SIE Exam: Unit 5 Flashcards
Other Investment Vehicles
5: 529 College Savings Plan
Education savings account available to investors. Allows money saved to be used for qualified expenses for K-12 and post-secondary education.
Qualified expenses: tuition up to $10k per year.
Municipal fund security, sale of these plans must be accompanied by an official statement or offering circular.
Can be opened by any adult, invest lump sum or periodic payments.
Withdrawals for non-qualified expenses subject to taxes on any gains and 10% penalty on the gains.
Contributions are made with after-tax dollars, earnings accumulate on a tax-deferred basis. Withdrawals are tax-free at federal level if used for qualified expenses.
Most states permit tax free withdrawals. Some states allow contributions to in-state plans to be tax deductible.
Can be transferred to another family member without penalty.
If beneficiary receives scholarship, donor may withdraw the equivalent value from the plan without penalty. Income taxes on gains still apply.
Assets remain under donor’s control. No income limitations on making contributions. Monthly payments. Rollovers permitted from one state’s plan to another state’s plan but no more than once every 12 months.
5: Prepaid 529 Plan
Prepaid plans allow resident donors to lock in current tuition rates by paying now for future education costs.
5: Savings 529 Plan
Allows donors to save money to be used later for education expenses.
5: Local Government Investment Pools (LGIPs)
Established by states to provide other government entities (cities, counties, school districts) with short-term investment vehicle to invest funds. Formed as a trust.
Operate similar to money market fund.
No SEC registration required, no prospectus but do have disclosure docs.
5: Achieving a Better Life Experience (ABLE) accounts
Tax advantaged savings accounts for individuals with disabilities and their families. Beneficiary of account is owner, and income earned is not taxed. Limits eligibility to individuals with significant disabilities age of onset before turning 26.
Contributions made by anyone, using after-tax dollars not tax deductible.
5: Partnership
Unincorporated association of 2 or more individuals. Must complete partnership agreement stating which of partners can make transactions in account. General and limited.
5: General Partnership
All partners in the business have responsibility to manage the business. Ownership may be unequal. All owners liable. Business results flow through partners for tax purposes proportional to own interest.
Tax-reporting but not tax-paying entity.
5: Direct Participation Programs (DPP)
Raise money to invest in real estate, oil and gas, equipment leasing, other similar business ventures. Not taxed directly as a corporation, the income or losses are passed directly through to owners (investors). No secondary market. Highly illiquid.
5: Limited Partnership
Tax responsibility passed through too LPs. Lack of liquidity in partnership interest. Secondary market is limited. Involves GP and LP
5: General Partners (GPs)
Have unlimited liability. Manage all aspects of partnership and have fiduciary responsibility to use invested capital in best interest of investors.
5: Limited Partners (LPs)
Limited liability, can’t lose more than invested. No business management responsibilities. Can vote, inspect records, and sue GP. Flow through income and certain expenses.
5: LP sales
May be sold through private placements or public offerings. If sold privately, receive PPM. Involved small group of LPs, must be accredited investors, must have substantial investment experience.
Public offering: LPs are sold by prospectus for disclosure. Large number of LPs each making a relatively small capital contribution. No need for accredited investor.
LPs liquidated on predetermined date in LPA.
5: LP Dissolutions
Must follow order:
- Secured lenders
- other creditors
- LPs - claims to shares of profits then for claims to return of contributed capital.
- GPs
5: Real Estate Programs
Invest in raw land, new construction, existing properties. Can provide: capital growth potential, income, tax deductions, tax credits.
5: Oil & Gas Programs
Speculative or exploratory programs to locate new oil and gas deposits and income programs that invest in producing wells. Unique tax advantages:
Intangible drilling costs (IDC): can be written off in full in 1st year of operation. Drilling, wages, supplies, fuel, insurance no salvage value when program ends. Deduction taken as depreciation. Each year asset worth less.
Depletion allowances: tax deductions that compensate the program for decreasing supply of oil or gas after taken out of ground and sold.
Drilling program offers greatest change for cap appreciation but does not provide current income. An income program provides income but offers less capital appreciation potential.
