Unit 2 Flashcards
What retirement plans have to conform to ERISA (employee retirement income security act) requirements?
- Private sector qualified plans
- ex. Corporate defined benefit plan
403(b) plans
- distributions follow the same distraction rules as those for other qualified plans
- if all contributions are qualified, the employee’s cost basis in the account is zero
- employee contributions have both a dollar limit and a percentage of salary limit
Distributions from pension plans into IRAs must be completed within how many days to maintain its tax-deferred status?
60 days
Examples of defined contribution plan
- qualified profit-sharing plan
- money-purchase plans
- 401(k) plans
What type of plans must be offered to all eligible employees (cannot discriminate)?
Qualified plans
403(b) plans
- also known as a TSA (tax-sheltered annuity)
- for public schools-403(b) organizations-and private schools, research foundations, religious organizations, and other nonprofits
- participants make pretax contributions directly from their salaries which will be invested according to a trust agreement
Who does a deferred compensation plan need prior approval of?
Only the employer
What are the vesting periods for a 401(k) plan?
- no vesting period for the employee’s contributions (because they contribute with their own money)
- may be a vesting period for the employer’s contributions (contributions made by the employer are optional and may carry a vesting requirement)
All qualified retirement plans must be established under a ________.
Trust agreement
What are some potential penalties to individuals guilty of insider trading?
- civil penalties of a minimum amount equal to the profit made or loss avoided
- criminal penalties of up to 20 years in prison
SEP IRAs
- used primarily by small businesses because they’re easier and less expensive to set up than other plans
- used by self-employed persons
- employer sets it up and administers it through an account held by a bank or another financial institution
Who qualify for tax-sheltered annuities (TSAs)?
-employees of 501(c)(3) and 403(b) organizations which include charities, religious groups, and school systems
Examples of defined contribution plans
- money-purchase plans
- 401(k) plans
- qualified profit-sharing plans
How will the contribution in a defined benefit plan vary?
-with the actual requirements to fund a certain benefit
After receiving the transfer initiation form (TIF) from a BD, how long does the carrying firm have to validate the information on the form?
1 business day
After receiving the transfer initiation form (TIF) from a BD, how long after validating the securities on the form does the carrying firm have to complete the transfer?
3 business days
What is the primary purpose of ERISA?
To protect employees from the mishandling of retirement funds by corporations and unions
Regarding a 401(k) plan, there is no vesting period for the __________ contributions.
Employee’s
Regarding a 401(k) plan, there may be a vesting period for the ____________ contributions.
Employer’s
Qualified profit-sharing retirement plans
- operate under a trust agreement
- must be in writing
- may not discriminate
- contributions are only required when the company makes a profit
- contributions are either a percentage of the employee’s salary or a percentage of the corporation’s profits
- contributions are tax-deductible to the corporate (pre-tax)-100% taxable at payout
- grows tax-deferred
Regulations regarding how contributions are made to tax-qualified plans relate to which ERISA requirements?
Funding
Defined contribution plans
- annual construction is predetermined
- retirement benefits are uncertain
- you get employees benefit most
Who benefits most from a defined contribution plan?
Younger employees
Defined benefit plan
- annual contribution is determined by yearly actuarial calculations
- retirement benefits are targeted for a certain amount
- older employees benefit most
Who benefits the most from a defined benefit plan?
Older employees
What are the 2 general types of qualified corporate sponsored retirement plans?
- defined contribution plans
- defined benefit plans
What type of plan is a 401(k)?
Defined contribution plan
Self-employed 401(k) plan
- company with no full-time employees (excluding owner/spouse)
- higher contribution limits and more flexibility
Do Roth 401(k) plans still have to take an RMD?
Yes
Roth 401(k) plans still have to take an _________.
RMD
Qualified plans
- pre-tax contributions
- contributions are tax deductible
- plan approved by the IRS
- plan CANNOT discriminate
- grows tax-deferred
- all withdrawals taxed
- plan is a trust
Nonqualified plans
- after-tax contributions
- contributions are NOT tax deductible
- plan does NOT need IRS approval
- plan CAN discriminate
- grows tax-deferred
- excess over cost base taxed
- plan is NOT a trust
What happens to a TIC account if one account owner dies?
All pending transactions and outstanding orders must be canceled immediately
When a person dies and leaves securities to heirs, the cost basis to the recipient is ___________. If the security has increased in value, this higher tax valuation is referred to as ___________.
The fair market value (FMV) on the date of the owner’s death; a “stepped up” cost basis
When are fees paid in a brokerage account?
When a transaction occurs
When are fees paid in an advisory account?
For advice regarding the securities in the account
Reasonable-basis suitability
- requires a broker to perform due diligence and have a reasonable basis to believe that the investment has the potential to earn a profit
- the recommendation must be suitable for at least some investors
Customer-specific suitability
- requires a broker to have a reasonable basis to believe that a particular recommendation is suitable for a given customer based on profile and objective
- the rep must ensure that a product is a good fit for a specific client in that it matched that client’s goals
Quantitative suitability
•requires a broker to examine the client’s portfolio and make sure that the recommendation is suitable in BOTH amount AND fit in light of the client’s existing assets
Ex. A risky stock recommendation might be suitable when viewed in isolation, but would be unsuitable if the amount of the purchase as a percentage of the client’s portfolio was excessive or if the client already had enough risky assets in his investment mix
What does Regulation S-P stand for?
Security & privacy
Regulation S-P
•each financial institution has a responsibility to protect the privacy of its customers’ nonpublic personal information (NPI)
A durable POA,
Will survive a declaration of mental incompetence
TSAs are often,
placed inside of 403(b) plans and may be referred to as “qualified contracts” on the exam
TSAs may be referred to as ___________ on the exam.
“Qualified contracts”
TSAs are funded with __________ and distributions are ____________.
Pretax contributions, fully taxable upon withdrawal
Who benefits most from deferred compensation plans?
Highly compensated employees who are just a few years from retirement
For a nonqualified deferred compensation plan, when is the employer entitled to the tax deduction?
At the time the benefit is paid out
What is full POA sometimes referred to as?
Durable POA
How long is LPOA for?
A set period time
If a corporation begins a nonqualified retirement plan, when do EMPLOYEE contributions grow tax-deferred?
- if the plan is funded by an investment vehicle that offers tax deferral
- If they’re invested in an annuity, for example.
____________ do NOT need to comply with all ERISA requirements.
Nonqualified plans
Who are deferred compensation plans available to?
Employees selected by the employer
In a deferred compensation plan, when does the employer receive a tax deduction for the deferred payment?
When the payment is actually made
What is the penalty for excess contributions to an IRA?
6%
When pension plan proceeds (employer contributions only) are rolled into a Roth IRA, what portion is taxable?
Employer contributions
What happens when a client’s cash account is frozen?
The client must deposit the full purchase price before a purchase order may be executed
Section 457 plans
- Nonqualified retirement plans set up by state and local government and tax-exempt employers for their employees and independent contractors that work for those entities
- function as deferred compensation plans
- earnings growth tax-deferred and all withdrawals are taxed at the time of distribution
- employees may defer up to 100% of their compensation up to an indexed contribution limit
Rollover
- Occurs when an IRA account owner takes temporary ownership of IRA account funds when moving the account to another custodian
- 100% of the funds withdrawn must be rolled into the new account within 60 days or they’ll be subject to tax and 10% early withdrawal penalty if applicable
- individuals can make only 1 rollover from an IRA to another in any 365-day period
Transfer
- occurs when the account assets are sent directly from one custodian to another and the account owner never takes possession of the funds
- there is NO LIMIT on the number of transfers that may be made during a 12-month period
Trustee-to-trustee transfers between IRAs are __________.
NOT limited
Conversions from traditional to Roth IRAs are ___________.
NOT limited
Vesting (ERISA requirements)
- defines when an employer contribution to a plan becomes the employee’s money, such as an employer-matching contribution to a 401(k) plan
- ERISA limits how long the vesting schedule can last before the employee is fully vested
- an employee is ALWAYS FULLY VESTED in their own contributions to a plan
Funding (ERISA requirements)
- funds contributed to the plan must be segregated from other corporate assets
- plan trustees must administer and invest the assets prudently and in the best interest of all participants
- IRS contribution limits must be observed
ERISA does NOT apply to __________.
Public sector plans, such as plans for federal or state government workers
