3.d

Question 1

What are the key features of an annuity when used for retirement?

Answer 1

Annuities are nonqualified plans.
* Contributions: Made with after-tax money (not deductible).
* Contribution Limits: No limit on how much you can invest.
* Growth: Grows tax-deferred.
* Withdrawals: Only the earnings/gains are taxed.

Question 2

Is a Traditional IRA technically a ‘qualified’ plan?

Answer 2

No. Technically, qualified plans must be employer-sponsored.

However, IRAs have many of the same rules (tax-deductible contributions, tax-deferred growth, taxation on withdrawal) and are best thought of as being in the same family as qualified plans. They are ‘self-sponsored retirement plans.’

Question 3

What are the rules for contributing to a Traditional IRA?

Answer 3

• You must have earned income (from work, not investments).
• You can contribute up to an annual maximum, or 100% of your earned income, whichever is less.
• There is a ‘catch-up’ provision allowing those age 50 and over to contribute an additional amount.
• The contribution deadline is April 15 of the following year.

Question 4

How are withdrawals from a Traditional IRA taxed? What if you take money out before age 59½?

Answer 4

• Taxation: All withdrawals are taxed as ordinary income.
• Early Withdrawal: If you are under age 59½, you pay ordinary income tax PLUS a 10% penalty.

Question 5

Name three situations where you can avoid the 10% penalty on an early IRA withdrawal.

Answer 5

You can avoid the 10% penalty (but not the tax) for:
* Death or disability of the owner.
* First-time home purchase (up to $10,000).
* Qualified education expenses.
* Certain medical premiums or expenses.

Question 6

When must an owner of a Traditional IRA start taking RMDs? What is the penalty for not taking one?

Answer 6

• Start Date: RMDs must begin by April 1 of the year after the owner turns 73.
• Penalty: Failure to take the full RMD results in a 25% penalty on the amount that should have been withdrawn.

Question 7

What can you NOT invest in or do within an IRA?

Answer 7

Prohibited Investments:
* Collectibles (art, stamps, rare coins)
* Life Insurance
* Municipal Bonds (not technically banned, but highly inappropriate and unsuitable)

Prohibited Practices:
* Margin trading
* Short selling stock
* Selling uncovered options

(Selling covered calls is allowed.)

Question 8

How are contributions to a Roth IRA different from a Traditional IRA?

Answer 8

• After-Tax: Contributions are made with after-tax dollars (they are NOT tax-deductible).
• Income Limits: High-income earners may be prohibited from contributing.
• Combined Limit: The total you can contribute to ALL your IRAs (Roth and Traditional) cannot exceed the annual maximum.

Question 9

How are qualified distributions from a Roth IRA taxed?

Answer 9

Qualified distributions are 100% TAX-FREE!

To be ‘qualified,’ two conditions must be met:
1. The account must have been open for at least 5 years.
2. The owner must be at least age 59½.

Question 10

When does the owner of a Roth IRA have to start taking RMDs?

Answer 10

Never.

There are no RMDs for the owner of a Roth IRA during their lifetime. (Beneficiaries who inherit a Roth IRA do have RMDs).

Question 11

What is the difference between an IRA Rollover and an IRA Transfer?

Answer 11

• Rollover: You take possession of the money. You have 60 days to deposit it into a new IRA. You can only do this once per year.
• Transfer: The money moves directly from one firm (trustee) to another. You never touch the funds. There is no limit on how many transfers you can do.