Final 2 Flashcards
Financial planning is a process during which life goals may be met.
It should be viewed as a coordinated, integrated, ongoing, dynamic process of managing an individual’s financial concerns. Investment planning may be used as one aspect of financial planning, but it does not represent financial planning in its entirety. Both risk management and insurance planning are a part of the financial planning process.
Financial planning goal setting can help clients:
Building an investment portfolio
Managing one’s income tax burden
Risk management
Foundational savings
Auto $35,000
Auto loan balance $20,000
Checking account $2,500
Contributions to savings $5,500
Credit card balance $3,000
Dividend and interest income $500
Fixed outflows (annual) $42,000
Gross salary $65,000
Growth fund balance $27,500 IRA balance $32,000 Money market account $7,500 Mortgage note balance $209,000 Personal property $43,500 Primary residence (market value) $315,000 Savings account $5,000 Stock portfolio $61,500
Variable outflows (annual) $18,000
Vested portion of pension plan $13,000
What is the total value of Grant’s assets?
$542,500
Assets = $35,000 (auto) + $2,500 (checking) + $27,500 (growth fund) + $32,000 (IRA) +$7,500 (money market) + $43,500 (personal property) + $315,000 (primary residence) + $5,000 (savings) + $61,500 (stock portfolio) + $13,000 (vested pension) = $542,500.
When assuming a rate of return for a clients’ goals, a planner should use
a conservative rate of return.
Which of these statements regarding currency risk is CORRECT?
It is also known as exchange rate risk.
Itemized Deductions are:
generally personal expenses (e.g., home mortgage interest, property taxes, state and local income taxes, medical expenses) that are specifically allowed as a deduction from AGI, in arriving at taxable income.
During the current tax year, Joey sold several securities that resulted in the following types of gains and losses:
long-term capital gain: $6,700 short-term capital gain: $7,000 long-term capital loss: $1,900 short-term capital loss: $9,200 What is the net capital gain or loss on Joey's security sales?
The long-term items are netted, leaving a long-term capital gain of $4,800 ($6,700 – $1,900). The short-term items are netted, leaving a short-term capital loss of $2,200 ($7,000 – $9,200). The long-term capital gain is netted with the short-term capital loss to result in a net long-term capital gain of $2,600.
adjusted basis
The original cost of an asset plus or minus certain adjustments (such as improvements or depreciation, respectively) is its adjusted basis. Capital improvements generally do increase an asset’s basis. Depreciation taken on an asset decreases, not increases, its adjusted basis.
Vic has up to $2,500 to spend on his employee benefits and wants to know which one of the following would provide the greatest amount of tax savings. You should advise him to
contribute to a flexible spending account (FSA).
The FSA would be the best choice because not only is it pretax, but there are also no FICA (Social Security) taxes payable. The 401(k) deferral is pretax, but FICA taxes would apply. Purchasing additional life insurance would not reduce Vic’s taxable income.
Coverdell Education Savings Accounts (CESAs) advantages:
They can be used for education expenses as early as kindergarten.
There is no taxation on earnings used for qualified education expenses.
There is tax deferral on any earnings.
There is no tax deduction for CESAs—they are funded with after-tax dollars.
Claudio, age 55, has a deferred annuity with a $100,000 value and a current 5% surrender charge. Due to a downturn in his business, he wishes to withdraw all of the funds to support the business. After tax and surrender charges, what amount would Claudio receive in the payment check?
$85,000
Because Claudio is not yet age 59½, the amount he is withdrawing is subject to a 10% penalty, in addition to a 5% surrender charge: $100,000 × 0.85 = $85,000.
Is accomplished by a living will?
It states in advance what medical measures may be employed if the writer becomes incapable of consenting to treatment.
Roth IRA Characteristics:
Qualified distributions are tax-free
Must have earned income to contribute
Funded with after-tax dollars
Contributions are allowed at any age, as long as there is earned income. Traditional IRAs do not allow contributions past age 72 because that is when required minimum distributions begin.
Regarding the key differences between mutual funds and exchange-traded funds (ETFs) Which is more tax efficient?
ETFs are usually more tax efficient with lower expenses than mutual funds. Mutual funds, which are open-ended investment companies, do not trade on stock exchanges (ETFs do), which results in them being priced once a day at the end of the day.
Which of these retirement plans may offer participants the opportunity to make catch-up contributions?
401(k) plans
SIMPLE IRA plans
Both 401(k) accounts and SIMPLE IRA accounts allow employee deferrals, and they both offer catch-up provisions for those age 50 or older. The catch-up amount in 2021 is $6,500 for the 401(k) plan and $3,000 for the SIMPLE IRA. SEPs only allow employer contributions, and defined benefit plans are funded entirely by the employer based on the amount needed to provide the promised retirement benefit.
Which of the following are common reasons people delay saving for retirement?
Saving for college
Procrastination
considerations during asset allocation
weights and percentages to be assigned to each asset class.
specific securities to be purchased.
allowable allocation ranges based on the weights chosen.
Having the financial calculator in BEGIN mode means that
this could be a calculation for mortgage payments.
Having the calculator in BEGIN mode (annuity due) means that payments are made at the beginning of the period; answers will, therefore, be a bit higher than with an ordinary annuity. Mortgage payments are made at the beginning of the month and use BEGIN mode on the calculator.
Waleed had an IRA and named his first child, Ava, as the beneficiary when she was young. Waleed and his wife, Mirtza, had two more children and created a will designating the IRA to be split equally among the three children. What will be the result when Waleed dies?
Ava will be given full rights to the IRA.
Beneficiary designations are a type of will bypass, meaning they will stand regardless of what the will may state. In this case, Ava was named as the sole beneficiary, so she will inherit the IRA. It does not matter that the will states that the IRA should be distributed equally among the three children.
annually renewable term life insurance
It typically has the lowest initial premium at a given age.
Premiums increase each year as the insured ages.
Term policies have no cash value.
the primary function of life insurance
To provide cash to beneficiaries for income needs and paying for final expenses
When should there be an insurable interest
at the time a life insurance policy is purchased. This ensures that, at this time, the purchaser of the policy would suffer a personal loss upon the death of the insured.
an insurance agent or an insurance broker is:
An agent is a legal representative of one insurance company
An agent is a legal representative of an insurance company, can bind insurance coverage immediately at application, and is accountable for information given by the client to the agent. A broker can shop around different insurance companies, and ultimately the company chosen binds the insurance.
Affordable Care Act (ACA)
Lifetime limits of coverage amounts are not allowed under the ACA. A major goal is to have as many participants as possible in the program to control adverse selection. Adverse selection occurs when only those who most need insurance buy it, and healthier individuals do not. This is not sustainable because there must be enough premium dollars paid into the plan to make claim payments.
the federal estate tax is:
Estate taxes are levied by the federal government on assets included in a decedent’s gross estate.
Estate taxes are paid by a decedent’s estate.
Some states also assess an estate tax on the assets of a decedent.
Estate taxes are paid by the estate, not each individual heir. Some states do have an inheritance tax, which the individual heir would have to pay, but this is not the same as the estate tax. All other statements are correct.
FICO Score
The range for FICO credit scores is from 300 to 850. A borrower’s FICO score can impact many things, including the interest rate charged on any loans, the premium that has to be paid for an auto policy, or even possible employment.
The low end of the range is 300.
The higher one’s FICO score, the better.
A borrower’s FICO score will impact the interest rate that he is charged on loans.
statements regarding taxation
All else being equal, a tax credit is better than a tax deduction.
A tax credit reduces the actual tax liability dollar-for-dollar, which is much better than a deduction, which just reduces taxable income. The amount saved with a deduction will be determined by a taxpayer’s marginal tax bracket. Section 529 plans are funded with after-tax dollars, traditional IRAs can be funded with either pretax or after-tax dollars, and the long-term capital gains rate is available for assets held longer than one year.
traditional IRA accounts are:
The direct rollover of an IRA account from one trustee to another without penalty can be made an unlimited number of times.
There is no limit on trustee-to-trustee (direct) rollovers. Under the SECURE Act, passed in late 2019, traditional IRAs can be established at any age as long as the individual is working (previously, there was an age limit of 70½). Roth IRAs can be established at any age if there is earned income). The contribution limit for IRAs in 2021 is $6,000 ($7,000 if age 50 and older). The $19,500 limit is for 2021 401(k) plan deferrals. Note that a $6,500 401(k) catch-up contribution is allowed for individuals age 50 and older. There is no such thing as a jointly titled spousal IRA—IRAs can only be in one name because they are for individuals. With spousal IRAs, nonworking spouses use the income of their working spouses to become eligible for their own IRAs.
main investment mutual fund objectives
income.
capital appreciation.
capital preservation.
mortgage lending purposes,
Gross income in the debt-to-income ratio
Gross income in the debt-to-income ratio is used to calculate mortgage lending ability.
mortgage lending purposes,
Gross income in the debt-to-income ratio
Gross income in the debt-to-income ratio is used to calculate mortgage lending ability.
An investment policy statement contains:
asset allocation, risk level, and other investing strategies. Once written, it becomes a guideline for the client to stay the course. A SWOT analysis or investment strategy could be used in each situation, but is more cumbersome than having the document available to remind the client of the agreed-on course of action.
