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Questions and Answers
Life insurance proceeds are generally taxed as which of the following?
Life insurance proceeds are generally taxed as which of the following?
A 60-year-old participant in a 401k plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true?
A 60-year-old participant in a 401k plan takes a distribution and rolls it over to an IRA within 60 days. Which of the following is true?
Which of the following is not true regarding policy loans?
Which of the following is not true regarding policy loans?
An insured decides to surrender his $100,000 whole life policy. The premium paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable?
An insured decides to surrender his $100,000 whole life policy. The premium paid into the policy added up to $15,000. At policy surrender, the cash surrender value was $18,000. What part of the surrender value would be income taxable?
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In a direct rollover, how is the money transferred from one plan to the new one?
In a direct rollover, how is the money transferred from one plan to the new one?
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Which of the following is incorrect regarding whole life insurance?
Which of the following is incorrect regarding whole life insurance?
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What method is used to determine the taxable portion of each annuity payment?
What method is used to determine the taxable portion of each annuity payment?
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Death benefits payable to a beneficiary under a life insurance policy are generally described as?
Death benefits payable to a beneficiary under a life insurance policy are generally described as?
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When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?
When a beneficiary receives payments consisting of both principal and interest portions, which parts are taxable as income?
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Who can make a fully deductible contribution to a traditional IRA?
Who can make a fully deductible contribution to a traditional IRA?
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A policy owner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. What is this nontaxable transaction called?
A policy owner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. What is this nontaxable transaction called?
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Which of the following is not an allowable 1035 exchange?
Which of the following is not an allowable 1035 exchange?
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In life insurance policies, cash value increases are taxed in which manner?
In life insurance policies, cash value increases are taxed in which manner?
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An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to rollover her plan to a traditional IRA, how much will she receive from the plan administrator and how long does she have to complete the tax-free rollover?
An employee quits her job where she has a balance of $10,000 in her qualified plan. If she decides to rollover her plan to a traditional IRA, how much will she receive from the plan administrator and how long does she have to complete the tax-free rollover?
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What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences?
What part of the Internal Revenue Code allows an owner of a life insurance policy or annuity to exchange or replace their current contract with another contract without creating adverse tax consequences?
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Study Notes
Life Insurance Proceeds
- Life insurance proceeds are generally not taxed as income.
401k Plan Distribution
- A 60-year-old taking a distribution and rolling it over to an IRA may face a 20% withholding tax; the distribution amount is reduced by this amount.
Policy Loans
- Money borrowed from the cash value of a life insurance policy is not taxable.
- A policy loan may be repaid after policy surrender and can be settled at death.
- Insurers can charge interest on outstanding policy loans.
Whole Life Policy Surrender
- Upon surrendering a whole life policy with a cash value of $18,000 and total premiums of $15,000, taxable income is $3,000.
Direct Rollover Process
- In a direct rollover, funds are transferred from trustee to trustee, ensuring tax advantages.
Whole Life Insurance Facts
- Cash value exceeding premiums paid is taxable, while premiums are not tax-deductible.
- Dividend interest received from whole life insurance policies is taxable.
- Policy loans are not tax-deductible.
Annuity Payment Taxation
- The taxable portion of each annuity payment is determined using the exclusion ratio.
Death Benefits and Taxation
- Death benefits payable under a life insurance policy are not subject to federal income taxation.
Taxability of Payments to Beneficiaries
- Payments to beneficiaries that consist of both principal and interest are only taxable on the interest portion.
Traditional IRA Contributions
- Fully deductible contributions to a traditional IRA can be made by individuals not covered by an employer-sponsored plan who have earned income.
1035 Exchange
- A nontaxable transaction involving the transfer of cash value from a life insurance policy to an annuity is known as a 1035 exchange.
Allowable 1035 Exchanges
- A whole life policy cannot be exchanged for a term policy under a 1035 exchange.
Cash Value Increases in Life Insurance Policies
- Cash value increases in life insurance policies grow tax-deferred and are only taxed when the policy is surrendered or cashed out.
Qualified Plan Balances
- If a qualified plan balance is directly paid out, the amount received may be $8,000 after withholding taxes, and the individual has 60 days to complete a tax-free rollover to a traditional IRA.
Internal Revenue Code Section 1035
- Section 1035 of the Internal Revenue Code allows life insurance or annuity policy owners to exchange contracts without adverse tax consequences.
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Description
Test your knowledge on federal tax considerations with this quiz based on Chapter 7. It covers topics like life insurance proceeds and 401k distributions. Perfect for students and professionals looking to refresh their understanding of tax implications.