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Series 66 > Chapter 4 > Flashcards

Chapter 4 Flashcards

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Series 66 flashcards
1
Q

Traditional IRAs

A

Lesser of 5,500 or 6,500 or 100% earned income. Tax Deductible
Tax Deferred
All withdrawals are fully taxable

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2
Q

Income for IRAs

A 
Wages, Salaries, Tips
Commissions
Self Employment
Alimony
Nontaxable Combat Pay
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3
Q

Not income for IRAs

A 
Capital Gains
Interest or Dividend Income
Pensionor Annuity Income
Child Support
Income from DPPs
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4
Q

ROTH IRA

A

Non deductible
After Tax Contributions
Tax Deferred
Earnings tax free after 5 years Provided that
a) older than 59 1/2
b) money withdrawn and is used for the fist time home purchase $10,000
c) disabled or died
d) higher education expenses
e)money is used to pay medical expenses or insurance premium. Unlike Traditional IRA’s subject to cannot contribute if AGI is above certain limits. For singles it’s $105 and gradually phases between 105 and 120. For married taxpayers it’s 166, and phases out between 166 and 176.

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5
Q

SEP IRAs

A

Self Employed and Corporations - may conntribute 25% or 51,000 whichever is less.
Tax Deductible
Not withdrawn before 59 1/2
Must withdraw by 70 1/2

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6
Q

Substantially Equal Periodic Payment Exception under IRS rule

A

If you receive IRA payments at least annually based on your life expectancy (or joint life expectancies of you and beneficiary), the withdrawals are not subject to the 10% early withdrawal penalty.

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7
Q

Nondeductible Capital Withdrawals

A

IRA investors who contribute after tax dollars to an IRA are not taxed on those funds when they are withdrawn from the account, but taxpayers are taxed at the ordinary income tax rate when they withdraw funds resulting from investment gains or income.

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8
Q

Coverdell ESA

A

After Tax Contributions
Contributions in cash only until age 18 unless special needs beneficiary.
Accumulate Tax Deferred
Earnings excluded from income if used for qualifying expenses. Otherwise taxes and 10% penalthy. Must be used buy age 30. Transferred or subject to tax and penalty.

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9
Q

Other Changes provided by EGRRA 2001

A

Catch up contributions
Special Needs
Extending the period for corrective withdrawals
Allowing Coverdell ESA contributions, for any year to be made up to April 15 of the following year.

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10
Q

IRA Contributions

A

Deductibility of an individual’s contribution is reduced or eliminated if he participates in an employer-sponsored retirement plan and earns more than a specified amount.

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11
Q

Ineligible Investments IRA

A

Collectibles, Antiques, Gems, Rare Coins, works of art, Stamps. Life Insurance. Tax Free municipal bonds and funds and UITs are too low and taxed at distribution.
Collectibles
Term Insurance
Whole Life Insurance

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12
Q

Ineligible Investment Practices

A

Margin Trading
Speculative Options
Short Sales

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13
Q

Rollovers by NonSpouse Beneficiaries of certain Retirement Plan Distributions

A

Pension Protection Act.
Allows nonspouse beneficiaries to roll over qualified retirment plan distributions to an inherited IRA. Must be trustee to trustee. Must be set up as inherited IRA, with minimum distributions taken under the rules that apply to beneficiaries. I

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14
Q

Direct Rollovers from Retirement Plans to Roth IRAs.

A

Allows rollovers from qualified retirement plans directly to Roth IRA’s, providing the client meets the requirements for converting a traditional IRA to a roth IRA.
Report entire amount as income in year of conversion
Have 100,000 or less not counting amount converted in AGI.

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15
Q

SEP IRA’s

A

Self Employed and Small Business Owners. Employers can contribute.
Employee must be at least 21, have received at least 550 in compensation from employer
25% or 51,000 whichever his lower. Employer must contribute the same percentage for each employee as well as the employer.
Fully vested immediately
Tax Deductible for Employers. Tax deferred, and fully taxable upon withdrawal to beneficiary.

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16
Q

Section 529 Plans

A

Remain under Control of the Donor.
Subject to 10% penalty if not used for qualifying expenses.
Only college -
Offering Circular MSRB

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17
Q

Keogh (HR-10) Plans

A

Self Employed or unincorporated owner employee.
25% or 51,000 whichever is less. May also maintain an IRA and must be covered by same percentage as the owner in order for the plan to be nondiscriminatory. Only earnings from self-employment are applicable
Tax deductible and nontax deductible contributions.
1000 hours
1 year of employment
21 years old.

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18
Q

403 (B) Plans

A

Tax Deferred retirement plans for employees of public school systems and tax exempt, non-profit organizations such as churches and charitable institutions. Qualified employees may exclude their taxable incomes provided they do not exceed limits. Qualified annuity plans under section 403 (b). Contributions occur from salary reduction and are excluded from participant’s gross income.
Participant’s earnings also accumulate tax free until distribution.

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19
Q

403 (b) Plan Requirements

A

The Plan must be in writing and must be made through a plan instrument, a trust agreement, or both.
The employer must remit plan contributions to an annuity contract, a mutual fund, or another approved vehicle.

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20
Q

Contribution Limits (403-b)

A

17,500 salary reduction or
Employer Contributions of the lessor of 100% of participant’s earned income or 51,000. Fully taxable at withdrawal. Once distributions begin, they must be paid annually by December 31 of each year following the initial distribution.

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21
Q

Corporate Sponsored Retirement Plans

A

Qualifies under Special Tax Treatment under Section 401. Qualified plans must comply with ERISA. ERISA regulates establishment and management of corporate pension or retirement plans, also known as private sector plans. All corporate pension and profit sharing plans must be established under a trust agreement

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22
Q

ERISA guidelines

A
  1. Eligibility
  2. Funding
  3. Vesting
  4. Communication
  5. Nondiscrimination
23
Q

Eligibility

A

If a company offers a retirement plan, all employees must be covered if they are 21 and older, have one year of service, and work 1000 hours per year.

24
Q

Funding

A

Funds contributed to the plan must be segregated from other corporate assets. The plan’s trustees have a fiduciary responsibilit to invest prudently and manage funds.

25
Q

Vesting

A

Employees must be entitled to their entire retirment benefit amounts within a certain time, even if they no longer work for the employer.

26
Q

Communication

A

The Retirement Plan must be in writing, and employees must be kept informed of plan benefits, availability, account status, and vesting procedures no less than annually.

27
Q

Nondiscrimination

A

A uniformly applied formula determines employee benefits and contributions. Such a method equitable and impartial treatment.

28
Q

UPIA

A

Uniform Prudent Investor Act

1) Prudence is applied to any investment as part of the total portfolio, rather than to individiual investments.
2) Primary consideration - trade off between risk and return.
3) All categorical restrictions on types of investments have been removed.
4) Fiduciaries diversify their investments
5) Delegation is now permitted.

29
Q

UPIA and IAs

A

Trustee must exercise reasonable care, skill, and caution.
A trustee’s investment and management decisions about individual assets must be evaluated in isolation but in context of total portfolio return. With risks and return objectives reasonable to trust.
Prudent Expert
A trustee who complies with all of the above is not liable to the beneficiaries or the trust for the decisions or actions of the adviser to whom the function was delegated.
In performing a delegated function, the adviser owns a duty to the trust ot exercise reasonable care to comply with the terms of the delegation.

30
Q

Circumstances that a trustee must consider in investing and managing a trust

A

1) General Economic Conditions
2) The possible effect of inflation or deflation
3) Tax Consequences
4) Role that each asset plays within the total portfolio, including financial assets, tangibles and intangibles, RE, etc.
5) Expected total return from income and the appreciation of capital
6) Other resources of the beneficiaries.
7) Needs for liquidity, regularity of income, and preservation of capital.
8) An asset’s sepcial relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

31
Q

Fiduciary Responsibilities

A

Trustees cannot delegate fiduciary duties, but they can delegate investment management responsibilities.
Fiduciaries must act
Solely in the interest of plan participants and beneficiaries.
Exlclusive benefit of participants and their beneficiaries and defraying reasonable plan expenses.
Prudent Expert Rule
Diversify
Consistent with Plan unless it’s contradictory to ERISA.

32
Q

Investment Policy Statement

A

In writing that serves as guideline for the plan’s fiduciary regarding funding and investment management decisions. It will include:

1) Investment Objectives for the plan
2) Investment Philosophy including asset allocation style.
3) Investment Selection Criteria
4) Monitoring procedures and performance

33
Q

Safe Harbor Provisions of Section 404(c)

A 
Applicable to 401(k)
Fiduciary is not liable for losses provided that three conditions were met
1) Investment Selection
2) Investment Control
3) Communicating Required Information
34
Q

Investment Selection

A

Plan participant must be able to:

a) Materially affect portfolio return potential and risk.
b) Choose between at least 3 investment alternatives.
c) Diversify his investment to reduce loss.

35
Q

Investment Control

A

Allowing them to make their own choices among investment options companies have selected.
Informing employees they can change their investment allocations at least quarterly (some daily).
Fiduciary must mark performance of each alternative investment.

36
Q

Communication

A

Making financial statements and prospectus available upon request. Also annual operating expenses and porfolio composition.
A Statement that it’s under ERISA 404-c and that fiduciaries may be releved for losses
Description of each altenatives’ risk and return
Explanation how to give investment instructions.
Allowing real time access to employee accounts either by phone or the internet.

37
Q

Defined Contribution Plans

A

1) Profit-Sharing Plans
2) Money-Purchase Plans
3) 401 (k) Plans
Plan Participant assumes risk

38
Q

Defined Benefit Plans

A

Designed to provide specific retirment benefits for participants, such as fixed monthly income. Regardless of investment performance, the promised benefit is paid under the contract terms. a defined benefit plan sponsor assumes the investment risk.
Contributions not affected by sex.
Emoloyer contributions to defined benefit and defined contribution are tax deductible to corporation and fully taxable upon withdrawal to beneficiary.

39
Q

Taxation

A

If all funds were contributed by the employer, the employee’s tax basis (cost) is zero. Everything above the cost is taxed at the employee’s ordinary income rate at time of distribution.

40
Q

Profit Sharing Plans

A

Defined Contribtion Plan
Contribute in times of profitability and skip contributions in time of low profits. Easy to install, administer and communicate to employees.

41
Q

401 (K) Plans

A

Defined Contribution Plan
Employee directs an employer to contribute a percentage of his salary, and make matching contributions up to a set percentage. Made with pretax dollars also making it a form of salary reduction. 401(k)s also allow hardship withdrawals facing serious and immediate financial difficulty. Maximum limits on amount withdrawn and is not eligible to be rollover. Subject to ordinary tax and 10% penalty. differs from the loan in that the loan is not taxable as long as repayments are met with IRS.

42
Q

401(k) Plan Loans

A

Not treated as distribution, so there is no tax. But if certain rules are not met, it may be taxed. Maximum loan is 50,000 or all vested, whichever is less. Other than if used for a home loan, it must be paid back on a regular schedule (usually through payroll deduction) in a period not exceeding 60 months.

43
Q

Roth 401(k) Plans

A

After Tax - nondeductibe contributions.
Tax free withdrawals after 59 1/2.
Doesn’t not have to be held for 5 years
Employer matching contributions but it must be put in a traditional 401 (k) and be fully taxable upon withdrawal. Cannot transfer money from one account to the other.
Have no income restriction
Require withdrawals to begin no later than 70 1/2.

44
Q

Self Employed 401(k) Plans

A

EGTRRA in 2001
May have no full time employees other than himself or spouse.
Tax Deductible contributions, fully taxable upon withdrawal. Offers highest possible contribution of any defined contribution plan.

45
Q

Top Heavy Plan

A

IRS has defined a top heavy 401(k) plan as one in which a disproportionate amount of the benefit goes to key employees.

46
Q

Safe Harbor 401(k) Plan

A

A plan does not have to undergo annual top-heavy testing if all employees, even those who do not elect to participate in the plan, receive a minimum employer-sponsored contribution equal to 3% of earnings (4% elective contributions) with immediate vesting.

47
Q

Section 457 Plans

A

Deferred Compensation Plan set up under section 456 of tax code tat may be used by employees of a state, political subdivision of a state, and an agency or instrumentality of a state. May also be offered to employees of hospitals, charitable organizations, unions, and so forth, but NOT churches.
Amount deferred is not included in AGI. Not reportable

48
Q

Important about 457 Plans

A

Exempt from ERISA - nongovernment must be unfunded. Government must be funded.
Not required to follow the nondiscrimination rules of other retirement plans.
Plans for tax-exempt organizations are limited to covering highly compensated employees. For government - even contractors can participate.
Distributions may not be rolled over to an IRA, but there’s no early 10% penalty.
It is possible to maintain both 457 and 403 and make maximum contributions or salary reductions of 17,500 to each.
Unlike 401(k) plans, loans are never permitted, and requirements for emergencies are much stricterDui

49
Q

Distribution Rules

A

All traditional IRAs and SEPs are treated as a single account and must be liquidated at least to the extent of percentage specified by the IRS. Qualified plans, however, are not aggregated, distributions from one qualified plan are not affected by distributions from another.

50
Q

Non Qualified Plans

A

Payroll Deduction Plans
Deferred Compensation Plans
Contributions are tax deductible to employer once paid out.

51
Q

Payroll Deduction Plans

A

After Tazes

52
Q

Deferred Compensation Plans

A

NQDC contractual agreement between a firm and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement.
1) Conditions and circumstances where benefits may be forfeited.
2) Statement that employee is not entitled to eany claim against assets until retirement, death or disability.
3) Void if it suffers a failure or bankruptcy.
Company directors are not considered employees and are not eligible.

53
Q

Business Failure

A

Becomes General Creditor

54
Q

Funding

A

Deferred compensation plans may be unfunded, in which case the deferred compensation is paid from the firm’s operating assets. if the plan is funded, tax advantages of deferral are lost. Many NQDC are informally funded through life insurance or trust arrangements.

Series 66 (6 decks)

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