Annuities and Retirement Planning Flashcards
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Read the first 6 Annuities and Retirement Planning flashcards as text
What is the primary difference between a qualified and a nonqualified annuity?
Answer: Qualified annuities are funded with pre-tax dollars; nonqualified with after-tax dollars
Qualified annuities are funded with pre-tax dollars (e.g., within an IRA or 401(k)), making all distributions fully taxable; nonqualified annuities use after-tax money, so only the earnings portion is taxed.
Which annuity rider guarantees that the contract owner's heirs will receive at least the total premiums paid if the annuitant dies during the accumulation phase?
Answer: Return of premium death benefit
A return of premium death benefit rider ensures that if the annuitant dies before annuitization, beneficiaries receive at least the total premiums paid, even if market losses reduced the account value.
How is an annuity death benefit treated for income tax purposes when paid to a named beneficiary?
Answer: The gain (earnings) portion is subject to ordinary income tax
Unlike life insurance death benefits, the gain accumulated inside a nonqualified annuity is subject to ordinary income tax when distributed to a beneficiary; only the cost basis passes income-tax-free.
What is a 'surrender charge' in a deferred annuity contract?
Answer: A penalty imposed if the owner withdraws funds within the surrender charge period
A surrender charge is a back-end contingent deferred sales charge assessed if the owner withdraws more than the free-withdrawal amount or fully surrenders the contract during the surrender charge period (typically 5–10 years).
In the context of qualified retirement plans, which annuity form is required as the default payout option for married participants under ERISA?
Answer: Qualified joint and survivor annuity (QJSA)
ERISA requires that defined benefit plans and certain defined contribution plans offer a qualified joint and survivor annuity (QJSA) as the default form of benefit for married participants, protecting surviving spouses.
What is a 'longevity annuity' (also called a deferred income annuity or DIA)?
Answer: An annuity purchased today that begins income payments at a future age, such as 80 or 85
A longevity annuity (DIA) is purchased with a lump sum but defers income payments until an advanced age (e.g., 80–85), providing insurance against outliving assets at the most vulnerable stage of retirement.