General Principles Flashcards
Qualified residence mortgage/equity loan INTEREST deductibility
interest paid on first $375k single/$750k MJF is deductible if used for buying, improving, building (1 million for OLD mortgages)
PITI (what, and calculation)
(Principal, Interest, Taxes, Insurance)/GROSS income should be less than 28%
529 plans=QTP
qualified tuition program
prepaid plan:
-generally doesn’t include room and board
if you cash out, earnings will be subject to tax and penalty
present interest even though owner retains control
Bankruptcy (ch7) examples of exempt property
- homestead
- limited amount of personal property and equity in motor vehicle
- wages due to head of family
- ERISA plans (like 401ks!)
- cash value of life insurance, annuity contracts, disability benefits
NOT cancellable- see other flashcard
college funding calculation
- cost of first year of college (find FV, “today’s dollar” needs to be inflated)
- use that as PMT for 4 yrs, (BEG) but inflation adjusted (find PV- lump sum needed at 18)
- use that as FV and see how much you need now (PV) or PMT
NPV and IRR (dollar-weighted)
when NPV is 0, interest rate is same as required rate of return (doesn’t evaluate actual profitability ($ amount), but just whether or not it gives you your required rate of return)
- positive NPV= investment earning more than req rate of return (greater the NPV, higher the return)N
- negative NPV= earning less than req rate of return- rethink about it!
NPV= discounts unequal cash flows at a required rate of return less the initial cost of an investment
IRR=Internal rate of return is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment.
calculator positive/negative entries
positives: money is deposited into client’s checking account
negative: check written out of checking account (investment into stocks, IRAs, repair made to investment property, pension deposits made by employer (because distribution not taken yet)
Federal Reserve Board and monetary policy
- Reserve requirements
- Discount rate
- Open market operations
prime rates?
initial margin (Reg. T)
FOMC (Federal Open Market Committee) determines monetary policy
- reserve requirement (banks must keep): increase it to tighten credit, reduce to loosen
- Discount rate (rate for banks to borrow): increased to tighten credit, lowered to loosen credit
- Open Market Operations (Repo and reverse-repo):
- Repo(repurchase)- Fed buys bond (securities) and gives them cash- loosen credit, expansionary/easy(interest can go down)
- Reverse repo- Fed sells securities to dealers- tighten credit. contractionary, tight money (interest can go up)
Prime rate is for banks to customers
Initial Margin required (set by Fed)- increase margin to tighten, decrease margin to loosen
cash equivalents
cash, checking, money market deposit acct, money market mutual fund, savings, CDs (short), laddered CD
(not mutual funds, stocks, annuities, life insurance cash values, collectibles for investment)
emergency fund can be invested in?
checking, govt money market acct, short maturity CD, savings acct, laddered CDs
529 (QTP)- present or future gift?
gift of present interest!
Coverdell -contribution rules
qualified expenses
$2000 per year per student (no more contributions after age 18, must be used before age 30)
the contribution is not deductible, parental asset, can be rolled over to family member (like 529)
qualified expenses:
-elementary and secondary also ok (tax-free)
-tuition, fees, academic tutoring, special needs services, books, supplies, other equipment needed for school
-room and board, uniforms, transportation, after-school programs, computer equipment for school
NOT covered- intramural sports equipment
what’s a “time deposit”
CDs!- insured by FDIC
divorce step-up
No step up in basis applies in a divorce related transfer.
ex: stock with basis of $5000 and FMV of $1 mil is transferred in divorce- the receiving spouses’s basis is $5000!
economic indicators
analyzed because they “anticipate” economy
some important ones:
initial claims for unemployment, new manufacturing orders, new private housing units, stock prices (S&P500), index of consumer expectations
lottery- taxation
if option to take lump sum or annuity, full value must be included in gross income even if annuity taken.
BUT within 60 day window and at least 10 yr annuity payout taken, then payouts are taxable as received
revocation of CFP mark
can still its decision within 30 days , then dispute will go to arbitration
American Opportunity Credit
Lifetime
American Opportunity Credit:
- 100% of first $2000 + 25% of next $2000 ($2500 max credit) of tuition, fees, (no room and board) only first 4 years of full time college
- no drug felony
Lifetime Learning Credit:
- 20% of first $10,000 (max $2000) qualified tuition and expenses (no room and board)
- no drug felony!
gross income- 401k contribution included?
yes, if salary is $40,000 and 401k contribution is $2000, gross income is $40,000 (don’t subtract!)
priorities question- reduce debt or establish emergency fund first?
for exam, reduce debut first so you can establish emergency fund (in general- for I II III IV questions, consider and eliminate using the given options)
behavioral finance- stages
- denial
- ambivalence (b/n change and stay same)
- preparation
- action
use charts, graphs, spreadsheets to show projections and consequences of behavior
multi-step calculator questions
beg/end mode
value for N- if you need to find out how much you need to save now to start BEG payments after a certain no of years (like college in 16 years), N might be 15
Coverdell
qualified elementary expenses?
keys
qualified expenses:
- elementary religious school room and board
- required uniforms
- school transportation to and from
- extended day care after school programs
other keys:
-bene must be under 18 when contributions are made
-individual stocks and bonds permitted as investment
contributions are gift of present interest
compensatory vs punitive damages taxation
compensatory- tax free
punitive- taxable (wrongful death is tax free)
lottery- lump sum vs annuitized payments
annuity of 10+ years chosen–> payments taxable as received
so compare with net amount of lump sum (after tax)
“Federal Funds” (federal funds rate)
Fed funds- excess reserves maintained at the Fed by member banks (charge for overnight loans from one bank to another bank, not set by Fed)
deflation
stagflation
disinflation
deflation- decline in price of goods and services (reverse of inflation)
stagflation- combination of slow economic growth and high unemployment (stagnation) with rising prices
disinflation- slowing down of price increases (downward mvt of inflated prices to normal level)
definition of Investment Advisor (ABC)
gives Advice,
in the Business,
AND
gets Compensation
Form ADV-W
W for withdrawal! (cease operations as investment advisor)
fee-only vs fee-based
fee-BASED if ANYONE in your firm gets commission/trails (insurance, brokerage)
(% of AUM only is fee-only)
fiduciary > best interest>
fiduciary standards tested in court
emergency fund (can checking account count?)
subtract one month’s expenses from it (if there’s not enough, the checking acct can’t be counted as emergency fund)
durable vs non-durable
durable- cars, appliances, equipments, toys
non-durable- (soft goods)- food, fuel, supplies, clothing
basis points
1 basis point=0.01%
Current assets include?
Cash, money market, marketable securities (BONDS)
EE bonds for college funding
won’t work with UTMA/UGMA
business cycle (recession, depression…)
not just 6 months (2q) or 24 mon (6q), but needs to have NEGATIVE GDP
reverse mortgage
- home does NOT have to be owned free and clear to qualify
- no monthly mortgage payments during life of the loan
- no income qualifications
- only for 62+ living in condo and single home
Practice Standards
E
I G Aa R P I M
P
Establish relationship
- obtain qualitative (subjective) and quantitative (objective) Information and analyze
- identify Goals- help select, prioritize
- Analyze current course of action and Alternatives
- develop Recommendations- consider the assumtions/estimates used, effects, potential to meet goas
- Present the recommendation
- Implement the recommendations- responsibilities, products, services, advantages/disadvantages, alternatives
- Monitor progress- responsibilities, how and when, obtain current info, update goals
Practice within professional and regulatory standards
taking money out of joint account
it’s a joint account, so you can take money out with request of one of the owners without the other one’s consent
