Ch. 14: Customer Accounts Flashcards
Anyone with ________ income may contribute to an IRA.
Earned
The ________________ Agreement describes the customer’s pledging of securities as collateral to the BD.
Hypothecation Agreement
Hank, age 71, has a Roth IRA. What penalty is assessed for his failure to begin distributions?
There is no penalty since Roth IRAs do not have a required minimum distribution.
True or False: Regardless of income level, a contribution is always permitted in any type of IRA.
False. High income individuals may lose the ability to contribute to Roth IRAs, but may contribute to Traditional IRAs.
What is waived for a first-time homebuyer in the event of an IRA distribution?
The penalty is waived, however, taxes are still levied.
RRs must examine what document to open any corporate account?
Corporate Resolution
The maximum contribution to an IRA is the lesser of $_______ or ____% of earned income.
The maximum contribution to an IRA is the lesser of $6,000 or 100% of earned income.
Define Regulation T.
The percentage a customer must deposit when purchasing securities or selling short
What are the general characteristics of a traditional IRA account?
It is an individual retirement account in which the money grows tax-deferred.
True or False: IRA trustee-to-trustee transfers are tax-free.
True
May a cash account be opened without the customer’s signature?
Yes
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
Only one rollover is allowed per rolling ____ months.
12 months
Must the custodian in an UGMA account be a parent?
No. Any adult may be custodian.
True or False: In a 401(k) plan, employers must make matching contributions on behalf of employees.
False. Employers may, but are not required to, make matching contributions.
Who may enter orders in a joint account?
Any owner named on the account
True or False: Only one person must provide information to open a joint account.
False. Each owner must provide information to open a joint account.
A contribution of $_______ can be made to a Spousal IRA for a non-working spouse.
$6,000
What is investment discretion?
An agreement where someone other than the owner is authorized to determine the securities to be purchased or sold
True or False: Custodial accounts are solely carried in the name of the minor.
False. The account is in the custodian’s name for the benefit of the minor.
A 401(k) plan uses _________ contributions and the growth of the account is _______________.
Pre-tax contributions and growth is tax-deferred
What is the maximum annual contribution to a 401(k)?
$19,000
What is needed to exercise discretion over a client’s account?
Written power of attorney
May an 85-year-old continue to contribute to a Roth IRA?
Yes, provided she has earned income
An investor had granted power of attorney to his son. If the client dies, is the power of attorney still valid?
No. Power of attorney is cancelled at the time of the owner’s death.
When must IRA withdrawals begin in order to avoid the late withdrawal penalty?
By April 1st of the year after an individual turns age 72
A rollover of qualified plan money from one account to another must be completed within ____ days of withdrawal.
60 days
____________ governs the extension of credit by BDs.
Regulation T governs the extension of credit by BDs.
True or False: All corporate officers may effect transactions for the corporation.
False, only those named in the Corporate Resolution
Qualified plan withdrawals prior to age 59 1/2 are taxable and also subject to a ____% IRS early withdrawal penalty.
10%
How is a Roth IRA contribution different from a Traditional IRA contribution?
The Roth IRA contribution is always made on an after-tax basis.
Identify the acronym: RMD
Required Minimum Distribution (only required of Traditional IRAs)
Is discretionary authorization required to enter a not held order?
No, since discretion is limited to time and price on not held orders.
True or False: When a client grants third-party authorization to another person, the account becomes a joint account.
False
True or False: To avoid a late withdrawal penalty, IRAs have a required minimum distribution (RMD) provision.
True
What document allows a BD to lend customer securities to someone wishing to sell them short?
Loan Consent Agreement
For what reasons may an individual may take an early withdrawal from his IRA without penalty?
Death, higher education, home buyer ($10k limit), birth of child ($5k limit)
IRA rollovers must be completed within ____ days.
60 days
As it relates to IRAs, what is the difference between a rollover and a trustee-to-trustee transfer?
In a rollover, the proceeds are directed to the owner, but in a transfer, the proceeds are directed to another institution.
A ___________________ is required to open an account for a partnership.
Partnership agreement
How are withdrawals from Roth IRAs treated for tax purposes?
Withdrawals are tax-free if the account is open for at least five years and is not considered an early withdrawal.
True or False: Principals must approve discretionary orders prior to entry.
False. The orders must be approved promptly afterward.
When rolling over a distribution from a qualified plan, when must the participant complete the transfer?
Within 60 days from the receipt of the funds from the old plan
Who is eligible to make tax-deductible contributions to an IRA?
A person not covered by an employer plan, or, if covered, a person who meets the income restriction
Why is an IRA trustee-to-trustee transfer not considered a rollover?
Because the proceeds are not directed to the owner
What is required for a BD to place securities in a discretionary account when the they have a conflict in the offering?
Written consent of the client is required.
When must an Options Disclosure Document (ODD) be delivered to a client?
At or prior to the time the account is approved for options trading
IRA contributions must be made in what form?
Cash
True or False: Client signature is required when opening either a cash or margin account.
False. Client signature is required when opening a margin account, but not a cash account.
May a custodian make speculative investments in a minor’s account?
Yes, provided they are suitable based on the objectives.
If an employer made all of the contributions into a pension plan, what is the employee’s cost basis?
Zero
Which type of retirement plan makes distributions based on a predetermined formula?
Defined benefit plans make distributions based on factors such as the retiree’s tenure, age, and earnings.
What are the general characteristics of an individual account?
It has only one owner of record and that one owner has sole trading rights
What are the general characteristics of an individual account?
It has only one owner of record and that one owner has sole trading rights
A contribution of $_______ may be made to a Spousal IRA for a non-working spouse.
$6,000
May a wife enter trades in a husband’s account?
Yes, with written third-party authorization.
When withdrawing from a qualified plan, how is the distribution taxed?
The entire withdrawal is taxed, since these plans are normally funded pre-tax and have a zero cost basis.
There is a ____% penalty for early withdrawals from an IRA.
10%
True or False: Earnings generated in a qualified retirement plan are tax-free.
False- Tax-deferred
An individual turns age 72 in December. When must she begin the RMDs from her IRA?
By April 1 of the following year
Since the _______ is responsible for any tax liability, custodial accounts use the tax ID of the _______.
Minor; minor
Is an Uniform Gifts to Minors Act (UGMA) account considered a joint account?
No. The assets are the property of the child.
Is discretionary authorization required to enter a not held order?
No, since discretion is limited to time and/or price for not held orders.
True or False: Contributions made to qualified retirement plans are tax-deductible.
True
When an individual reaches age ______, they may begin withdrawing from an IRA without penalty.
59 1/2
Identify the acronym: UGMA/UTMA
Uniform Gifts to Minors Act / Uniform Transfers to Minors Act
In a 401(k) plan, there is immediate vesting of _________ contributions.
Employee contributions
Both the ____________ and the ____________ are required for a corporation to open an options or margin account.
Corporate Resolution and Corporate Charter
In general, a 401(k) plan is available to individuals who work for a ____________ corporation.
For-proft
The shifting of funds from one IRA trustee/custodian directly to another trustee/custodian is called a _________.
Transfer
When must IRA rollovers be completed?
Within 60 days
The ___________ bears the investment risk in a defined benefit plan.
Employer
The current Reg T margin requirement is ____%
50%
True or False: An IRA trustee-to-trustee transfer must be completed within 60 days.
False. The 60-day rule applies to IRA rollovers.
How often may an individual roll over an IRA?
Once per rolling 12 months
What is ERISA?
Employee Retirement Income Security Act
What is the tax treatment of the distributions made by qualified retirement plans?
They are entirely taxed at ordinary income rates, since these plans have a zero cost basis.
True or False: A power of attorney given to an agent (RR) must be renewed.
False. Powers of attorney do not have to be renewed.
What are the general characteristics of a Roth IRA account?
It is an individual retirement account in which the money grows tax-free if certain conditions are met.
How are withdrawals from a Traditional IRA treated for tax purposes?
If all contributions were deductible, then the entire withdrawal is taxed as ordinary income.
Only ______ custodian is allowed per minor’s account.
One custodian per minor’s account
For how long may a not held order be maintained?
not held order will be considered a day order.
Who must review and approve all discretionary trades effected in a client’s account?
The principal/supervisor of the BD
____________ authorization is required for a client’s wife to effect trades in his account.
Third party authorization
What is the difference between a revocable and irrevocable trust?
Revocable trusts can be changed after they’re established, while irrevocable trusts cannot be changed.
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.
Jim instructs his RR to use the BD’s research and buy $10,000 worth of a stock of the firm’s choosing. What is required?
The BD must have first obtained a written power of attorney from Jim.
The _________ is responsible for taxes on income in a custodial account.
Minor
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).
Custodians have a ____________ duty to do what is best for the minor.
Fiduciary duty
How are withdrawals from a Roth IRA treated for tax purposes?
Withdrawals will be tax-free if the account is open for at least 5 years and is not considered an early withdrawal.
May a client use a numbered account instead of her name?
Yes, provided the client’s identity is known to the firm.
How is a Roth IRA contribution different from a traditional IRA contribution?
Roth IRA contributions are always made after-tax, while traditional IRA contributions are deductible.
Whose Social Security number is listed on a custodial account?
Minor’s
In what form must IRA contributions be made?
In cash
What percentage of income from a qualified plan is typically taxable?
100%, since qualified plans are normally funded with pre-tax funds and have a zero cost basis
What happens to the deceased’s portion in a joint account with tenants-in-common?
The deceased’s portion goes to his estate for tax purposes.
____% of earned income up to $_______ is the maximum contribution to an IRA.
100%; $6,000
What is the typical cost basis for a participant in a qualified retirement plan?
$0, since these plans are typically funded pre-tax.
True or False: Money may be withdrawn from a joint account in one owner’s name.
False. Any checks should be in both parties’ names.
An individual turns age 72 in December. When must she begin the RMDs from her IRA?
April 1 of the following year
For how long may a not held order be maintained?
A not held order is considered a day order.
What are the general characteristics of a corporate account?
An account opened and owned by a business entity that has a valid corporate resolution
The ___________________ must sign the account form.
The supervising principal must sign the account form (clients are not required to sign).
What must be examined to determine who has the authority to execute trades in a corporate account?
The corporate resolution
How must a client’s authorization be obtained to enter discretionary orders, orally or in writing?
Written form
Distributions from a qualified plan are taxed at __________________ rates.
Ordinary income
The ___________ bears the investment risk in a defined contribution plan.
Employee
True or False: Not held orders may only be executed in a discretionary account.
False. Discretionary power of attorney is not required.
A withdrawal of up to $______ may be taken without penalty from an IRA for a first-time purchase of a home.
$10,000
At death, assets held in a minor’s account become a part of her _______.
Estate
May a custodian remove funds from a custodial account?
Yes, but only for the benefit of the minor
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
Private pension plans
In a custodial account, when does the minor own the assets?
On the trade date
After what age may traditional IRA plan contributions no longer be made?
As long as an individual has earned income, she’s able to contribute to a Traditional IRA regardless of her age.
True or False: Gifts made to minors are irrevocable.
True
True or False: Discretionary orders must be confirmed with the client before being entered.
False
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.
When a child reaches legal age, what action is taken in the custodial account?
The custodian must transfer the assets to the owner.
When an individual reaches age ______, he may begin withdrawing from an IRA without penalty.
59 1/2
True or False: For discretionary trades, principal approval is required prior to entry.
False. Principal approval is typically provided by the end of the day, but not in advance.
401(k) plans are used by _____-profit employers.
For-profit
What are some of the possibilities for avoiding premature distribution penalties in IRAs?
Death or disability of the owner, education expenses, first-time home buyer, or annuitization of distributions
When may an individual withdraw money from an IRA without penalty?
59 1/2
What happens to the deceased’s portion in a joint account with right of survivorship?
Her portion passes to the survivor.
How much may a married couple earning $325,000 contribute to a Roth IRA?
$0, since the couple’s income exceeds the income threshold
Only one IRA rollover is allowed per rolling ____ months.
12 months
Employer contributions into an employee qualified plan are _______________ to the employer.
Tax-deductible to the employer
True or False: All contributions made to IRAs are tax-deductible.
False. Only contributions to Traditional IRAs are tax-deductible; Roth IRA contributions are NEVER deductible.
When must a margin disclosure document be provided to a client?
At the time the account is opened
Hypothecation is synonymous with what term?
Pledge
Joan invests $15,000 in a qualified annuity. At age 64, she withdraws all $22,000. What’s Joan’s basis and what’s taxed?
Her basis is zero, since the annuity is qualified (funded pretax) and the entire $22,000 is taxed as ordinary income
In an IRA rollover, to whom are the funds directed?
The owner
What is the maximum annual IRA contribution for a 58-year-old who only has investment income?
$0, since he has no earned income
What is an IRA rollover?
A tax-free distribution to an IRA owner that is then contributed to a different IRA or retirement plan
In a Roth IRA, when must withdrawals begin in order to avoid a late withdrawal penalty?
There is no withdrawal requirement for Roth IRAs.
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 $7,000.
True or False: Qualified plans receive favorable tax treatment by the IRS.
True
If an IRA owner takes receipt of the assets for up to 60 days before reinvesting in a new plan, this is a _________.
Rollover
If a customer purchases exchange-traded stock, what is the margin requirement?
50% of purchase price
What is an RR permitted to do if they have limited discretionary authority over a client’s account?
She may buy or sell securities in the account without consulting the client.
For a joint account, how many account numbers and SSNs are used for tax reporting?
One
In a one-year period, how many times may a qualified plan be transferred via a trustee transfer?
There is no limit to the number of trustee transfers
What is the maximum annual IRA contribution for a 58-year-old whose only income is investment income?
$0, since individual has no earned income
When may a person begin taking penalty-free withdrawals from her 401(k)?
59 1/2
Annuity withdrawals prior to age 59 1/2 will be subject to a ___% IRS penalty plus __________________ of earnings.
10% IRS penalty federal taxation
A qualified annuity contract or retirement plan is typically funded with _____- tax funds.
Pre-tax funds
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.
Anyone with __________ income may contribute to an IRA.
Earned
What federal law requires employers to provide a high degree of fiduciary responsibility to group plan participants?
The Employee Retirement Income Security Act (ERISA)
What may an RR do with full discretion, but not with limited discretion?
Withdraw money from the account
What is the late withdrawal penalty?
50% of the amount that should have been taken (an actuarial amount).
When must clients be given an Option Disclosure Document?
At or prior to account approval
True or False: A withdrawal of up to $10,000 may be taken from an IRA for the purchase of a vacation home.
False. A penalty free withdrawal from an IRA is only permitted for a first-time purchase of a home.
When do gifts become the property of the minor in a custodial account?
When gifted
For what reasons may an individual may take an early withdrawal from his IRA without penalty?
Death, disability, qualified higher education, home buyer ($10,000 limit), birth or adoption of a child ($5,000 limit)
True or False: Firms may establish their own in-house rules relating to payment dates and minimum requirements.
True. However, the requirements must be at least as stringent as those established by the regulators.
True or False: Required minimum distributions apply to Roth IRA accounts.
False. Required minimum distributions apply to traditional IRA accounts, not Roth IRAs.
Define vesting.
The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits
Rollovers must be completed within ____ days.
60 days
Hank is a 71-year-old who has a Roth IRA. What penalty is assessed if Hank has failed to begin taking distributions?
There is no penalty, since Roth IRAs do not have RMDs.
True or False: Sophisticated clients with extensive experience need not be provided with an Option Disclosure Document.
False. All clients receive the disclosure document.
What is the Reg T margin requirement for short sales?
50%
Is margin permitted in a minor’s account?
No, securities must be fully paid
The maximum contribution to an IRA is ____% of earned income up to $_______.
100% up to $6,000
True or False: An RR may sell stock from a client’s non-discretionary account if a negative report is released.
False. Without written authorization, an RR may not choose the security to buy for or sell from a client’s account.
For every rolling 12 months, how many times may a qualified plan be transferred via a rollover?
Once per rolling 12 months
If an agent (RR) received a power of attorney seven years ago, could she still trade that customer’s account?
Yes, powers of attorney do not need to be renewed.
When may a member firm lend the stock that belongs to a client?
When the client signs the loan consent agreement
True or False: Customers are required to sign the Loan Consent Agreement.
False. Signing the agreement is optional.
