Chapter 7 Additional Questions Flashcards
What does UTMA and UGMA stand for and do?
UTMA = Uniform Transfers to minors
UGMA = Gifts to Minors Act
Its where money and securities are owned by a minor
Whose social is used to open a UTMA or UGMA account?
The minors social is used
- Has a general custodian who acts in a fiduciary capacity
When does ownership transfer for UTMA and UGMA?
With UGMA, ownership transfers at the age of majority
With UTMA, ownership transfers at any specified age, up to 25
What does the Uniform Prudent Investors Act (UPIA) do?
Establishes standards and allows the custodian to have trading authority to a qualified third party.
What are UGMA accounts not allowed to do?
UGMA cannot be under a margin account
Is there an annual contribution limit for custodial accounts?
NO, but if it is over the gift tax minimum it is a taxable event to the donor
When can the custodian remove funds from minors account?
The custodian can remove the funds for the benefit of the minor
- Education expenses, buying a new car, paying taxes on the account
Who is responsible for paying taxes on a UGMA/UTMA account?
The child; Kiddie Tax
Taxed @ parents tax rate
All earnings are taxed after the child turns 24
Which of the following regarding custodial accounts is true?
A) All earnings are taxed at the parents highest marginal rate
B) Control of account assets can take place an any age specified at account opening
C) The minors parents are responsible for funding any account tax liabilities
D) Any gifts made to the account are Irrevocable
D) Any gifts made to the account are irrevocable
What is the Coverdell Educations Savings Account (ESAs)?
- Invest $2,000 a year to help fund a child’s education until child turns 18
- Account under child’s Social security
Are earnings on Coverdell education savings account subject to taxation?
Earnings are not subject to taxation as long as distribution are taken before 30 and is used for qualified education expenses
What is a benefit of getting a Coverdell Education savings account?
If child no longer needs the account, he is allowed to transfer the funds to another relative without tax consequences
What is the penalty for withdrawing unqualifed expenses from a ESA account?
The expenses are subject to ordinary income tax on the earnings as well as a 10% penalty on the taxable portion
What are exceptions to the 10% penalty rule?
Dying
Become disabled
Unable to attend school
receiving a scholarship
What are 529 College Savings Plan used for?
Further amended to allow the limited use of funds to defray the costs associated with private elementary and secondary education expenses.
What does the ERISA stand for?
It stands for
Employee Retirement Income Security Act
What is ERISA used for?
Offers minimum standards to protect the interests of participants in an employer sponsored retirement plan
What is a qualified retirement pan for?
This allows individuals to qualify for certain tax benefits under IRC
- must be in writing
What are the Contributions Limitations for retirement accounts ?
Limits are adjusted annually for inflation
- Any amount that exceeds the contribution limits are subject to a 6% penalty tax
What is the purpose for a Catch Up Provision?
To help employees over the age of 50 to make additional contributions to a qualified plan
What are the tax benefits of a qualified plan?
Contribute on pre tax basis and earnings grow tax deferred
Are contributions deductible for qualified retirement plans?
They are deducted on the year it was taken out.
it is deducted from employees salary before taxation
Are the distributions taxed on qualified retirement plans?
Yes they are taxed as ordinary income based on employees tax bracket in year of withdrawl
At what age can you start withdrawing from a qualified retirement plan?
On April 1st, after age 73
What is the penalty for not withdrawing the required minimum distribution?
They are subject to a 25% penalty on the amount that should have been taken out
What happens if you get an early distributions (before age 59 1/2)?
They are subject to a 10% penalty on the taxable amount of distribution.
What is a defined benefit plan for?
Promises the employee a specific monthly payout
- For people closer to retirement
How are monthly benefits calculated for a defined benefit plan?
It is based on Employees age, years of service, and highest salary
Who funds a define benefit plan?
It is the employers responsibility
- Employer will be penalized if the plan is not properly funded
What is the purpose of a Pension Benefit Guaranty Corporation (PBGC)?
To provide coverage if a define benefit plan does not have sufficient assets to provide the benefits earned by the participants
What is a define Contribution Plan for?
It is a plan where the employee directs the employer to withhold a “defined” amount of compensation
- Assets can be transferred
What does a defined contribution plan depend on?
Is dependent on the investment performance
Who chooses the investments in a defined contribution plan?
The employee
What is the purpose of a 403(b) plan?
This plan is for non profit organizations to make contributions that are tax deductible
- Originally established to hold annuities
What is the Savings Incentive Match plans for?
Adopted by small business that employ 100 or fewer employees and do not have another qualified plan available.
What is Keogh (HR-10 Plans)
Established as a defined benefit or dined contribution plan and are available to unincorporated self-employed persons and any full time employees
What is an IRA stand for?
Individual Retirement Account
Who is an IRA for?
Anyone with an earned income.
What are the contribution limits to an IRA account?
Lesser of specified limit or up to 100% of earned income.
What is the tax penalty for an IRA account?
Any excess contribution is charge a 6% annual penalty and growth on the excess contributions LOSES its tax-deferred status
What can you do if you signed up for an IRA late?
There is a “catch up” provision once individuals reach the age 50 or higher
Contributions to a deductible IRA may be limited depending on all of the following factors, EXCEPT?
A) The state in which the taxpayer lives
B) Tax-filing status
C) Taxpayer’s Income
D) If taxpayer can participate in an employer sponsored qualified retirement plan
A) The state in which the taxpayer lives
What are the tax consequences for early distributions?
6% penalty each year + a 10% penalty tax if distributed before the age 59 1/2
What are ROTH IRAs for?
Similar to a traditional IRA but there is no required minimum distribution.
- Distributions are tax free because contributions are after tax contributions
What are the rules for a qualified distribution for a ROTH IRA?
- Account open for 5 years and then meet one of the following
- Owner reaches age 59 1/2
- Death or disability
- First time home buyer of $10,000
All the following are true about ROTH IRAs, EXCEPT?
A) Contributions can be made even if the individual has no earned income
B) Contributions are not age limited
C) Contributions are made on a after-tax basis
D) There are no RMDs
A) Contributions can be made even if the individual has no earned income
When can a RR use discretionary Authority?
With either a limited or full power of attorney and must be approved in writing by a supervisory principal
When can a client verbally authorize a RR to make a trade?
Client specifies whether the order is a buy or sell
- the amount of the security
- Choose the price and time of execution
- Must be done on the same business day as request
What are Discretionary accounts for?
- Approved with a POA, gives the trading authority but are still subject to suitability requirements
- Trades must be approved by a principal of the broker dealer
When is a verbal discretionary authority necessary?
When you need to do one of the three actions
(assets, actions, amounts)
- Only during the business day the order was placed
When there is activity on an account when do statements have to be sent?
Monthly for active
Quarterly for non active account
What do you have to do to hold mail for longer than 3 months?
The client has to give written permission with a substantial reason
What is the account requirement for cash accounts?
S+2, Under Reg T
- When the customer does not pay BD will well the security and charge customer for profit
What is the account requirement for a margin account?
For margin accounts customers have to deposit either 50% or $2,000 which ever is higher
- Customer needs to sign margin agreement
- Signs a hypothecation agreement
What is not allowed with margin accounts?
Cannot purchase new issues on margin
What is Hypothecation agreement?
Its permission to use your security as collateral
What are the specific Account requirement for option accounts?
- ## Information for suitability
What is the account requirement for Frozen accounts?
- Accounts are frozen when payment not received for 90 days
- Security will be liquidated
- Customer must pay cash up front to unfreeze the account
What is a Wrap Account?
Its an advisory account
- Client pays 1 fee that covers IA fees, administrative fees, and transaction costs (WRAP FEE)
What are Fee-Based accounts for?
They are investment advisory / Percentage of assets are undermanagement = FEE
What are Fee-Based accounts for?
They are investment advisory / Percentage of assets are undermanagement = FEE
What are Fee-Based accounts for?
They are investment advisory / Percentage of assets are undermanagement = FEE
Whats a market order?
Buy or sell at what the price is right now.
What does market not held mean?
The trader gets to decide when to buy and sell
What is a limit order for?
You specify a price but not guaranteed an execution.
What is a buy limit?
By below the current market price.
What is a Sell Limit?
is priced above current market price
What is a Stop Order?
(Trigger) To not do anything until price happens.
Limit losses
55 stop limit?
Trigger at 55, and then waits until below 55
