Question 1

Donna, age 50, is single and earns $40,000 annually. She is covered under her employer's retirement plan. Donna would like to start a traditional IRA and contribute $4,000 this year. Which of the following describes her ability to establish a traditional IRA and the tax treatment of her contribution?

Accepted Answer

A)   Her contribution is fully tax deductible.
B)   Her contribution is partially tax deductible.
C)   No portion of the contribution is tax deductible.
D)   Donna is not eligible to establish a traditional IRA, so no contribution can be made. A

Question 2

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). If Juanita is alive 20 years later, how much of the $6,000 received during the year is taxable?

Accepted Answer

A)   nothing
B)   $3,000
C)   $4,500
D)   $6,000 D

Question 3

Traditionally, tables have been prepared showing how long IRA funds will last based on rates of return and annual withdrawal rates. These tables, however, assume constant returns over the projection period. Many financial planners are now using a technique that allows for fluctuations in market returns. A computer is programmed to estimate how long funds will last under many different return scenarios and to determine the probability that funds will last until a specified age. This technique is called

Accepted Answer

A)   decision-tree analysis.
B)   sensitivity analysis.
C)   computer simulation.
D)   cost-benefit analysis. C

Question 4

Daryl, age 42, quit his job. His employer offered a defined contribution pension plan, and the balance in the account was $30,000 when Daryl quit. He can avoid immediate taxation of these funds by

Accepted Answer

A)   taking a lump-sum distribution.
B)   using an IRA rollover account.
C)   receiving the money through four equal installments.
D)   using the funds to purchase common stock issued by the former employer.

Question 5

Which of the following statements about converting a traditional IRA to a Roth IRA is (are) true?
I.Such conversions can be done with no income tax consequences.
II.Qualified distributions from a Roth IRA after a conversion are received tax-free.

Accepted Answer

A)   I only
B)   II only
C)   both I and II
D)   neither I nor II

Question 6

Insurers offering variable annuities charge a number of expenses. One category of expenses is to pay the fund manager and to pay brokerage fees. This expense is the

Accepted Answer

A)   investment management charge.
B)   administrative charge.
C)   surrender charge.
D)   front-end load.

Question 7

Cassie, age 62, paid a life insurer $100,000 in exchange for a life annuity. If Cassie dies before receiving 120 monthly payments from the insurer, the remaining payments will be made to a beneficiary. If Cassie dies after receiving 120 payments, no additional payments are made by the insurer. The annuity option Cassie selected it

Accepted Answer

A)   life annuity, no refund.
B)   life annuity with period certain.
C)   installment refund annuity.
D)   cash refund annuity.

Question 8

During the funding period, the premiums paid for a variable annuity are used to purchase

Accepted Answer

A)   annuity units.
B)   immediate participation shares.
C)   mutual fund shares.
D)   accumulation units.

Question 9

Which of the following statements is (are) true regarding the Roth IRA?
I.Roth IRA contributions are tax deductible.
II.Roth IRA investment income accumulates income-tax free.

Accepted Answer

A)   I only
B)   II only
C)   both I and II
D)   neither I nor II

Question 10

Rita is 66 years old. She earned $20,000 this year working part-time at a store and her modified adjusted gross income was $28,000. Rita is considering making a $3,000 contribution to her traditional IRA. Which of the following statements is true regarding this contribution?

Accepted Answer

A)   Rita cannot contribute to her traditional IRA because she is over age 65.
B)   Rita can make a $3,000 contribution to her traditional IRA, but it is not tax deductible.
C)   Rita can make a $3,000 contribution to her traditional IRA, but it is only partially tax deductible.
D)   Rita can make a $3,000 contribution to her traditional IRA, and it is fully tax deductible.

Question 11

Which of the following statements is (are) true with respect to a joint-and-survivor annuity?
I.Some joint-and-survivor annuities reduce the income payment after the first annuitant dies.
II.No payments are made after the first annuitant dies.

Accepted Answer

A)   I only
B)   II only
C)   both I and II
D)   neither I nor II

Question 12

Which of the following statements is (are) true with respect to an equity-indexed annuity?
I.The maximum percentage gain is usually capped.
II.There is no downside protection against loss of principal if the annuity is held to term.

Accepted Answer

A)   I only
B)   II only
C)   both I and II
D)   neither I nor II

Question 13

Which of the following statements is (are) true with respect to variable annuities?
I.The price at which accumulation units can be purchased fluctuates during the funding period.
II.The value of annuity units fluctuates over time.

Accepted Answer

A)   I only
B)   II only
C)   both I and II
D)   neither I nor II

Question 14

Agnes and Mary Clare, two elderly sisters, own an annuity covering both of their lives. The annuity pays benefits to them until the first sister dies, then the annuity terminates. Agnes and Mary Clare own a(n)

Accepted Answer

A)   flexible premium annuity.
B)   joint life annuity.
C)   longevity annuity.
D)   joint-and-survivor annuity.

Question 15

Which of the following statements about the withdrawal of funds from a traditional IRA is true?

Accepted Answer

A)   Withdrawals of deductible contributions between the ages of 59.5 and 65 are subject to a tax penalty unless they are withdrawn because of specified circumstances such as death or long-term disability.
B)   Amounts attributable to nondeductible contributions are fully taxable as ordinary income when received.
C)   Withdrawals must begin no later than April 1 of the year following the calendar year in which an individual attains age 70.5.
D)   Withdrawals must be taken in the form of an annuity.

Question 16

Which of the following statements is (are) true about a longevity annuity (longevity insurance)?
I.If the annuitant dies during the deferral period, the purchase price of the annuity is forfeited.
II.Longevity insurance is an example of an immediate annuity.

Accepted Answer

A)   I only
B)   II only
C)   both I and II
D)   neither I nor II

Question 17

Stan paid an insurance company $50,000 for a fixed annuity when he was 50 years old. At age 62, Stan plans to begin to receive payments from the insurer. There are no guarantees on the number of payments he will receive. Based on the description provided, this annuity can be described as a(n)

Accepted Answer

A)   deferred annuity.
B)   life annuity with guaranteed payments.
C)   immediate annuity.
D)   variable annuity.

Question 18

Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n)

Accepted Answer

A)   account administration fee.
B)   investment management fee.
C)   front-end load.
D)   surrender charge.

Question 19

Life annuity payments are made up of all of the following EXCEPT

Accepted Answer

A)   return of premiums.
B)   interest earnings.
C)   unliquidated principal of annuitants who live too long.
D)   unliquidated principal of annuitants who die early.

Question 20

Which of the following statements is (are) true concerning the joint and survivor annuity settlement option?
I.Under this option, payments begin after the first annuitant dies.
II.This settlement option is often selected by married couples.

Accepted Answer

A)   I only
B)   II only
C)   both I and II
D)   neither I nor II

Exam 14: Annuities and Individual Retirement Accounts

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months) . If Juanita is alive 20 years later, how much of the $6,000 received during the year is taxable?

Daryl, age 42, quit his job. His employer offered a defined contribution pension plan, and the balance in the account was $30,000 when Daryl quit. He can avoid immediate taxation of these funds by

Which of the following statements about converting a traditional IRA to a Roth IRA is (are) true? I.Such conversions can be done with no income tax consequences. II.Qualified distributions from a Roth IRA after a conversion are received tax-free.

Insurers offering variable annuities charge a number of expenses. One category of expenses is to pay the fund manager and to pay brokerage fees. This expense is the

During the funding period, the premiums paid for a variable annuity are used to purchase

Which of the following statements is (are) true regarding the Roth IRA? I.Roth IRA contributions are tax deductible. II.Roth IRA investment income accumulates income-tax free.

Rita is 66 years old. She earned $20,000 this year working part-time at a store and her modified adjusted gross income was $28,000. Rita is considering making a $3,000 contribution to her traditional IRA. Which of the following statements is true regarding this contribution?

Which of the following statements is (are) true with respect to a joint-and-survivor annuity? I.Some joint-and-survivor annuities reduce the income payment after the first annuitant dies. II.No payments are made after the first annuitant dies.

Which of the following statements is (are) true with respect to an equity-indexed annuity? I.The maximum percentage gain is usually capped. II.There is no downside protection against loss of principal if the annuity is held to term.

Which of the following statements is (are) true with respect to variable annuities? I.The price at which accumulation units can be purchased fluctuates during the funding period. II.The value of annuity units fluctuates over time.

Agnes and Mary Clare, two elderly sisters, own an annuity covering both of their lives. The annuity pays benefits to them until the first sister dies, then the annuity terminates. Agnes and Mary Clare own a(n)

Which of the following statements about the withdrawal of funds from a traditional IRA is true?

Which of the following statements is (are) true about a longevity annuity (longevity insurance) ? I.If the annuitant dies during the deferral period, the purchase price of the annuity is forfeited. II.Longevity insurance is an example of an immediate annuity.

Stan paid an insurance company $50,000 for a fixed annuity when he was 50 years old. At age 62, Stan plans to begin to receive payments from the insurer. There are no guarantees on the number of payments he will receive. Based on the description provided, this annuity can be described as a(n)

Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n)

Life annuity payments are made up of all of the following EXCEPT

Which of the following statements is (are) true concerning the joint and survivor annuity settlement option? I.Under this option, payments begin after the first annuitant dies. II.This settlement option is often selected by married couples.