Final Push Study Flashcards
phase out range for a Roth IRA for a couple who files married filing separately?
$0 - $10,000
What is a Roth re-characterization? and how can it be used?
Hint: starting in 2018 they changed the rules.
A re-characterization is is when the Roth contribution is re-characterized to a prior or current year and a conversion is sent back to the traditional. In 2018 they eliminated the option for conversion re-characterizations.
What is a strategic allocation versus tactical allocation?
Strategic allocation models are based on the client. The models are regularly rebalanced back into alignment.
Tactical allocation models are more tailored to the market or economy.
What is and what does the black-scholes option valuation method do?
Determines the value of a European call option based on certain factors. Assume the option can only be exercised at expiration.
What is the correlation coefficient and what are the measurement units?
Measures the extent to which returns on two securities are related.
R = +1 (movement is identical) R = -1 (movement is opposite)
The bigger the standard deviation, the bigger the?
Risk
Standard Qualified Plan Eligibility Rules
21 & 1 Rule
must be 21 years old and have 1 year of service
Employer can make this 2 years but if they do they cannot implement vesting and must make a minimum match.
Contributory vs non-contributory
Contributory plans are when employee’s are able to contribute to it.
Non-contributory plans are employer plans only.
Real Estate Valuation Formula
Net Operating Income / Discount Rate
Net operating Income = income - vacancy - expenses
Constant Growth Dividend Discount Model
Vo = Di / r-g
Price for a security where dividends are growing at a constant rate.
r = required return g = growth rate D = dividend V = Value
Whats the typical qualified plan loan amount? (% and $)
Payback period on qualified plan loans?
The maximum typical loan amount available is 50% or $50,000.
Payback period can be no longer than 5 years unless used for a home purchase.
Is participation in a 457 plan considered active participation for determining Traditional IRA deductible contirbutions?
No, participation in a 457 plan is not considered active participation for IRA deductibility rules.
457 plan
Limit
Special Catch up Contribution Rules
Limit = $19,500
Special Catch up Contribution Rules = If permitted by the plan, allow a participant for 3 years prior to the normal retirement age (as specified in the plan) to contribute the lesser of:
Twice the annual limit
the basic annual limit plus any amount of the basic limit not used in prior years
An employee must have worked for their employer for how many years out of the last 5 years to qualify for SEP IRA contributions?
3 out of the last 5 years.
What is the beta of a portfolio and what does a beta of 1.25 mean?
Beta is a measure of systematic risk (volatility).
A portfolio with a beta of 1.25 means the portfolio is 25% more volatile than the market.
Profit sharing plans do not have mandatory funding, however they must be…….
Substantial & Recurring
Standard Deviation percentages
return falls within:
1 standard deviation …% of the time
2 standard deviations …% of the time
3 standard deviations …% of the time
1 standard deviation 68% of the time
2 standard deviations 95% of the time
3 standard deviations 99% of the time
Davis company stock has a average return of 11% and a standard deviation of 4%. What is the probability that the stock will return above 15%?
16% chance
What is the Treynor Ratio? How is it calculated? and what are the measurements?
a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk, per each unit of market risk assumed.
Portfolio Return - Risk Free Return / Beta
Bigger number the better
What is Jensen’s Alpa and what does a positive alpha indicate?
How did the portfolio return compared to the capital asset pricing model.
(the capital asset pricing model is a model used to determine a theoretically appropriate required rate of return of an asset).
A positive alpha indicates the portfolio outperformed the market.
SIMPLE IRA Characteristics
Maximum number of employee's? Contribution limit? matching options? Can a employer reduce the match? Penalty for distributions in the first 2 years?
Can have no more than 100 employee’s earning greater than $5,000.
$13,500 contribution limit + $3,000 catch up
Employer must choose between a 3% match or a 2% non-elective contribution.
25% penalty for withdrawal in the first 2 years.
Efficient Market Hypothesis
Can or cannot outperform the market consistently?
Stock price reflects?
Day to Day prices follow a …………… Pattern?
Cannot consistetly outperform the market
Stock prices reflect all available information
Day to Day prices follow a random walk pattern
Weak form market hypothesis?
Semi-strong market hypothesis?
Strong market hypothesis?
Weak - Technical Analysis doesn’t work. Its already reflected in the price.
Semi-Strong - Technical & fundamental analysis don’t work. They are already reflected in the price.
Strong - Technical, fundamental & insider information don’t make a difference. They are already reflected in the price.
How to determine a highly compensated employee?
- Greater than 5% owner in current or preceding year
- Compensation greater than $130,000 in preceding year
- Family ownership attribution rules apply
- Top 20% election (employee is in the top 20% of earners)
How to identify a Key Employee?
- Greater than 5% owner in current or preceding year
- 1% owner with greater than $150,000
- An officer of the company sponsoring the plan and receives actual compensation for the year of $185,000 or more (2020)
Federal Lifetime Gift Tax Exemption
$11,580,000 per person
Crummy Provision & the 5 by 5 power rule
Allows gifts of a future interest to qualify for annual exclusion.
A 5 by 5 Power in Trust is a clause that lets the beneficiary make withdrawals from the trust on a yearly basis. The beneficiary can cash out $5,000 or 5% of the trust’s fair market value each year, whichever is a higher amount.
403b plan characteristics
Limited to which employers?
Contribution Limit?
Special Catch up contribution rules?
For education or non-profit entities only
$19,500 contribution limit
Employee must have 15 years of service Can contribute the lesser of: $3,000 extra $15,000 less previous catch ups $5,000 x yrs of service less all prior salary deferalls
What is fundamental analysis vs technical analysis?
Bonus: What is top down and bottom up?
Fundamental analysis is the analysis of a business’s financial statements; health; and competitors and markets. Top down analysis starts by analyzing the broader economy and working down to more specifics. Bottom up is the reverse of this.
Technical analysis is use of stock prices and volume to determine demand.
What is Bond Duration?
The longer a bonds duration, the (greater or weaker) sensitivity to the interest rate changes?
Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates. Weighted number of years until an investment is recovered.
The longer the duration the greater the sensitivity to interest rate changes.
A high coupe rate means what for a bonds duration?
The higher the coupon rate the lower the duration.
The duration of a bond is the weighted number of years until an investment is recovered.
Coupon rate and duration have what type of relationship?
The coupon rate and duration have an inverted relationship. The higher the coupon rate the lower the duration.
Current Yield
Annal Interest payment / current market price
What is a QDOT Trust?
A qualified domestic trust (QDOT) is a special kind of trust that allows taxpayers who survive a deceased spouse to take the marital deduction on estate taxes, even if the surviving spouse is not a U.S. citizen.
Executor makes the irrevocable election
Why is the generational skipping transfer tax important?
It stops families from skipping the estate tax between 1 or more generations. I.e. a person can give their estate to their daughter who may die one year later and be taxed again almost immediately.
Simple vs complex trust
Simple - Must distribute income annually
Complex - Not required to distribute income annually
Intervivos trust vs testamentary
Intervivos = living trust
Testamentary Trust = created at death
Difference between a section 2503 B trust and 2503 C trust?
2503B trust has to have income paid annually but assets may be held in the trust past the beneficiaries age of majority. Assets are removed from the grantors gross estate.
2503C trust does not require income to be paid annually but does require the trust assets to be distributed at the beneficiaries age of majority. 21 years old.
Child tax credit Amount? Phaseout? Qualifications? Refundable or not?
Amount: $2,000
Phaseout: >$400,000 (married)
Qualifications: Tax payer is providing the majority of the support to the child.
Refundable up to $1,400
What is the correlation coefficiency and what does -1 and +1 mean?
Correlation coefficiency is a statistical measure of the strength of the relationship between the relative movements of two variables.
-1 is perfectly negatively correlated (opposite)
+1 is perfectly positively correlated (the same)
A real estate investor or a portfolio that contains real estate is concerned with which:
Heterogeneity
Homogeneity
Heterogeneity because a real estate investor is concerned that every property is unique and different such as with design and location.
Which below option can be secured with collateral?
Private Annuity
Scin
Scin
A private annuity cannot be secured by collateral. The “self-cancelling” feature means that if you die during the term of the note (which cannot be longer than your actuarial life expectancy at the time of the sale), then the “buyers” (your children, or other loved ones) are relieved of any future payment obligations, and receive the entire asset free of any transfer taxes.
The following are expenses due to a car accident: $100,000 medical bill $15,000 damage to a vehicle $20,000 rehab bill $1,000,000 pain & suffering
What amount represents special damages?
$135,000
Special damages represent measurable loss
What is the difference between a GRIT, GRAT & GRUT?
GRIT - Grantor retained income trust.
Payment of income annually. Income created by the asset.
GRAT - Grantor retained annuity trust.
Fixed dollar payment based on a % of the FMV at the beginning of the trust.
GRUT - Grantor retained uni-trust.
Fixed dollar payment based on the FMV annually.
What is recapitalization of a corporation and what type of corporation must it be?
Recapitalization is when you convert the current common stock to new common stock and non-voting preferred stock. It must be done as a C corp.
This allows the owner to keep control of the business but gift the shares of common stock to children and have the appreciated common stock value be treated under the child. reducing any future gifting.
The amount of any preferred stock is the only portion valued under the owners gross estate. The preferred stock has a fixed value.
What is the contributory negligence rule?
The insured party cannot recover damages if his own negligence contributed to his injuries, even if his negligence was slight.
This is more of a concept that a practical application. Most states have some sort of comparative negligence rule.
