66-10 Flashcards
True or False: Only one person must provide information to open a joint account.
False
Municipal bond interest is exempt from __________ tax.
federal
Who is eligible to contribute to a qualified annuity?
Public school employees [403(b)] and certain non-profit organization employees [501(c)3]
What is the penalty for making excess contributions to an IRA?
6% of the excess
True or False: Excess contributions made to an IRA will still be deductible and will grow tax-deferred.
False
IRA contributions must be made in what form?
Cash
What are some of the investments that are not suitable for IRA contributions?
Collectibles, insurance, and metals (except U.S. gold and silver coins)
Anyone with __________ income may contribute to an IRA.
earned
Rollovers must be completed within ____ days.
60
Only one rollover is allowed per rolling ____ months.
12
True or False: To avoid a late withdrawal penalty, IRAs have a required minimum distribution (RMD) provision.
True
How is a Roth IRA contribution different from a Traditional IRA contribution?
The Roth IRA contribution is always made on an after-tax basis.
Early withdrawal without penalty is allowed for what reasons?
Death, disability, qualified higher education expenses, or first-time home buyer ($10,000 limit)
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
private pension
According to ERISA, are there any standards that must be followed regarding how money is invested?
Yes. The plan’s trustee must abide by the Uniform Prudent Investor Act.
Describe the employees who must be eligible to contribute to an ERISA qualified plan.
Employees who are 21 years or older with one year of full-time service
What retirement plans are available to the self-employed?
Keogh Plans and SEPs
May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan?
Yes, provided the Keogh contribution is solely based upon the employee’s self-employment income.
May an individual with a Keogh Plan also fund an IRA?
Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax-deductible.
_____ Plans are college savings plans with high contribution limits set by the state sponsor.
529
Describe the tax treatment of contributions made to a 529 Plan.
They are after-tax contributions that may possibly grow tax-free.
A savings plan which funds both elementary and higher education is referred to as the ____________________________.
Coverdell
If not needed for a child’s education, may the funds in a 529 Plan be transferred to a relative’s 529 Plan?
yes
If an employer makes a Keogh contribution on its own behalf, what must be done for its employees?
A contribution at the same percentage must be made for the employee.
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
qualified
Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?
non-qualified
A limited partnership could be formed by a minimum of how many individuals?
two
What document is filed with the state of legal domicile to create a partnership?
Certificate of Limited Partnership
What does the Partnership Agreement define?
The rights, liabilities, and obligations of each partner
To become a limited partner, the __________________’s signature is required on the Subscription Agreement.
general partner’s
____________ Partners are the primary contributors of capital.
limited
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
Income or estate tax is an example of a _______________________ tax.
progressive or graduated
How is basis determined for the recipient of gifted securities?
Basis will be the donor’s cost or market value, whichever is lower.
When securities are gifted, the recipient’s holding period will be _______________________.
same as the donor’s
What business structure provides flow-through tax treatment and has a P&L reported on the owner’s personal tax return?
An S Corporation
List some important considerations when determining the suitability of recommendations made to customers.
Investment objectives, financial situation, risk tolerance, tax status
List some of the different types of institutional clients.
IAs, BDs, investment, insurance, or trust companies, banks, savings and loan associations, and pension plans
If a client wins $1 million, what should an agent or an IAR do?
Update the client’s information that is on file
To open any account on behalf of a corporation, what document must agents and IARs examine?
Corporate Resolution
True or False: C Corporations are subject to double taxation.
True. The corporation pays tax on its earning and any distributions are taxed to the owners (shareholders).
The maximum number of shareholders in an S Corporation is _____.
100
What is the primary purpose of forming a family limited partnership (FLP)?
To minimize estate tax and gift tax liabilities
What is required to receive the tax benefits of a family limited partnership?
A legitimate business purpose is required. (If created solely for tax benefits, the IRS may disallow the benefits.)
The tax treatment of a limited liability company (LLC) is similar to the treatment of what other entity?
a Subchapter S Corporation
What are the contents of an estate?
The total assets and liabilities of a decedent
What are the different terms used to identify the individual who sets up a trust?
Creator, maker, grantor, donor, trustor, settlor
The __________ is the person who has fiduciary control over a trust.
trustee
What are the differences between a simple and a complex trust?
A simple trust must distribute earnings, but not principal. Complex trusts may retain earnings or distribute principal.
What are the benefits of setting up an irrevocable trust?
It will reduce estate taxes and also avoid probate.
What is the benefit of establishing a revocable trust?
It avoids probate.
When investing for an estate, the most suitable investments are normally _______-term.
short-term
Who establishes a testamentary trust?
The estate of the deceased
When is an inter vivos trust established?
during the donor’s lifetime
In a trust, all actions of the trustee must be for the benefit of the ______________.
beneficiary
To whom will the earnings produced in an irrevocable trust normally be taxed?
the trust
The earnings generated in a revocable trust will be taxed to the __________.
grantor
In which type of trust could the grantor not also be the trustee?
A testamentary trust, since it is established by the estate of the grantor
When selling inherited securities, how is the beneficiary’s cost basis calculated?
The cost basis is the asset’s market value at the time of death (a stepped-up basis)
When receiving securities as a gift, how is the recipient’s cost basis calculated?
The cost basis is the lower of the donor’s original basis or the market value at the time of the gift.
Will estate tax apply when assets are left to a spouse?
Generally there is no estate tax between spouses. However, if the spouse is a non-U.S. person, the exclusion is denied.
A revocable trust will eliminate __________, but will not reduce _________ tax.
eliminate probate, but not reduce estate tax
An irrevocable trust will eliminate __________ and will reduce _________ tax liability.
eliminate probate and will reduce estate tax liability
A trust is required to be managed for the benefit of the _____________.
beneficiary
Name the person who establishes a trust.
the grantor or donor
Define an estate.
The total of all assets and liabilities of a decedent
True or False: When conducting a client’s financial analysis, liquid investments would be considered long-term assets.
false. they are current assets
True or False: When formulating a financial plan, it is always important to consider the client’s liquidity needs.
True
Identify the acronym: AMT
Alternative Minimum Tax
Identify the acronym: RMD
Required Minimum Distribution
Identify the acronym: IRA
Individual Retirement Account
What is ERISA?
Employment Retirement Income Security Act
Identify the acronym: ESA
Education Savings Account (Coverdell)
Identify the acronym: SEP
Simplified Employee Pension Plan
Identify the acronym: UGMA/UTMA
Uniform Gifts to Minors Act / Uniform Transfers to Minors Act (governs custodial / minor’s accounts)
Define a sole proprietorship.
A business that is owned by one person who is responsible for all management decisions and entitled to all profits
For a qualified retirement plan, what document details the plan’s needs, goals, time horizon, and investment philosophy?
The investment policy statement
______________ retirement plans need not meet IRS requirements for employee coverage, contribution limits, and vesting.
non-qualified
Name two examples of nonqualified retirement plans.
Payroll deduction plans and deferred compensation plans
True or False: A beneficiary of a trust account must pay the associated taxes.
False. Taxes are paid by the trust
List some of the common financial goals.
Income, growth, preservation of capital, liquidity, tax relief, and speculation
If a client is reluctant to disclose information, what must an IAR do?
Take the information given and create a plan based on that information. An IAR may not make assumptions.
True or False: Spouses may give an unlimited amount to one another and not be subject to the gift tax.
True
Regarding clients, list some of the non-financial considerations an IAR must consider?
Age, occupation, time horizon, investment experience, and social values
Define the investment policy statement.
A document that describes a retirement plan’s investment strategy, as well as the specific needs of the plan
True or False: Employees are fully vested in their own contributions.
True
True or False: A defined contribution plan provides employees with a fixed monthly payment at retirement.
False
Who is eligible for a 457 plan?
Employees of state and local governments
How often may an individual roll over an IRA?
once every 12 months
When may an individual withdraw from an IRA without penalty?
After he turns 59 1/2
S-Corporations are not subject to ________________.
double taxation
Reinvesting dividends in a mutual fund creates a ________ event.
taxable
What is the cost basis for a gift of a collectible (e.g., jewelry)?
the donor’s cost
What is the formula for calculating an individual’s personal net worth?
Assets - Liabilities = Net Worth
What is the formula for calculating an individual’s personal discretionary income?
Income - Expenses = Discretionary Income
True or False: S-Corporations may have foreign residents as owners.
False
What is the difference in owner’s liability when forming an LLC as opposed to a sole proprietorship?
The owners of an LLC have limited liability, while the owner of a sole proprietorship has unlimited personal liability.
What would be an advantage to choosing corporation formation as opposed to a partnership?
Partnerships are dissolved due to the death of one of the partners, while corporations may continue.
If someone receives a collectible (e.g. jewelry) as a gift, what is the cost basis for tax purposes?
donor’s original cost
What are the general characteristics of a Joint Tenants With Right of Survivorship (JTWROS) account?
It has multiple owners and each has trading rights. If one owner dies, her account value passes to the other owner(s).
What are the general characteristics of a Joint Tenants in Common (JTIC) account?
It has multiple owners and each has trading rights. If one owner dies, his account value passes to his estate.
What form of business provides owners with limited liability and income that flows through to its investors?
LLC
What would an IAR consider when performing a capital needs assessment for a client?
The client’s future earnings potential, expenses, and life expectancy, but also inflation expectations
Retirement goals, future college tuition, and remaining mortgage payments are examples of _______ needs.
capital
True or False: When managing assets in a trust, the trustee should consider the grantor’s tax status.
False
Identify the acronym: AGI
adjusted gross income
What is adjusted gross income (AGI)?
An individual’s taxable income (e.g., wages, commissions, tips, dividends, and interest)
What happens to a general partnership when a general partner dies?
it is dissolved
If an IAR’s client has just died without a will, from whom may she accept instructions?
intestate Administrator
True or False: Employers are required to contribute a specific amount to their employees’ SEP-IRAs.
False
What factors would determine a person’s tax status?
Age, marriage status, state or country of residence, earned income, and unearned income.
What is the tax rate called that applies to the last dollar amount a person earns?
Marginal Tax Rate
The ________ tax rate is used to tax the last dollar amount a person earns.
marginal
True or False: The amount left on a mortgage is found on a customer’s cash flow statement.
False
True or False: Mortgage payments are found on a customer’s cash flow statement.
True
True or False: Tax refunds are found on a customer’s cash flow statement.
True
When is an individual (single filer) eligible to make tax-deductible contributions to a Traditional IRA?
When not covered by an employer-sponsored plan or when covered by a plan and below an adjusted gross income limit.
Which plans impose income limitations on the contributors, 529 plans or Coverdell ESAs?
Coverdell
How are S Corporations treated for tax purposes?
S Corporations have the same flow-through treatment as partnerships (i.e., they are not taxable entities).
What business structure does not provide for flow-through tax treatment?
C Corporations
True or False: When investing in a 401(k) plan, all forms of taxes are deferred on the money contributed.
False. Although income taxes are deferred, unemployment and Medicare taxes must still be paid in the current year.
____% of earned income up to $_______ is the maximum contribution to an IRA.
100% up to $5,500
If Joe is 55 years old, how much could he contribute to his IRA?
For anyone 50 or older, an additional $1,000 is allowed, making the maximum contribution $6,500.
A contribution of $_______ can be made to a Spousal IRA for a non-working spouse.
$5,500
True or False: 529 Plans allow for a 5-year front-end contribution of $70,000, which avoids gift tax.
True
Grandparents contributing to a grandchild’s 529 Plan may give how much money and still avoid gift tax consequences?
Front-loading 5 years of contributions is allowed; therefore, each could contribute $70,000 for a total of $140,000.
A gift of securities between spouses will be subject to gift tax when more than what amount?
no limit on gift size between spouses
Without incurring gift taxes, individuals may give gifts of up to $________ per year to any number of persons.
$14,000
How much may be contributed to a Simplified Employee Pension (SEP) plan?
Employers may contribute 25% of employee income up to $51,000 per year.
What is the maximum annual contribution to a 401(k)?
$17,500
What is the maximum annual contribution to a 403(b)?
$17,500
What is the maximum annual contribution to a 457?
$17,500
What are some of the acceptable investments for IRA contributions?
Stocks, bonds, mutual funds, and CDs
There is a ____% penalty for early withdrawals from an IRA.
10%
When must IRA withdrawals begin in order to avoid the late withdrawal penalty?
By April 1st of the year after an individual turns age 70 1/2
How are withdrawals from a Traditional IRA treated for tax purposes?
ordinary income
How are withdrawals from a Roth IRA treated for tax purposes?
tax-free if account is open for at least 5 years and not an early withdrawal
Contributions to a Keogh plan are solely based on _________________ income.
self-employment
How much may be contributed to a Coverdell each year?
$2,000
In a 529 Plan, what happens if the funds are withdrawn, but not used for qualified education expenses?
The earnings would be subject to ordinary income tax plus a 10% penalty.
Define vesting.
The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits
True or False: SEPs require employees to become immediately vested in the full amount contributed.
True
In a qualified annuity, how is the payout taxed?
The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.
What is a Simplified Employee Pension (SEP) Plan?
An employer-sponsored IRA for the self-employed and its employees
For employers offering SEP plans, where are contributions made on behalf of their employees directed?
In the employee’s individual SEP IRA
How much may be contributed to a 529 plan and avoid gift tax?
$14,000
True or False: A gift made to an UGMA/UTMA account is the preferred method of funding a child’s college education.
False. The assets in an UGMA/UTMA account are owned by the child, which may reduce the eligibility for student aid.
Why is a client’s profession relevant when determining suitability?
It may indicate the client’s level of sophistication and the potential need for liquidity
If a mutual fund’s dividends are re-invested, what impact will this have on the cost basis of a client’s shares?
If re-invested dividends are used to acquire additional shares, the client’s cost basis will increase.
What amount may be gifted without being subject to the gift tax?
$14,000
In calculating an IA’s net worth, what assets are NOT included?
Homes, home furnishings, automoblies, goodwill, and pre-paid expenses are not included.
Under the provisions of UGMA/UTMA, when does a minor obtain ownership of the assets in the account?
A minor is the owner at the time a gift is made, but does not gain control of the assets until he reaches legal age.
What is the maximum annual contribution for a Keogh Plan?
20% of pre-tax income up to $51,000 each year
After 3:25 p.m., what happens if the S&P 500 declines by 20%?
market is closed for remainder of day
Per IRS Publication 950, the gift tax annual exclusion is $______, but is adjusted by the cost of living (now $______).
$10,000/$14,000
Due to a significant event, when is an issuer required to file a Form 8-K?
within four business days of the event
An investor buys stock for $100 and receives a $10 dividend. If she sells for $95, what is her capital gain or loss?
Her loss is $5 ($100-$95). The $10 dividend is taxed separately and is not treated as a capital event.
If Bruce intends to buy an IPO in his wife’s individual account, what is the regulatory issue?
Bruce must obtain signed third party authorization from his wife in order to complete this trade.
What form is filed with the IRS when a financial institution acts as a fiduciary (e.g., receiver or conservator)?
56-F
When selling a primary residence, how much of the gain (if any) is excluded from taxes?
$250,000 for single filers or $500,000 for joint filers
True or False: Under ERISA, business decisions (e.g., choosing the type of plan) are made by fiduciaries.
False. Business decisions are made by settlors and are referred to as settlor functions.
