Financial Profile/Savings Plans

Question 1

ERISA Rule 404(c) applies to retirement plans that offer “self-directed” investment, such as 401(k) plan. It requires that the plan sponsor offer what 3 things?

Answer 1

1. Three investment alternatives that are a) diversified, b) have different risk characteristics, and c) that tend to minimize risk through diversification
2. Opportunity to diversify their accounts sufficiently to avoid large losses
3. Opportunity to change investments with a frequency appropriate to the volatility of the investments

Question 2

Can any type of asset be held in a partnership?

Answer 2

Yes - any assets can be held in the partnership - real estate is common - not just financial assets

Question 3

If a customer asks an RIA to establish a trust for his children, the best course of action for the RIA to take would be to:

Answer 3

Refer the client to an attorney that can set up the trust

Trusts must be established as legal entities in a State, similar to establishing a corporation or partnership in a State

Question 4

What 2 tax forms must the sole proprietor of a business file?

Answer 4

1. 1040 (individual tax form)

2. Schedule C (Profit or Loss from a business)

Question 5

What is a Schedule E tax form used for?

Answer 5

Passive income (Real estate and partnerships)

Question 6

Taxation of mutual fund distributions is based on the length of time that __________ held the underlying securities

Answer 6

The FUND. Fund distribution taxation is always based on the length of time that the FUND held the shares, not the individual themselves.

Question 7

All fund distributions, whether they are dividends, short term capital gains or long term capital gains, are reported to shareholders and to the IRS on Form:

Answer 7

1099 - DIV

Question 8

What is the tax rate for dividend capital gains?

Answer 8

15% (or 20% for individuals making over $400K)

Question 9

What is a money purchase retirement plan?

Answer 9

In a money purchase retirement plan, which is a qualified plan under ERISA, the employer sets up the plan and contributes a fixed percentage of each employee’s income annually capped at 25% (statutory rate; 20% effective rate), up to $55,000 max. Regardless of whether the employer is profitable or not, it must make the annual contribution - and this is deductible to the employer. f

Question 10

A corporate investor may exclude from taxation, part of:

Answer 10

Cash dividends. Corporate investors may exclude 70% of dividends received (both common and preferred) from taxation

Note: Interest income received is 100% taxable

Question 11

How are mutual fund distributions that are automatically reinvested taxed?

Answer 11

They are taxed. Whether a shareholder reinvests capital gains and dividends or does not reinvest, the shareholder must report them for income taxes

Question 12

Many years ago, a customer bought 100 shares of ABC stock at $40. The customer dies and wills the stock to her son when is valued at $50. The son sells the security at $55. The tax consequence to the son is:

Answer 12

$5/share capital gain

For estate tax purposes, securities are valued at the current market value at the date of death