IRA Withdrawals

answer

1) withdrawal on or after age 59.5 are subject to tax 2) must begin withdrawal at 70.5 3) annuity spreads taxation over life expectancy 4) loans from an IRA are not permitted 5) pre-59.5 withdrawals are subject to tax + 10% penalty 6) exceptions to 10% penalty --> death or disability --> annuity distributions for life --> purchase of first home up to $10,000 --> higher education expense

question

Roth IRA

answer

1) contribution are not deductible 2) tax free investment income 3) contributions and accumulation may continue after 70.5 4) distributions after 59.5 and five years are tax free 5) max contributions: under age 50 = 5500, over age 50 = 6500

question

Roth IRA Eligibility

answer

1) income below 133,000 (single) or 196,000 (married) 2) may participate in employer-sponsored qualified plan

question

Roth IRA Withdrawals

answer

1) withdrawals are qualifed (tax free) if: - after age 59.5 and five years after accounts established - pre-age 59.5 and five years after the account established and based on death, disability or first time home purchase 2) non-qualified withdrawals are subject to tax earnings only with 10% penalty

question

MyIRA

answer

1) Roth IRA 2) same eligibility guidelines as regular ROTH 3) invested in US Savings Bonds 4) no fees 5) $25 initial and $5 min contribution 6) $15,000 max. accumulation; then convert to regular ROTH

question

Selecting a Tradition or ROTH IRA

answer

1) projected future tax bracket 2) projected future income level 3) participation in employer sponsored plan

question

IRA Funding Instruments

answer

1) individual retirement account - bank or brokerage firm as trustee - investment in mutual funds 2) individual retirement annuity - bank, brokerage firm, or insurance company as trustee - investment in annuity contract - funding IRA with life insurance is prohibited

question

Rollovers vs. Transfers

answer

1) rollove to individual - tax withholding - must rollover to an IRA or qualified plan within 60 days 2) transfer between institutions - no tax withholding - no 60 days requirement - recommended approach 3) funds may stay with former 401k for limited period

question

SIMPLE Plans

answer

1) employer sponsored IRA plans - 100 or fewer employees - no other qualified plans sponsored by employer 2) employees earning at least $5000 annually may participate 3) employee and employer contributions 4) employer contributions are mandatory

question

Contribution Limits - SIMPLE Plans

answer

1) employee: 12,500 max annual employee contribution + 3000 for employees age 50 and older 2) employer must contribute: dollar for dollar match up to 3% of employee's compensation or 2% of compensation for all eligible employees

question

Advantages of SIMPLE

answer

1) simple to install and administer 2) 100% vesting 3) employee portability of benefits 4) higher annual contribution limit than IRA

question

Simplified Employee Pension (SEP)

answer

1) funding by employer contributions only 2) annual employer contributions are not mandatory 3) all employees must be included in plan if: - at least age 21 and - employed 3 of preceding 5 calendar years (includes part time and seasonal employees)

question

SEP Contribution

answer

1) if employer contributions are made, must be uniform % of compensation for each employee 2) maximum employer contribution is lesser of: - 25% of employee's compensation or - $53,000 per employee

question

Advantages of SEP

answer

1) simple to install and administer 2) 100% vesting 3) employee portability 4) funding flexibility by the employer - employer may elect not to fund in a particular year 5) higher contribution limits than SIMPLE

question

Employer Sponsored Qualified Retirement Plans (401k)

answer

1) IRS approved retirement funding program 2) provides tax deferred accumulation 3) must be non-discriminatory 4) must provide special vesting rules

question

Qualified Retirement Plan Tax Benefits (401k)

answer

1) employer contributions are tax deductible 2) employee contributions are not subject to tax - Roth 401k contributions are included in taxable income 3) earnings on plan investments are tax deferred 4) participants do not pay taxes until amounts are actually received - Roth 401k distributions are tax free

question

Qualified Plan must be non-discriminatory

answer

1) minimum age and service criteria can not exceed age 21 and one year service 2) plan can not discriminate in favor of "highly compensated" employees 3) "highly compensated" employees are - 5% owners or - received total compensation in excess of $120,000 and in top 20% of compensation

question

Qualified Plan Participation Rules (401k)

answer

1) the plan must cover a minimum number of non highly compensated (Non-HC) employees equal to at least 70% of the total number of non-highly compensated employees

question

Qualified Plan Vesting Rules (401k)

answer

1) "vesting" means that the employee is entitled to take vested funds upon leaving the company 2) employee contributions plus earnings on employee are always 100% vested 3) employer contributions: one of the following must apply for defined contribution qualified plans - cliff vesting: less than 3 years = 0 vesting, more than 3 years = 100% vesting - graded vesting: vesting percentage increase from 20% after two years, 40% after 3, 60% after 4, 80% after 5, 100% after 6

question

Classification of Qualified Plans: Defined contribution

answer

1) individual account for each employee 2) employee contributions by salary reduction 3) employer may contribute 4) benefits based on accumulated values in employee's account 5) examples - profit sharing - 401k

question

Classification of Qualified Plans: Defined Benefit

answer

1) no individual employee accounts 2) funded primarily by employer 3) less flexibility and greater long term liability for the employer 4) employee's retirement benefit is based on a formula 5) benefits insured by Pension Benefit Guaranty Corporation (PBGC)

question

Jim retires after 30 years of service. His final average monthly salary prior to retirment is 7500. If his pension plan guarantees 1.5%, what will his monthly retirement benefit be?

answer

3375 (.015)*(7500)*(30) = 3375

question

Current Qualified Plan Trends

answer

1) employer need to minimize long term retirement plan liabilities 2) employer need for flexibility 3) employee need for flexibility and portability 4) majority of current plans are defined contribution

question

401k general features

answer

1) qualified profit sharing plan (defined contribution) 2) employees elect: - participation - contribution (salary reduction) 3) employees select asset allocation 4) employer may contribute based on percentage employee contribution

question

Eligible 401k employers

answer

1) for-profit employers - 401k 2) non-profit (tax exempt) employers - 403b 3) government employees not eligible for 401k - 457 plans

question

Employee salary reductions: 401k

answer

1) employee elects salary reduction annually 2) based on a percentage of annual compensation 3) maximum annual limit per employee is 18,000 4) 6,000 aditional annual catch up contribution for employees age 50+

question

Employer matching contributions: 401k

answer

1) usually a percentage of employee's contribution 2) maximum annual dollar contribution for employee and employer is 53000

question

Why is the 401k popular with employees?

answer

1) tax deferred 2) optional participation 3) employee elects % contribution 4) employer match 5) investment flexibility 6) portability

question

Why is the 401k popular with employers?

answer

1) flexibility in plan design and funding 2) no long term liability 3) no investment risk 4) administrative simplicity

question

Taxation of 401k Distributions

answer

1) ordinary income for distributions after age 59.5 2) ordinary income plus 10% penalty for withdrawal prior to age 59.5 3) exceptions to 10% penalty - annuity payments for life (after age 55) - death - disability - medical expenses exceeding 7.5% of AGI

question

401k Hardship Distribution

answer

1) no other funds available 2) distribution still subject to tax and 10% penalty 3) employee contributions suspended for 6 months 4) hardship examples: - medical expenses - purchase of a principal residence or expenses to prevent home foreclosure - higher education expenses

question

401k Loans

answer

1) not subject to hardship rules and 10% penalty 2) five year maximum pay back period 3) pay back by payroll deduction 4) if leave job before payback completed, loan become an early withdrawal with tax and 10% penalty

question

Taxation of Roth 401k Distributions

answer

1) "qualified distributions" are tax free if: - after age 59.5 and five years after account established - before age 59.5 and five years after account established AND based on death or disability 2) "non-qualified distributions" are subject to tax on earnings only with 10% penalty --> exceptions: - first time home buyer - life annuity (after age 55) - higher education expenses

question

Common 401k Mistakes

answer

1) failure to participate 2) failure to contribute enough to receive maximum employer match 3) borrowing from your 401k 4) failure to update asset allocation annually 5) investing more than 10% of 401k in employer's stock 6) cashing out during a job change (tax plus 10% penalty)

question

Success of your 401k plan is up to you!

answer

1) you must decide to participate 2) you decide the level of participation 3) you direct the investments (asset allocation) 4) you conserve the fund balance by avoiding premature distributions or loans

question

Pension Reform Legislation

answer

1) automatic enrollment in 401k - employee may opt out 2) automatic increases in contribution percentages 3) default investments - age based funds - risk based funds - balanced funds

question

Living Trust

answer

1) created during lifetime 2) written trust document is necessary 3) grantor can revoke trust at any time, until death 4) can hold any assets of grantor 5) can receive property at death by Will 6) no impact on income taxes - not a tax shelter 7) may have impact on estate taxes

question

Property Eligible for Trust

answer

1) life insurance 2) cash 3) stocks 4) bonds 5) residence 6) any other assets

question

Why set up a revocable trust?

answer

1) management of assets 2) conservation of assets 3) distribution of assets 4) estate planning

question

Trust - management of assets

answer

1) grantor retains lifetime control of property 2) grantor usually is the trustee 3) successor trustee continues to mange property if grantor incapacitate or deceased 4) unification of assets: LI, real estate, investments combined in single trust 5) privacy-terms of trust not public knowledge

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Trust - Conservation of Assets

answer

1) avoid cost of probate - property owned at death is subject to probate fees 2) trust is less likely than a will to be successfully challenged - protection from claims by unhappy heirs

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Trust - Distribution of Assets

answer

1) greater flexibility in distribution than with life insurance settlement options 2) unification and income distribution from diverse assets 3) trustee will invest and manage life insurance proceeds for the policy beneficiaries

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LI Settlement Option vs. LI Trust

answer

1) LIF settlement options - lump sum distribution -life income only or - life income with term guarantee - joint and survivor income 2) Revocable LI Trust - policy proceeds to trust - investment managment by trustee -distribution by trustee - ultimate flexibility - match beneficary's needs - privacy

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Disadvantage of a Revocable Living Trust

answer

1) legal and accounting fees - fiduciary tax return not required if grantor and trustee is same person 2) fees to corporate trustee (if applicable) 3) administrative issues - transfer of future assets to trust - transfer of mortgage to trust

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Trust Document

answer

1) specifies how assets are to be invested and managed 2) who receives income and principal 3) how income and principal is paid 4) when income and principal is to be paid to beneficiaries

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What is the job of the trustee?

answer

1) manage and invest assets of trust 2) make payment to beneficiaries 3) any natural person or corporation can be a trustee - grantor can be trustee - co-trustees can be named - successor trustee(s) should be named - corporate trustee can be named

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Who can be the beneficiaries?

answer

1) grantor 2) other primary beneficiaries: - named beneficiares (spouse, child) - class beneficiaries (children and grandchildren) - charity or institution

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Estate and Gift Taxes

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1) estate tax - 5 million dollar exemption and 40% rate 2) gift tax - each spouse may gift $14,000 annually, to an unlimited number of people, with no gift tax

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Use of Trust for Estate Planning

answer

1) marital deduction Trust A - outright distribution to spouse 2) family Trust B - life income for spouse; assets to children at spouse's death - also referred to as credit equivalent bypass trust - minimize estate tax at death of second spouse

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Pour-Over Will

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1) specific bequest of property not yet placed in trust - "I give all furniture, furnishings, jewelry and other personal effects to my spouse" 2) pour-over provision to trust - all property not subject to specific bequest goes to the trust 3) will appoints executor of estate

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General Power of Attorney

answer

1) authorizes an agent to transact business for you should you become incapacitated

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Health Care Power of Attorney

answer

1) authorizes an agent to communicate for you concerning medical treatment - a physician makes the decision that you are not capable of making your own health care decisions

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Living Will

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1) declaration of a desire for a natural death

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Insurance Company Ratings Agencies

answer

1) AM Best 2) Fitch 3) Moody's 4) S&P 5) Weiss

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State Guaranty Funds

answer

1) Protects against insurance company insolvency 2) pays claims if company declared insolvent 3) funded by assessments against all insurance companies 4) company assessment based on market share 5) per claim limit for NC Guaranty Fund is $300,000

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Shopping for Life Insurance

answer

1) select a professional financial advisor and discuss fiduciary duty (fiduciary acts solely in best interest of client) 2) determine your need for life insurance - cash and income needs - liquid assets, social security 3) match need to cash flow

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Shopping for Life Insurance (Cont.)

answer

1) determine the appropriate policy: - term - whole life - universal or variable 2) determine the interest adjusted cost 3) check LI company financial rating and dividend history

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Comparing Policy Cost

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1) interest adjusted cost - considers time value of money 2) two interest adjust cost indexes: - surrender cost - assumes policy surrender (includes policy's cash value) - net payment cost - assumes no surrender

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Review Policy Provisions and Company Financial Rating

answer

1) review and compare key policy provisions - waiver of premium - accelerated death benefit - loan and surrender charges - term life-renewable, convertible, re-entry rating 2) company financial rating and dividend history

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Policy Replacement - Factors to consider

answer

1) current insurability 2) surrender charges 3) cost of replacement policy 4) incontestable and suicide clauses 5) tax free exchange

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State Insurance Departments

answer

1) monitor company's financial solvency 2) licensing of agents and companies 3) approval of forms and rates 4) consumer complaints 5) state guarantee funds

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