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Series 7 Top-off Exam > Customer Accounts & Retirement Plans > Flashcards

Customer Accounts & Retirement Plans Flashcards

This deck focuses on the account opening process, types of customer accounts and account titles, as well as corporate and individual retirement plans.

1
Q

What type of joint account allows for a specified percentage of ownership of each party in the account?

A

Tenancy in Common

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2
Q

What is the FINRA “know your customer” rule?

A

This rule states that the registered representative and the member firm must use reasonable due dilligence to discover and maintain essential facts about every customer. Name, Social Security Number, Address, and DOB are required. Beyond that, a customer can refuse to provide more information and the firm is under no obligation to try to obtain more.

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3
Q

Whose signature is required on the new account form?

A

Only the principal’s

The customer’s signature isn’t required at account opening (so accounts can be opened over the phone).

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4
Q

Define:

Suitability Rule

A

States that the firm or registered representative must have a “reasonable basis” to recommend a strategy or investment.

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5
Q

Define:

discretionary account

A

An account where the investor gives the broker power to make investment decisions for the account holder. Specifically, the registered rep has the authority to choose the asset, action (buy or sell) and/or amount. To establish a discretionary account, a written power of attorney is required.

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6
Q

How does a full power of attorney differ from a limited power of attorney?

A

A limited power of attorney allows the holder to trade (buy and sell securities) on behalf of the account owner, whereas a full power of attorney allows the holder to trade as well as withdraw cash from the account.

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7
Q

Define:

durable power of attorney

A

A type of power of attorney that continues even if a grantor is declared legally or mentally incompetent by a court.

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8
Q

What type of joint account allows for each party to own an undivided interest in the account - if one person dies the other party owns the entire account.

A

Joint Tenancy with Rights of Survivorship

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9
Q

An individual wants to establish an account and have a named beneficiary. They should open a

A

Transfer on Death (TOD) account

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10
Q

What is a customer account that allows the broker to trade but not to withdraw funds?

A

Limited power of attorney

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11
Q

What type of joint account is a divided account?

A

Tenants in Common (TIC)

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12
Q

In what type of joint account do all parties have an undivided interest in the account?

A

Joint Tenants with Rights of Survivorship (JTWROS)

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13
Q

In a joint account, who must checks be made out to?

A

All registered account owners

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14
Q

What is the system created after 9/11 for customer identification?

A

CIP - Customer Identification plan

Required Post-9/11, all customers’ identification must be verified through this system promptly after account opened. If a customer cannot be identified, the account is not closed, but identification must ultimately be verified.

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15
Q

When securities are held in street name, to whom do companies send dividends?

A

“Street name” refers to securities held for customers, but in the name of the dealer. In this situation, the customer is still the beneficial owner of the security and retains all ownership rights including dividends.

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16
Q

How are corporations taxed on dividends received from other corporations?

A

If a company owns stock of another company and receives a dividend, 50% of the dividends received are tax-free and the remaining 50% are taxed at the company’s corporate rate.

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17
Q

Define:

wrap account

A

An account, offered by a broker-dealer, that charges a single fee for both advisory and execution services. Usually charged as a percentage of assets.

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18
Q

Define:

adjusted gross income

A

Used in the calculation of personal income tax and is calculated before deductions or exemptions are made.

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19
Q

Regulation that requires sheltering of private customer information and privacy notices

A

Regulation S-P

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20
Q

When principal approval is required for a new customer account

A

At or promptly after the first transaction in the account

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21
Q

Type of trading authorization granted to permit a third party to make trades but not withdraw cash or securities

A

Limited trading authorization

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22
Q

Type of trading authorization granted to permit a third party to make trades and withdraw cash or securities

A

Full trading authorization

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23
Q

Two types of custodial accounts established for minors

A

UGMAs and UTMAs

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24
Q

Joint account that passes assets to surviving owner at death with no probate

A

Joint tenancy with rights of survivorship (JTWROS)

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25
Type of account that passes assets at death by will to the heirs
Joint tenants in common (JTIC)
26
Type of joint account that permits unequal ownership interests
Joint tenants in common (JTIC)
27
Type of joint account that requires equal ownership interests
Joint tenancy with rights of survivorship (JTWROS)
28
Type of account that authorizes registered representatives to make trades on behalf of the customer
Discretionary
29
Type of individual account that passes assets to a named beneficiary at death and avoids probate
Transfer on death (TOD)
30
Three trading restrictions for a custodial account
Short sales, uncovered options, margin accounts
31
Prohibited practice of trading frequently to boost commissions
Churning
32
The number of days a firm has to validate positions when an account transfer is requested
One business day
33
The number of days a firm has to transfer the securities after the account has been frozen
Three business days
34
Two order instructions that are not considered discretionary
Time and price
35
Length of time mail can be held for customers that are traveling in the U.S.
3 months
36
Length of time mail can be held for customers that are traveling outside of the U.S.
3 months
37
Minimum frequency for sending customer account statements
Quarterly
38
Frequency with which account statements are sent to customers in an active account
Monthly
39
Minimum frequency statements are sent to customers if penny stocks are held in the account
Monthly
40
When a principal must approve an order ticket
Promptly after execution
41
The number of days after account opening a firm has to furnish a copy of the account record to the customer
30 days
42
Two required documents for opening a corporate account
Corporate charter and corporate resolution
43
Account charge that is appropriate only for persons who engage in moderate to active trading
Fee-based
44
Account charge that is appropriate for persons who engage in little trading activity
Commission
45
Accounts that provide a group of services such as asset allocation and portfolio management, and are generally available through investment advisors
Managed accounts
46
Document that must be obtained when opening a partnership account
Partnership agreement
47
Type of responsibility that applies to persons named to manage custodial accounts
Fiduciary
48
Series of steps that a firm must follow at the death of an individual account owner
Cancel all open orders, freeze the account, await instructions
49
The party that can buy, sell or liquidate securities in an UGMA account
Custodian
50
When assets transfer to the donee in an UGMA account
Age of majority
51
The Social Security number on an UGMA account form
The minor's
52
Documents that can confirm identity of a new customer as specified by a firm's Customer Identification Program
Unexpired driver's license or passport
53
The frequency that customer account information must be updated
Every 3 years
54
Frequency that privacy notices must be provided to customers after account opening
Annually
55
Upon receipt of an ACAT form, a firm must verify the account positions within
1 business day
56
Customers must receive a copy of new account form every
36 months
57
Customers must be given a copy of new account form within
30 days of account opening
58
Type of account in which a customer trades with multiple firms but receives a consolidated statement from a single firm
Prime brokerage account
59
The party that can buy, sell or liquidate securities in an UGMA account
Custodian
60
When assets transfer to the donee in an UGMA account
Age of majority
61
The Social Security number on an UGMA account form is that of
The minor
62
When principal approval is required for the opening of a new cash account
promptly after the first transaction
63
Business document required for the opening of a trading account by a partnership
Partnership Agreement
64
John purchases XYZ stock for $40 per share. Three years later John dies when the stock is worth $52 per share and will the stock to his heir Daniel. If Daniel decides to sell the stock when it is worth $60, what is his cost basis?
$52 ## Footnote When a person dies and leaves securities to an heir, the cost basis for the recipient becomes the market value on the date of the owner's death.
65
Amount of dividends that may be excluded from taxation by U.S. corporations
50%
66
Type of power of attorney that survives the declaration of mental incompetence
Durable
67
Category of retirement plans with tax deductible contributions
Qualified
68
Retirement plan category that can make non-deductible employee contributions on a discriminatory basis
Non-qualified
69
Annual IRA catch-up contribution amount allowed for individuals 50 and over
$1,000
70
Age at which distributions from an IRA may begin without penalty
59 1/2
71
In a traditional IRA account, age at which distributions must begin to avoid penalties
73 (updated in 2023 from 72)
72
Amount of IRA insufficient distribution penalty
50% of amount that should have been withdrawn
73
Amount of IRA early distribution penalty
10% of amount distributed (plus ordinary income tax)
74
Five events prior to age 59 1/2 that will not trigger an IRA early distribution penalty
Death; disability; 1st time home purchase; education expenses for taxpayer, spouse, child or grandchild; medical premiums for unemployed; and excess medical expenses
75
Two examples of ineligible IRA investments
Collectibles and life insurance
76
Three investment practices that are prohibited in IRA accounts
Short sales of stock, speculative options strategies, margin account trading
77
Time limit allowed for completion of an IRA rollover
60 days
78
Number of IRA trustee to trustee transfers allowed in one year
No limit
79
Tax status of contributions made to Roth IRAs
After tax
80
Tax status of distributions from Roth IRAs
Non-taxable
81
Withholding tax that applies when an individual receives a distribution of assets from an employer-sponsored qualified plan prior to age 59 1/2.
20%
82
Type of small business retirement plan in which IRAs are set up by employees to receive employer contributions
Simplified employee pension plans (SEPS)
83
Taxation that applies to a lump sum withdrawal from an IRA account at age 55
Ordinary income on earnings + 10% penalty
84
Retirement plan for self-employed persons, unincorporated businesses or professional practices
HR-10 plan (Keogh plan)
85
Penalty for excess contributions made to an IRA account
6%
86
Qualified plan available to employees of non-profit organizations; funded by elective employee deferral
403(b) (TSA plan)
87
Type of qualified plan that promises a specified benefit at retirement
Defined benefit
88
Type of defined contribution plan that allows employee pre-tax contributions which may be matched by employer contributions up to a certain percentage
401(k) plan
89
Federal regulation that specifies guidelines for private sector and certain union plans
Employee Retirement Income Security Act (ERISA)
90
Schedule that identifies employee entitlement to pension benefits, based on years of service
Vesting schedule
91
ERISA clause that specifies impartial treatment for eligible employees
Non-discrimination clause
92
ERISA-defined employee eligibility requirements for plan participation
21 years of age; one year of full time service, minimum of 1000 hours
93
An IRA rollover must be completed within
60 days
94
Distributions from tax deferred annuities are
100% taxable
95
A retirement plan requiring the services of an actuary to determine annual contributions
Defined benefit plan
96
The penalty that applies if funds are withdrawn from an annuity before age 59 1/2.
10% penalty on earnings
97
Number of IRA rollovers permitted each year
One
98
An employee's pension payments are based on his salary and length of service. He does not bear the risk of the pension being affected by market performance. He is enrolled in a
**defined benefit plan**
99
**defined benefit plan**
A type of retirement fund that pays out a set benefit upon retirement. A pension is an example of a defined benefit plan.
100
**defined contribution plan**
A retirement plan where there is no guarantee of value upon retirement. Usually investment choices are controlled by the employee. A 401(k) plan is an example of a defined contribution plan.
101
# Define: **ERISA**
A law passed by Congress that governs qualified corporate retirement plans. According to ERISA, for a plan to be qualified and eligible for tax-deductible contributions, it must be offered to all full-time employees with at least 21 years of age and one year of service with the employer. The plan must also have a vesting schedule.
102
# Define: **non-qualified corporate retirement plan**
A corporate retirement plan, such as a deferred compensation or payroll deduction plan, that is not required to meet strict ERISA guidelines. Instead, companies have the flexibility to choose which employees are offered to participate in the plan. Because these plans are discriminatory, they do not allow deductible contributions. Instead, after-tax contributions are made, which grow tax-deferred, and when distributions are taken, only the growth is taxed as ordinary income.
103
# Define: **profit-sharing plan**
A type of qualified, defined contribution corporate retirement plan that allows companies to contribute to their employees’ retirement based on the companies’ profits. Because these plans are qualified, they allow for tax-deductible contributions.
104
# Define: **required minimum distribution**
Requires the owner of a traditional IRA to begin minimum withdrawals specified by IRS rules from the account by April 1st following the individual’s 72nd birthday. Any shortfalls in this distribution are penalized with a 50% tax on the under-distribution amount.
105
# Define: Roth IRA
A type of IRA that requires after-tax contributions, but allows the assets in the plan to grow tax-free. Distributions from the plan are also completely tax-free as long as the assets have been in the plan for at least five years and withdrawals do not begin prior to age 59 1/2. Only individuals who have income below a certain threshold are allowed to contribute to a Roth IRA.
106
# Define: **rollover**
The process of an investor moving their retirement funds from one custodian to another. In a rollover, the individual takes possession of the funds and from that point has 60 days to move the funds to the new custodian or else it may be considered a distribution and taxes and penalties may apply.
107
# Define: **Transfer**
Occurs when an individual moves their retirement plan from one custodian to another. Because the individual does not take possession of the funds, there are no potential tax consequences or penalties.
108
# Define: **money purchase plan**
A type of defined contribution retirement plan where each year the employer contributes a specified percentage of the employee's compensation to the plan.
109
What does the acronym **ERISA** refer to?
* ERISA stands for Employee Retirement Income Security Act. * It defines what types of plans may be considered **qualified plans** for the purposes of retirement planning.
110
What does it mean for a plan to be "**qualified**"?
Qualified plans allow the investor to **contribute to the plan prior to taxes being taken out of their paycheck**. This means they have a lower gross income, which is good for tax purposes, but it also means they have never paid taxes on those contributions to the retirement plan.
111
What is the penalty for **excessive IRA contributions**?
**6%** penalty on the excess contribution
112
What are the **tax characteristics** of an ERISA plan?
* Contributions are made with pre-tax dollars * The earnings grow in the plan tax-deferred * All distributions are taxed as ordinary income
113
What are the tax characteristics of a non-qualified corporate plan?
* Contributions are made with after-tax dollars * The earnings in the plan grow tax-deferred * When distributions are taken from the plan, only the growth is taxed as ordinary income
114
What is the maximum contribution in an **IRA Account**?
Currently the cap on contributions is $6,500 per year for those under age 50 and $7,500 for those over 50 (referred to as a catch-up contribution) ## Footnote If you are 50 or older, you can contribute an additional $1,000 as a "catch-up" contribution.
115
Up until what date may a **prior year contribution** be made to an individual's IRA?
Individuals may make IRA contributions **until April 15th of the following year**, i.e. an individual can contribute for 2018 until April 15th of 2019.
116
Before what age and at what rate are **early withdrawals** from a traditional IRA penalized?
Before 59 1/2, early withdrawals are penalized at 10%.
117
When do **mandatory distributions** begin from a traditional IRA?
Mandatory distributions from an IRA must begin on the April 1st of the calendar year following an individual's 73rd birthday.
118
What is an **IRA rollover** and how often can they occur?
When an employee leaves an employer with assets in a qualified plan, that employer may choose to do nothing and keep those funds in the employee's plan while retaining ownership, or they may choose to move their qualified dollars from the 401(k) to an IRA. **This is called a Rollover** and it can happen once per year.
119
Can an **IRA** hold any type of asset?
No ## Footnote IRAs are limited to holding regular securities such as stocks, bonds, and annuities, and can also hold precious metals. They cannot hold art, raw commodities, land, real estate or insurance policies.
120
What is the age for **mandatory distributions** in a ROTH IRA?
Unlike Traditional IRAs, Roth IRAs do not have a mandatory age distribution.
121
Can anyone contribute to a **Roth IRA**?
No, only individuals below a certain income threshold can contribute to a Roth IRA. This is because a Roth provides unique tax benefits as the earnings and growth are completely tax-free as long as the individual takes distributions after age 59.5 and the money has been in the plan for at least five years.
122
What can an **IRA** be invested in?
* IRAs can be invested in bonds, mutual funds, UITs, treasury securities, annuities, and gold and silver. * Investments such as real estate art and collectibles are not allowed in IRAs.

Series 7 Top-off Exam (8 decks)

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