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What are annuities?
They are products sponsored by insurance companies in which investment income grows tax-deferred. They may be fixed or variable.
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Fixed annuity: who takes the investment risk, is it a security, what account is it in, what type of portfolio does it hold, and is it a good inflation hedge?
- Investment risk: insurance company
- Security: no
- Account: general
- Portfolio: safe, secure, and predictable investments
- Inflation hedge: poor
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Variable annuity: who takes the investment risk, is it a security, what account is it in, what type of portfolio does it hold, and is it a good inflation hedge?
- Investment risk: annuitant
- Security: yes
- Account: separate
- Portfolio: many different sub accounts that meet investor objectives
- Inflation hedge: better
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What is the separate account?
- It is an investment product regulated under the investment company act of 1940
- It is registered with the SEC
- It must be sold with a prospectus
- Investments may be changed in it during the accumulation phase
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What are some examples of separate accounts?
- SP 500 Index subaccount
- Intrnational
- High yield corporate bond
- value
- biotech
- GNMA
- aggressive growth
- global
- special situations
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What is the tax situation during the accumulation phase?
- Units are purchased after-tax with no deduction
- Investment income is tax-deferred until withdrawn
- During this phase, the account is valued in terms of accumulation units
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What is the AUV?
Accumulation Unit Value (similar to a NAV) which is the price to buy into a variable annuity. It is calculated at the end of the business day.
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How do withdrawals work during the accumulation phase?
- Annuitants may choose to take withdrawals. They control the timing and ammount.
- Only the earning portion is taxable
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What is a premature withdrawal from an annuity?
- Withdrawal before 59.5 years
- 10% penalty
- The gross is added to taxable income
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How do you take a loan against an annuity?
You can take it against the accumulated value, but it is taxable and interest is charged (by reducing the number of accumulation units)
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What happens if you die during the accumulation phase?
- If you die, the beneficiary is paid the greater of: the total contributions or the current value
- Any amount above the cost basis (contributions) is taxable
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What happens during the annuitization phase?
- Accumulation units are converted into a fixed number of annuity units.
- This is based on age/gender, life expectancy, payout option selected, and value of the separate account
- Payout = annuity units * value
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What are the 4 payout options for an annuity? Describe them.
- Straight life: annuitant receives payments for life, but family gets nothing (highest payout, highest risk)
- Life annuity with period certain: Payments are made to the annuitant for life or to the beneficiary if the annuitant dies for a specified minimum number of years
- Joint and last survivor annuity: Payments are made as long as one annuitant is living (1 of 2 spouses)
- Unit refund life annuity: Annuitant receives an amount at least equal to original investment (paid to beneficiary)
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What is a qualified annuity?
- 403B is an example
- Only offered to employees of tax-exempt organizations or public schools
- Deductible (pre-tax) contributions, which results in zero cost basis
- Contribution amount is limited
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What is a non-qualified annuity?
- Available to any person through insurance company or broker-dealer
- Non-deductible contributions
- Unlimited contributions
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What is a 457 plan?
Offered by state/local governments to employees--has features of a qualified annuity.
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What is the target audience of an annuity?
- 30-55 years
- Tax deferred growth or to offset inflation
- Persons who have maximized qualified plan contributions
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Who should not get an annuity?
- Senior citizens/people needing immediate tax benefits
- Investors with short time horizons
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What is a 1035 exchange? What is the concern?
1035 is a rollover to a new annuity. Customer must benefit and the RR must have their recommendation signed and approved by the principal.
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What is a 529?
- Funded with after-tax dollars, this grows tax-deferred but can be removed tax-free for education.
- Transfers from state to state
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What is the max contribution to a 529?
- $15k per person per year to avoid the gift tax
- Doubled for married couples
- You can front load 5 years of contributions
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529 Maximum withdrawal for K-12?
$10k
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What is a 529 ABLE?
This is a 529 plan for disabled people who are receiving SS disability, Medicaid, or private insurance payments.
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