Investment Advisory Clients Flashcards
1
Q
True or False: All corporate officers may effect transactions for the corporation.
A
False, only those named in the Corporate Resolution
2
Q
A ___________________ is required to open an account for a partnership.
A
A Partnership Agreement is required to open an account for a partnership.
3
Q
Municipal bond interest is exempt from __________ tax.
A
Municipal bond interest is exempt from federal tax.
4
Q
The _____________________ has the authority to regulate margin requirements.
A
The Federal Reserve Board (FRB) has the authority to regulate margin requirements.
5
Q
____________ governs the extension of credit by BDs.
A
Regulation T governs the extension of credit by BDs.
6
Q
Does the payment date requirement of Regulation T apply to cash or margin accounts?
A
Payment is required within 5 business days for both (100% in a cash account, 50% in a margin account).
7
Q
Who is eligible to contribute to a qualified annuity?
A
Public school employees [403(b)] and certain non-profit organization employees [501(c)3]
8
Q
What is the penalty for making excess contributions to an IRA?
A
6% of the excess
9
Q
True or False: Excess contributions made to an IRA will still be deductible and will grow tax-deferred.
A
False. Excess contributions are non-deductible and will not grow on a tax-deferred basis.
10
Q
IRA contributions must be made in what form?
A
Cash
11
Q
What are some of the investments that are not suitable for IRA contributions?
A
Collectibles, insurance, and metals (except U.S. gold and silver coins)
12
Q
Anyone with __________ income may contribute to an IRA.
A
Anyone with earned income may contribute to an IRA.
13
Q
True or False: To avoid a late withdrawal penalty, IRAs have a required minimum distribution (RMD) provision.
A
True
14
Q
How is a Roth IRA contribution different from a Traditional IRA contribution?
A
The Roth IRA contribution is always made on an after-tax basis.
15
Q
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
A
ERISA gave the U.S. Government jurisdiction over private pension plans.
16
Q
According to ERISA, are there any standards that must be followed regarding how money is invested?
A
Yes. The plan’s trustee must abide by the Uniform Prudent Investor Act.
17
Q
Describe the employees who must be eligible to contribute to an ERISA qualified plan.
A
Employees who are 21 years or older with one year of full-time service
18
Q
What retirement plans are available to the self-employed?
A
Keogh Plans and SEPs
19
Q
May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan?
A
Yes, provided the Keogh contribution is solely based upon the employee’s self-employment income.
20
Q
May an individual with a Keogh Plan also fund an IRA?
A
Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax-deductible.
21
Q
_____ Plans are college savings plans with high contribution limits set by the state sponsor.
A
529 Plans are college savings plans with high contribution limits set by the state sponsor.
22
Q
Describe the tax treatment of contributions made to a 529 Plan.
A
They are after-tax contributions that may possibly grow tax-free.
23
Q
A savings plan which funds both elementary and higher education is referred to as the ____________________________.
A
A savings plan which funds both elementary and higher education is referred to as the Coverdell Education Savings Plan.
24
Q
If not needed for a child’s education, may the funds in a 529 Plan be transferred to a relative’s 529 Plan?
A
Yes
25
If an employer makes a Keogh contribution on its own behalf, what must be done for its employees?
A contribution at the same percentage must be made for the employee.
26
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
Qualified
27
Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?
Non-Qualified
28
A limited partnership could be formed by a minimum of how many individuals?
Two (one general partner and one limited partner)
29
What document is filed with the state of legal domicile to create a partnership?
Certificate of Limited Partnership
30
What does the Partnership Agreement define?
The rights, liabilities, and obligations of each partner
31
True or False: Limited partnership units are illiquid and require permission of the general partner to sell.
True
32
What does it mean to say "a limited partnership is a pass-through investment?"
The results of the business venture (profits and losses) flow through directly to the investor.
33
Is income generated by a limited partnership taxed once or twice?
Only once, and it is at the partner's level. The program itself is not a taxable entity.
34
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
35
How is basis determined for the recipient of gifted securities?
Basis will be the donor's cost or market value, whichever is lower.
36
When securities are gifted, the recipient's holding period will be _______________________.
When securities are gifted, the recipient's holding period will be the same as the donor's.
37
What business structure provides flow-through tax treatment and has a P&L reported on the owner's personal tax return?
An S Corporation
38
List some important considerations when determining the suitability of recommendations made to customers.
Investment objectives, financial situation, risk tolerance, tax status
39
If a client wins $1 million, what should an agent or an IAR do?
Update the client's information that is on file
40
To open any account on behalf of a corporation, what document must agents and IARs examine?
Corporate Resolution
41
The maximum number of shareholders in an S Corporation is _____.
The maximum number of shareholders in an S Corporation is 100.
42
What is the primary purpose of forming a family limited partnership (FLP)?
To minimize estate tax and gift tax liabilities
43
What is required to receive the tax benefits of a family limited partnership?
A legitimate business purpose is required. (If created solely for tax benefits, the IRS may disallow the benefits.)
44
In a limited partnership, which partner has unlimited personal liability and which has limited liability?
General partners (GPs) have unlimited liability, while the limited partners (LPs) have limited liability.
45
The tax treatment of a limited liability company (LLC) is similar to the treatment of what other entity?
A Subchapter S Corporation
46
What are the contents of an estate?
The total assets and liabilities of a decedent
47
What are the different terms used to identify the individual who sets up a trust?
Creator, maker, grantor, donor, trustor, settlor
48
The __________ is the person who has fiduciary control over a trust.
The trustee is the person who has fiduciary control over a trust.
49
What are the differences between a simple and a complex trust?
A simple trust must distribute earnings, but not principal. Complex trusts may retain earnings or distribute principal.
50
What are the benefits of setting up an irrevocable trust?
It will reduce estate taxes and also avoid probate.
51
What is the benefit of establishing a revocable trust?
It avoids probate.
52
When investing for an estate, the most suitable investments are normally _______-term.
When investing for an estate, the most suitable investments are normally short-term.
53
Who establishes a testamentary trust?
The estate of the deceased
54
When is an inter vivos trust established?
During the donor's lifetime
55
In a trust, all actions of the trustee must be for the benefit of the ______________.
In a trust, all actions of the trustee must be for the benefit of the beneficiary.
56
To whom will the earnings produced in an irrevocable trust normally be taxed?
The trust
57
The earnings generated in a revocable trust will be taxed to the __________.
The earnings generated in a revocable trust will be taxed to the grantor.
58
In which type of trust could the grantor not also be the trustee?
A testamentary trust, since it is established by the estate of the grantor
59
When selling inherited securities, how is the beneficiary's cost basis calculated?
The cost basis is the asset's market value at the time of death (a stepped-up basis)
60
When receiving securities as a gift, how is the recipient's cost basis calculated?
The cost basis is the lower of the donor's original basis or the market value at the time of the gift.
61
Will estate tax apply when assets are left to a spouse?
Generally there is no estate tax between spouses. However, if the spouse is a non-U.S. person, the exclusion is denied.
62
A revocable trust will eliminate __________, but will not reduce _________ tax.
A revocable trust will eliminate probate, but will not reduce estate tax.
63
An irrevocable trust will eliminate __________ and will reduce _________ tax liability.
An irrevocable trust will eliminate probate and will reduce estate tax liability.
64
True or False: When conducting a client's financial analysis, liquid investments would be considered long-term assets.
False. Liquid investments would be considered current assets.
65
True or False: When formulating a financial plan, it is always important to consider the client's liquidity needs.
True
66
Identify the acronym: AMT
Alternative Minimum Tax
67
Identify the acronym: RMD
Required Minimum Distribution (only required of Traditional IRAs)
68
Identify the acronym: IRA
Individual Retirement Account
69
What is ERISA?
Employment Retirement Income Security Act
70
Identify the acronym: ESA
Education Savings Account (Coverdell)
71
Identify the acronym: SEP
Simplified Employee Pension Plan
72
Identify the acronym: UGMA/UTMA
Uniform Gifts to Minors Act / Uniform Transfers to Minors Act (governs custodial / minor's accounts)
73
Define a sole proprietorship.
A business that is owned by one person who is responsible for all management decisions and entitled to all profits
74
For a qualified retirement plan, what document details the plan’s needs, goals, time horizon, and investment philosophy?
The investment policy statement
75
List some of the common financial goals. 6
1. Income,
2. growth,
3. preservation of capital,
4. liquidity,
5. tax relief, and
6. speculation
76
True or False: Spouses may give an unlimited amount to one another and not be subject to the gift tax.
True
77
Regarding clients, list some of the non-financial considerations an IAR must consider? 5
1. Age,
2. occupation,
3. time horizon,
4. investment experience, and
5. social values
78
True or False: Employees are fully vested in their own contributions.
True
79
True or False: A defined contribution plan provides employees with a fixed monthly payment at retirement.
False. This statement describes a defined benefit plan.
80
Who is eligible for a 457 plan?
Employees of state and local governments
81
How often may an individual roll over an IRA?
Once per rolling 12 months
82
Reinvesting dividends in a mutual fund creates a ________ event.
Reinvesting dividends in a mutual fund creates a taxable event.
83
What is the formula for calculating an individual's personal net worth?
Assets - Liabilities = Net Worth
84
What is the formula for calculating an individual's personal discretionary income?
Income - Expenses = Discretionary Income
85
True or False: S-Corporations may have foreign residents as owners.
False. All owners of an S-Corporation must be U.S. citizens or resident aliens.
86
What is the difference in owner's liability when forming an LLC as opposed to a sole proprietorship?
The owners of an LLC have limited liability, while the owner of a sole proprietorship has unlimited personal liability.
87
What is the balance sheet equation?
Assets = Liabilities + Shareholders' Equity
88
What are the general characteristics of a Joint Tenants With Right of Survivorship (JTWROS) account?
It has multiple owners and each has trading rights. If one owner dies, her account value passes to the other owner(s).
89
What are the general characteristics of a Joint Tenants in Common (JTIC) account?
It has multiple owners and each has trading rights. If one owner dies, his account value passes to his estate.
90
What form of business provides owners with limited liability and income that flows through to its investors?
A limited liability company (LLC)
91
What would an IAR consider when performing a capital needs assessment for a client?
The client's future earnings potential, expenses, and life expectancy, but also inflation expectations
92
Retirement goals, future college tuition, and remaining mortgage payments are examples of _______ needs.
Retirement goals, future college tuition, and remaining mortgage payments are examples of capital needs.
93
True or False: When managing assets in a trust, the trustee should consider the grantor's tax status.
False. Generally, the trustee should act in the best interests of the beneficiary, not the grantor.
94
Identify the acronym: AGI
Adjusted gross income
95
What is adjusted gross income (AGI)?
An individual's taxable income (e.g., wages, commissions, tips, dividends, and interest)
96
What happens to a general partnership when a general partner dies?
Typically, general partnerships dissolve upon the death of a general partner.
97
If an IAR's client has just died without a will, from whom may she accept instructions?
From the intestate Administrator
98
True or False: Employers are required to contribute a specific amount to their employees' SEP-IRAs.
False
99
What is the tax rate called that applies to the last dollar amount a person earns?
Marginal tax rate
100
True or False: The amount left on a mortgage is found on a customer's cash flow statement.
False. That would be a liability on the balance sheet.
101
True or False: Mortgage payments are found on a customer's cash flow statement.
True. Mortgage payments are also found on the income statement.
102
True or False: Tax refunds are found on a customer's cash flow statement.
True. Tax refunds are cash inflows (i.e. money coming into a customer's account).
103
When is an individual (single filer) eligible to make tax-deductible contributions to a Traditional IRA?
When not covered by an employer-sponsored plan or when covered by a plan and below an adjusted gross income limit.
104
Which plans impose income limitations on the contributors, 529 plans or Coverdell ESAs?
The Coverdell ESA
105
How are S Corporations treated for tax purposes?
S Corporations have the same flow-through treatment as partnerships (i.e., they are not taxable entities).
106
What business structure does not provide for flow-through tax treatment?
C Corporations
107
True or False: When investing in a 401(k) plan, all forms of taxes are deferred on the money contributed.
False. Although income taxes are deferred, unemployment and Medicare taxes must still be paid in the current year.
108
If Joe is 55 years old, how much could he contribute to his IRA?
For anyone 50 or older, an additional $1,000 is allowed, making the maximum contribution $6,500.
109
A contribution of $_______ can be made to a Spousal IRA for a non-working spouse.
A contribution of $5,500 can be made to a Spousal IRA for a non-working spouse.
110
Without incurring gift taxes, individuals may give gifts of up to $________ per year to any number of persons.
Without incurring gift taxes, individuals may give gifts of up to $14,000 per year to any number of persons.
111
What are some of the acceptable investments for IRA contributions?
Stocks, bonds, mutual funds, and CDs
112
There is a ____% penalty for early withdrawals from an IRA.
There is a 10% penalty for early withdrawals from an IRA.
113
When must IRA withdrawals begin in order to avoid the late withdrawal penalty?
By April 1st of the year after an individual turns age 70 1/2
114
How are withdrawals from a Traditional IRA treated for tax purposes?
If all contributions were deductible, then the entire withdrawal is taxed as ordinary income.
115
Contributions to a Keogh plan are solely based on _________________ income.
Contributions to a Keogh plan are solely based on self-employment income.
116
How much may be contributed to a Coverdell each year?
An after-tax contribution of $2,000 is allowed per year.
117
In a 529 Plan, what happens if the funds are withdrawn, but not used for qualified education expenses?
The earnings would be subject to ordinary income tax plus a 10% penalty.
118
Define vesting.
The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits
119
True or False: SEPs require employees to become immediately vested in the full amount contributed.
True
120
In a qualified annuity, how is the payout taxed?
The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.
121
What is a Simplified Employee Pension (SEP) Plan?
An employer-sponsored IRA for the self-employed and its employees
122
For employers offering SEP plans, where are contributions made on behalf of their employees directed?
In the employee's individual SEP IRA
123
How much may be contributed to a 529 plan and avoid gift tax?
A donor may give up to $14,000 per year and avoid the gift tax.
124
True or False: A gift made to an UGMA/UTMA account is the preferred method of funding a child's college education.
False. The assets in an UGMA/UTMA account are owned by the child, which may reduce the eligibility for student aid.
125
Why is a client's profession relevant when determining suitability?
It may indicate the client's level of sophistication and the potential need for liquidity
126
True or False: Ease of ownership transfer is an advantage to stock ownership as opposed to ownership in a partnership.
True. Partnership interests are typically illiquid, whereas stock is easy to buy and sell.
127
In calculating an IA's net worth, what assets are NOT included?
Homes, home furnishings, automoblies, goodwill, and pre-paid expenses are not included.
128
Under the provisions of UGMA/UTMA, when does a minor obtain ownership of the assets in the account?
A minor is the owner at the time a gift is made, but does not gain control of the assets until he reaches legal age.
129
Per IRS Publication 950, the gift tax annual exclusion is $______, but is adjusted by the cost of living (now $______).
Per IRS Publication 950, the gift tax annual exclusion is $10,000, but is adjusted by the cost of living (now $14,000).
130
Due to a significant event, when is an issuer required to file a Form 8-K?
Within four business days of the event. However, compliance with Regulation FD may require filing sooner.
131
An investor buys stock for $100 and receives a $10 dividend. If she sells for $95, what is her capital gain or loss?
Her loss is $5 ($100-$95). The $10 dividend is taxed separately and is not treated as a capital event.
132
If Bruce intends to buy an IPO in his wife's individual account, what is the regulatory issue?
Bruce must obtain signed third party authorization from his wife in order to complete this trade.
133
When selling a primary residence, how much of the gain (if any) is excluded from taxes?
$250,000 for single filers or $500,000 for joint filers
134
True or False: Under ERISA, business decisions (e.g., choosing the type of plan) are made by fiduciaries.
False. Business decisions are made by settlors and are referred to as settlor functions.
135
True or False: A stockholder is able to vote for a director, but not an officer.
True
136
True or False: Required minimum distributions apply to SEP IRAs.
True. Required minimum distributions apply to IRA SEP plans.
137
True or False: IRA contributions must be made in cash.
True. Although IRA contributions must be in cash, the account may be invested in various securities.
138
True or False: An order ticket includes the price of execution.
False. The price of execution is found on the customer confirmation.
139
What amount may be gifted without being subject to the gift tax?
A gift of $14,000 per recipient, per year is permitted.
140
True or False: The income of a C Corporation is subject to double taxation.
True. The corporation pays tax on its earnings, with any distributions being taxed to the owners (shareholders).
141
When may an individual withdraw money from an IRA without penalty?
After he turns 59 1/2
142
A branching trust would pass on a(n) _________ of the trust to the next generation.
A branching trust would pass on an equal share of the trust to the next generation.
143
A per capita trust would pass on the same __________ of the trust to each member of the next generation.
A per capita trust would pass on the same percentage of the trust to each member of the next generation.
144
True or False: Required minimum distributions apply to Roth IRA accounts.
False. Required minimum distributions apply to traditional IRA accounts, not Roth IRAs.
145
A SIMPLE 401(k) may be established by a ______________.
A SIMPLE 401(k) may be established by a small business.
146
A SIMPLE 401(k) may not be established by a business that has more than ___ employees.
A SIMPLE 401(k) may not be established by a business that has more than 100 employees.
147
What is the maximum annual contribution to a 401(k)?
$18,000
148
What is the maximum annual contribution to a 403(b)?
$18,000
149
What is the maximum annual contribution to a 457?
$18,000
150
The maximum contribution that may be made to a SIMPLE 401(k) is _______.
The maximum contribution that may be made to a SIMPLE 401(k) is $12,500.
151
For employees who are 50 and older, the catch-up contribution in a SIMPLE 401(k) is ______.
For employees who are 50 and older, the catch-up contribution in a SIMPLE 401(k) is $3,000.
152
How much may be contributed to a Simplified Employee Pension (SEP) plan?
Employers may contribute 25% of employee income up to $53,000 per year.
153
What is the maximum annual contribution for a Keogh Plan?
25% of pre-tax income up to $53,000 each year
154
When a limited partnership's assets are sold for a captial gain, the gain is taxed when ________, not when ___________.
When a limited partnership's assets are sold for a captial gain, the gain is taxed when realized, not when distributed.
155
What two types of business can have a single owner and flow through tax treatment?
Sole proprietorships and Subchapter S-Corps
156
True or False: Employer contributions in a Money Purchase Plan are mandatory.
True
157
IRA rollovers must be completed within ____ days.
IRA rollovers must be completed within 60 days.
158
Only one IRA rollover is allowed per rolling ____ months.
Only one IRA rollover is allowed per rolling 12 months.
159
In an IRA, an early withdrawal without penalty is allowed for what reasons?
Death, disability, qualified higher education expenses, or first-time home buyer ($10,000 limit)
160
To become a limited partner, the _______ ________'s signature is required on the Subscription Agreement.
To become a limited partner, the general partner's signature is required on the Subscription Agreement.
161
____________ Partners are the primary contributors of capital to a limited partnership.
Limited Partners are the primary contributors of capital to a limited partnership.
162
Income and estate tax are examples of a ___________ or __________ tax.
Income and estate tax are examples of a progressive or graduated tax.
163
______________ retirement plans need not meet IRS requirements for employee coverage, contribution limits, and vesting.
Non-qualified retirement plans need not meet IRS requirements for employee coverage, contribution limits, and vesting.
164
Give two examples of non-qualified retirement plans.
1. Payroll deduction plans and
| 2. deferred compensation plans
165
If a client is reluctant to disclose information, what must an IAR do?
Use the information given and create a plan based on that information. An IAR may not make assumptions.
166
S-Corporations are not subject to _______ taxation.
S-Corporations are not subject to double taxation.
167
What is the recipient's cost basis for a gift of a collectible (e.g., jewelry)?
It is generally the donor's cost.
168
If a person receives a collectible (e.g. jewelry) as a gift, what is the cost basis for tax purposes?
The cost basis is usually the donor's original cost (purchase price).
169
What factors are necessary to determine a person's tax status?
Age, marriage status, state or country of residence, earned income, and unearned income.
170
The ________ tax rate is the rate that is used to tax the last dollar amount that a person earns.
The marginal tax rate is the rate that is used to tax the last dollar amount that a person earns.
171
The maximum contribution to an IRA is ____% of earned income up to $_______.
The maximum contribution to an IRA is 100% of earned income up to $5,500.
172
True or False: 529 plans allow for a five-year front-end contribution of $70,000, which avoids gift tax.
True ($14,000 x 5 years)
173
Grandparents contributing to a grandchild's 529 plan may give how much money and still avoid gift tax consequences?
Front-loading five years of contributions is allowed; therefore, each could contribute $70,000 for a total of $140,000.
174
A gift of securities between spouses is subject to gift tax if it exceeds what dollar amount?
There is no limit on gift size between spouses. The gift tax exclusion of $14,000 per year does not apply to spouses.
175
How are withdrawals from Roth IRAs treated for tax purposes?
Withdrawals are tax-free if the account is open for at least five years and is not considered an early withdrawal.
176
If a mutual fund's dividends are reinvested, what impact will this have on the cost basis of a client's shares?
If reinvested dividends are used to acquire additional shares, the client's cost basis will increase.
177
List some retirement accounts that have required minimum disributions.
Required minimum distributions apply to traditional IRAs, 401(k), 457, and 403(b) plans.
178
What is an advantage to being formed as a corporation as opposed to a partnership?
Partnerships are dissolved due to the death of any of the partners, while corporations may continue.
179
What are parties in interest?
Individuals who provide services to a retirement plan, such as attorneys, accountants, and actuaries as long as they are acting solely in their professional capacity.
180
ERISA prohibits parties in interest from engaging in what transactions? 4
1. Selling, exchanging, or leasing property to the plan
2. Lending money or extending credit to the plan
3. Furnishing goods, services, or facilities to the plan
4. Transferring of using plan assets for their own benefit.
181
Who has fiduciary responsibility for a retirement plan? 3
Anyone that:
- exercises discretionary authority or responsibility for the administration of the plan,
- exercises discretionary authority or control involving the management or disposition of plan assets, or
- provides investment advice for compensation
