66-10 Flashcards
1
Q
True or False: Only one person must provide information to open a joint account.
A
False
2
Q
Municipal bond interest is exempt from __________ tax.
A
federal
3
Q
Who is eligible to contribute to a qualified annuity?
A
Public school employees [403(b)] and certain non-profit organization employees [501(c)3]
4
Q
What is the penalty for making excess contributions to an IRA?
A
6% of the excess
5
Q
True or False: Excess contributions made to an IRA will still be deductible and will grow tax-deferred.
A
False
6
Q
IRA contributions must be made in what form?
A
Cash
7
Q
What are some of the investments that are not suitable for IRA contributions?
A
Collectibles, insurance, and metals (except U.S. gold and silver coins)
8
Q
Anyone with __________ income may contribute to an IRA.
A
earned
9
Q
Rollovers must be completed within ____ days.
A
60
10
Q
Only one rollover is allowed per rolling ____ months.
A
12
11
Q
True or False: To avoid a late withdrawal penalty, IRAs have a required minimum distribution (RMD) provision.
A
True
12
Q
How is a Roth IRA contribution different from a Traditional IRA contribution?
A
The Roth IRA contribution is always made on an after-tax basis.
13
Q
Early withdrawal without penalty is allowed for what reasons?
A
Death, disability, qualified higher education expenses, or first-time home buyer ($10,000 limit)
14
Q
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
A
private pension
15
Q
According to ERISA, are there any standards that must be followed regarding how money is invested?
A
Yes. The plan’s trustee must abide by the Uniform Prudent Investor Act.
16
Q
Describe the employees who must be eligible to contribute to an ERISA qualified plan.
A
Employees who are 21 years or older with one year of full-time service
17
Q
What retirement plans are available to the self-employed?
A
Keogh Plans and SEPs
18
Q
May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan?
A
Yes, provided the Keogh contribution is solely based upon the employee’s self-employment income.
19
Q
May an individual with a Keogh Plan also fund an IRA?
A
Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax-deductible.
20
Q
_____ Plans are college savings plans with high contribution limits set by the state sponsor.
A
529
21
Q
Describe the tax treatment of contributions made to a 529 Plan.
A
They are after-tax contributions that may possibly grow tax-free.
22
Q
A savings plan which funds both elementary and higher education is referred to as the ____________________________.
A
Coverdell
23
Q
If not needed for a child’s education, may the funds in a 529 Plan be transferred to a relative’s 529 Plan?
A
yes
24
Q
If an employer makes a Keogh contribution on its own behalf, what must be done for its employees?
A
A contribution at the same percentage must be made for the employee.
25
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
qualified
26
Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?
non-qualified
27
A limited partnership could be formed by a minimum of how many individuals?
two
28
What document is filed with the state of legal domicile to create a partnership?
Certificate of Limited Partnership
29
What does the Partnership Agreement define?
The rights, liabilities, and obligations of each partner
30
To become a limited partner, the __________________'s signature is required on the Subscription Agreement.
general partner's
31
____________ Partners are the primary contributors of capital.
limited
32
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
33
Income or estate tax is an example of a _______________________ tax.
progressive or graduated
34
How is basis determined for the recipient of gifted securities?
Basis will be the donor's cost or market value, whichever is lower.
35
When securities are gifted, the recipient's holding period will be _______________________.
same as the donor's
36
What business structure provides flow-through tax treatment and has a P&L reported on the owner's personal tax return?
An S Corporation
37
List some important considerations when determining the suitability of recommendations made to customers.
Investment objectives, financial situation, risk tolerance, tax status
38
List some of the different types of institutional clients.
IAs, BDs, investment, insurance, or trust companies, banks, savings and loan associations, and pension plans
39
If a client wins $1 million, what should an agent or an IAR do?
Update the client's information that is on file
40
To open any account on behalf of a corporation, what document must agents and IARs examine?
Corporate Resolution
41
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).
42
The maximum number of shareholders in an S Corporation is _____.
100
43
What is the primary purpose of forming a family limited partnership (FLP)?
To minimize estate tax and gift tax liabilities
44
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.)
45
The tax treatment of a limited liability company (LLC) is similar to the treatment of what other entity?
a Subchapter S Corporation
46
What are the contents of an estate?
The total assets and liabilities of a decedent
47
What are the different terms used to identify the individual who sets up a trust?
Creator, maker, grantor, donor, trustor, settlor
48
The __________ is the person who has fiduciary control over a trust.
trustee
49
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.
50
What are the benefits of setting up an irrevocable trust?
It will reduce estate taxes and also avoid probate.
51
What is the benefit of establishing a revocable trust?
It avoids probate.
52
When investing for an estate, the most suitable investments are normally _______-term.
short-term
53
Who establishes a testamentary trust?
The estate of the deceased
54
When is an inter vivos trust established?
during the donor's lifetime
55
In a trust, all actions of the trustee must be for the benefit of the ______________.
beneficiary
56
To whom will the earnings produced in an irrevocable trust normally be taxed?
the trust
57
The earnings generated in a revocable trust will be taxed to the __________.
grantor
58
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
59
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)
60
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.
61
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.
62
A revocable trust will eliminate __________, but will not reduce _________ tax.
eliminate probate, but not reduce estate tax
63
An irrevocable trust will eliminate __________ and will reduce _________ tax liability.
eliminate probate and will reduce estate tax liability
64
A trust is required to be managed for the benefit of the _____________.
beneficiary
65
Name the person who establishes a trust.
the grantor or donor
66
Define an estate.
The total of all assets and liabilities of a decedent
67
True or False: When conducting a client's financial analysis, liquid investments would be considered long-term assets.
false. they are current assets
68
True or False: When formulating a financial plan, it is always important to consider the client's liquidity needs.
True
69
Identify the acronym: AMT
Alternative Minimum Tax
70
Identify the acronym: RMD
Required Minimum Distribution
71
Identify the acronym: IRA
Individual Retirement Account
72
What is ERISA?
Employment Retirement Income Security Act
73
Identify the acronym: ESA
Education Savings Account (Coverdell)
74
Identify the acronym: SEP
Simplified Employee Pension Plan
75
Identify the acronym: UGMA/UTMA
Uniform Gifts to Minors Act / Uniform Transfers to Minors Act (governs custodial / minor's accounts)
76
Define a sole proprietorship.
A business that is owned by one person who is responsible for all management decisions and entitled to all profits
77
For a qualified retirement plan, what document details the plan’s needs, goals, time horizon, and investment philosophy?
The investment policy statement
78
______________ retirement plans need not meet IRS requirements for employee coverage, contribution limits, and vesting.
non-qualified
79
Name two examples of nonqualified retirement plans.
Payroll deduction plans and deferred compensation plans
80
True or False: A beneficiary of a trust account must pay the associated taxes.
False. Taxes are paid by the trust
81
List some of the common financial goals.
Income, growth, preservation of capital, liquidity, tax relief, and speculation
82
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.
83
True or False: Spouses may give an unlimited amount to one another and not be subject to the gift tax.
True
84
Regarding clients, list some of the non-financial considerations an IAR must consider?
Age, occupation, time horizon, investment experience, and social values
85
Define the investment policy statement.
A document that describes a retirement plan’s investment strategy, as well as the specific needs of the plan
86
True or False: Employees are fully vested in their own contributions.
True
87
True or False: A defined contribution plan provides employees with a fixed monthly payment at retirement.
False
88
Who is eligible for a 457 plan?
Employees of state and local governments
89
How often may an individual roll over an IRA?
once every 12 months
90
When may an individual withdraw from an IRA without penalty?
After he turns 59 1/2
91
S-Corporations are not subject to ________________.
double taxation
92
Reinvesting dividends in a mutual fund creates a ________ event.
taxable
93
What is the cost basis for a gift of a collectible (e.g., jewelry)?
the donor's cost
94
What is the formula for calculating an individual's personal net worth?
Assets - Liabilities = Net Worth
95
What is the formula for calculating an individual's personal discretionary income?
Income - Expenses = Discretionary Income
96
True or False: S-Corporations may have foreign residents as owners.
False
97
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.
98
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.
99
If someone receives a collectible (e.g. jewelry) as a gift, what is the cost basis for tax purposes?
donor's original cost
100
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).
101
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.
102
What form of business provides owners with limited liability and income that flows through to its investors?
LLC
103
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
104
Retirement goals, future college tuition, and remaining mortgage payments are examples of _______ needs.
capital
105
True or False: When managing assets in a trust, the trustee should consider the grantor's tax status.
False
106
Identify the acronym: AGI
adjusted gross income
107
What is adjusted gross income (AGI)?
An individual's taxable income (e.g., wages, commissions, tips, dividends, and interest)
108
What happens to a general partnership when a general partner dies?
it is dissolved
109
If an IAR's client has just died without a will, from whom may she accept instructions?
intestate Administrator
110
True or False: Employers are required to contribute a specific amount to their employees' SEP-IRAs.
False
111
What factors would determine a person's tax status?
Age, marriage status, state or country of residence, earned income, and unearned income.
112
What is the tax rate called that applies to the last dollar amount a person earns?
Marginal Tax Rate
113
The ________ tax rate is used to tax the last dollar amount a person earns.
marginal
114
True or False: The amount left on a mortgage is found on a customer's cash flow statement.
False
115
True or False: Mortgage payments are found on a customer's cash flow statement.
True
116
True or False: Tax refunds are found on a customer's cash flow statement.
True
117
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.
118
Which plans impose income limitations on the contributors, 529 plans or Coverdell ESAs?
Coverdell
119
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).
120
What business structure does not provide for flow-through tax treatment?
C Corporations
121
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.
122
____% of earned income up to $_______ is the maximum contribution to an IRA.
100% up to $5,500
123
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.
124
A contribution of $_______ can be made to a Spousal IRA for a non-working spouse.
$5,500
125
True or False: 529 Plans allow for a 5-year front-end contribution of $70,000, which avoids gift tax.
True
126
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.
127
A gift of securities between spouses will be subject to gift tax when more than what amount?
no limit on gift size between spouses
128
Without incurring gift taxes, individuals may give gifts of up to $________ per year to any number of persons.
$14,000
129
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.
130
What is the maximum annual contribution to a 401(k)?
$17,500
131
What is the maximum annual contribution to a 403(b)?
$17,500
132
What is the maximum annual contribution to a 457?
$17,500
133
What are some of the acceptable investments for IRA contributions?
Stocks, bonds, mutual funds, and CDs
134
There is a ____% penalty for early withdrawals from an IRA.
10%
135
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
136
How are withdrawals from a Traditional IRA treated for tax purposes?
ordinary income
137
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
138
Contributions to a Keogh plan are solely based on _________________ income.
self-employment
139
How much may be contributed to a Coverdell each year?
$2,000
140
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.
141
Define vesting.
The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits
142
True or False: SEPs require employees to become immediately vested in the full amount contributed.
True
143
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.
144
What is a Simplified Employee Pension (SEP) Plan?
An employer-sponsored IRA for the self-employed and its employees
145
For employers offering SEP plans, where are contributions made on behalf of their employees directed?
In the employee's individual SEP IRA
146
How much may be contributed to a 529 plan and avoid gift tax?
$14,000
147
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.
148
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
149
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.
150
What amount may be gifted without being subject to the gift tax?
$14,000
151
In calculating an IA's net worth, what assets are NOT included?
Homes, home furnishings, automoblies, goodwill, and pre-paid expenses are not included.
152
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.
153
What is the maximum annual contribution for a Keogh Plan?
20% of pre-tax income up to $51,000 each year
154
After 3:25 p.m., what happens if the S&P 500 declines by 20%?
market is closed for remainder of day
155
Per IRS Publication 950, the gift tax annual exclusion is $______, but is adjusted by the cost of living (now $______).
$10,000/$14,000
156
Due to a significant event, when is an issuer required to file a Form 8-K?
within four business days of the event
157
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.
158
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.
159
What form is filed with the IRS when a financial institution acts as a fiduciary (e.g., receiver or conservator)?
56-F
160
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
161
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.
