Comprehensive Guide to Annuities and Retirement Plans: Definitions, Types, and Tax Implications

What is an annuity?

A financial product providing periodic payments over a fixed period or the lifetime of the annuitant, designed to protect against longevity risk.

How do annuities differ from life insurance?

Annuities provide income streams, while life insurance provides death benefits.

What are the sources of annuity payments?

Premiums paid, interest earned, and unliquidated principal of deceased annuitants.

Name three types of annuities.

Immediate, deferred, joint life (others include variable, fixed-indexed, longevity, QLACs, MYGAs).

When do immediate annuities begin payments?

Shortly after purchase.

What characterizes deferred annuities?

Payments begin at a future date and may have flexible premiums.

What is a key feature of variable annuities?

Income is linked to equity market performance, offering inflation hedging but with higher fees and risks.

How do fixed-indexed annuities work?

They combine market participation with principal protection.

What is the purpose of longevity annuities and QLACs?

To provide income starting at advanced ages, often with lower costs and limited liquidity.

Are annuities tax-deductible?

No, annuity premiums are not deductible for federal tax purposes.

How is annuity income taxed?

An exclusion ratio determines taxable and nontaxable portions of income.

What is an IRA?

A tax-advantaged retirement savings vehicle.

What are the two main types of IRAs?

Traditional IRAs and Roth IRAs.

What are the tax benefits of traditional IRAs?

Tax-deductible contributions and taxed distributions.

What are the tax benefits of Roth IRAs?

Tax-free qualified distributions and nondeductible contributions.

What are the early withdrawal rules for traditional IRAs?

Penalties apply before age 59½, except under specific conditions.

Can you contribute to a Roth IRA after age 70½?

Yes, if income eligibility requirements are met.

Can traditional IRAs be converted to Roth IRAs?

Yes, conversions are allowed.

What requirements must tax-qualified retirement plans meet?

Specific IRS requirements for favorable tax treatment, including broad coverage for non-highly compensated employees and adherence to minimum coverage and vesting rules.

Which two major acts govern private retirement plans?

ERISA (Employee Retirement Income Security Act) and the Pension Protection Act.

What is the typical age and service requirement for plan eligibility?

Age 21 and one year of service.

At what age are early withdrawals typically penalized?

Before age 59 1/2.

When do mandatory distributions (RMDs) generally begin?

At age 70 1/2.

Which type of plan promises a predetermined benefit and shifts investment risk to the employer?

Defined-benefit plan.

Which type of plan fixes contribution amounts and shifts investment risk to the employee?

Defined-contribution plan.

What is a cash-balance plan?

A defined-benefit plan that defines benefits as hypothetical account balances.

What does the PBGC insure?

Certain vested benefits if a defined-benefit plan terminates.

What type of contributions are made to a Roth 401(k)?

After-tax contributions, which allow for tax-free qualified distributions.

Which plan targets employees of public schools and tax-exempt organizations?

403(b) Plans.

Which type of plan is an employer-funded IRA with low startup costs and immediate vesting?

SEP (Simplified Employee Pension) Plans.

Which plan is designed for small employers and allows employee deferrals with employer matching or nonelective contributions?

SIMPLE Plans.

What is the contribution limit percentage for profit-sharing plans?

Contributions are generally limited to 25% of compensation.

What are the three main types of pension funding agencies?

Trust-fund plans, insured plans, or split-funded plans.

What is a Guaranteed Investment Contract (GIC)?

An insurance contract that guarantees principal and interest for a set term.

What dictates when an employee gains ownership of employer contributions?

Vesting schedules.

What is the difference between a traditional and Roth 401(k) contribution?

Traditional is pre-tax (distributions taxed); Roth is after-tax (qualified distributions are tax-free).

What feature allows employees over age 50 to contribute more to their plans?

Catch-up contributions.

What is a major issue regarding retirement savings balances in qualified plans?

Inadequate retirement savings balances among participants.

What is a key issue regarding retirement plan access across the workforce?

Incomplete labor force coverage (many employees are not covered by any private plan).

What is one major disparity problem concerning retirement benefits?

Gender disparities in benefits.

What risk is involved when retirement benefits do not increase with the cost of living?

Insufficient inflation protection.

What is a common mistake participants make that threatens retirement security?

Participant investment mistakes or poor use of lump-sum distributions.

What is the primary characteristic of a Defined-Benefit plan's contribution structure?

Employer contributions are variable to ensure the predetermined benefit is funded.