Unit 2 - Opening Accounts, Retirement Plans

Question 1

TOD Account

Answer 1

Transfer on Death. Allows the registered owner of the account to pass all or a portion of it, upon death, to a named beneficiary. Account avoids probate because the estate is bypassed. Assets do not avoid estate taxes.

Question 2

What is the cost basis of a security upon death.

Answer 2

FMV at death.

Question 3

TIC

Answer 3

Tenants In Common ownership provides that a deceased tenant’s fractional interest in the account be retained by that tenant’s estate and not passed to the surviving tenant(s). If one account owner dies, all pending transactions and outstanding orders must be canceled.

Question 4

Dividend Exclusion Rule

Answer 4

Dividends paid from one corporation to another are 50% exempt from taxation. A corp that receives dividends on stocks of other domestic corporations , therefore, pays taxes on only 50% of the dividends received.

Question 5

What are the 4 items that must be included on a new account form?

Answer 5

Name
Address
SSN
DOB.

Question 6

How often must customer account information be updated?

Answer 6

No less than every 3 years. Completed new account forms must be send within 30 days. Anytime the account is amended, an updated form must be sent to the customer within 30 days.

Question 7

Regulation S-P

Answer 7

Privacy Notices. Enacted by the SEC to protect the privacy of customer information, particularly nonpublic personal information. Firm must provide a privacy notice describing its privacy policies to customers whenever a new account is opened and annually thereafter. The notice must provide customers a reasonable means to opt out of the disclosure of the customer’s non-public personal information to unaffiliated third parties.
Regulation S-P requires that if a broker/dealer reserves the right to disclose nonpublic personal information to third nonaffiliated parties, it must notify the customer at the time of the account opening and annually thereafter. Means to opt out of the disclosures must be reasonable and easy. Requiring a written request to opt out would not be considered reasonable means under the regulation.

Question 8

CIP

Answer 8

Under provisions of USA Patriot Act, BDs are required to institute a Customer Identification Program. Designated to:

• verify identity with gov’t issued ID.
• incorporation docs, partnership agreement, trust instrument if not an individual.
• maintaining records used to verify
• checking with Office of Foreign Assets Control (OFAC) which is a list of suspected terrorists and terrorist organizations.

Question 9

What are the 3 “As” that identify a discretionary order?

Answer 9

Activity (buy or sell)
Amount (number of shares
Asset (the security)
Discretionary authority requires principal approval
-each order must be identified as such
-officer or partner must approve each order promptly and in writing
-record of all transactions
-no excessive trading or churning.

If the registered representative may decide the specific security, the transaction requires discretionary authority and therefore must be done in a discretionary account. Determining the time or price does not require discretionary authority.

Question 10

ACATS

Answer 10

Automated Customer Account Transfer Service. Used when a customer wants to transfer an account from one BD to another. Carrying firm has 1 day to validate the securities listed on the TIF (Transfer Initiation Form) and 3 days following the confirmation to complete the transfer.

Question 11

What are the 2 basic types of retirement plans.

Answer 11

Qualified: allows pretax contributions to be made
Nonqualified: funded with after-tax money. Nonqualified plans may be used to favor certain employees (typically executives, because nondiscrimination rules do not apply.

Question 12

Deferred Compensation Plan

Answer 12

A nonqualified deferred compensation plan is an agreement between a company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement. Assumed employee will be in a lower tax bracket at retirement. Persons affiliated with the company solely as board members are not eligible as they are not considered employees. Somewhat risky as employee has no right to plan if the business fails. In this situation, employee becomes a general creditor.

Question 13

Section 457 Plan

Answer 13

nonqualified retirement plans set up by state and local governments and tax-exempt employers for their employees and independent contractors that work for those entities. Earnings grow tax deferred and all withdrawals are taxed at the time of distribution.

Question 14

IRA

Answer 14

-anyone who has earned income and is under 70 1/2.
-contribution up to maximum of $6,000 or 100% of earned income - which ever is less.
-contributions may continue up to 70 1/2.
-Contributions fully deductible if the investor is not covered by a qualified employer plan, in the case of a defined benefit plan, is ineligible.
-AGI must fall within income guidelines.
-additional catch-up contribution of $1,000 annually is available for those over 50.
-excess contributions subject to 6% penalty. Excess contribution penalty can be avoided by removing the excess contribution (and any earnings) prior to the legal filing date.
Investments not permitted for funding an IRA:
-collectibles
-life insurance contracts
-municipal bonds (as benefit of tax-free interest is lost in a retirement plan).
Investment practices that are inappropriate:
-margin account trading
-short sales of stock
-uncovered call options. (covered call writing is permissible because it does not increase risk).

Question 15

Types of investments that are appropriate for an IRA:

Answer 15

• stocks and bonds
• mutual funds (other than bond muni funds).
• Unit Investment Trusts (UITs)
• Gov’t securities
• US gov’t issued gold and silver coins.

Question 16

What are the rules for distributions under an IRA

Answer 16

• distributions may begin without penalty once the individual has reached age 59 1/2
• RMDs (required minimum distributions) must begin by April 1 of the year after the individual turns 70 1/2
• Distributions before age 59 1/2 are subject to a 10% penalty as well as regular income tax. 10% penalty not applied under certain circumstances such as:
• death
• disability
• purchase of a principal residence by 1st time homebuyer (up to $10K)
• education expenses for spouse, child or grandchild
• medical premiums for unemployed individuals
• medical expenses in excess of defined AGI limits
• Rule 72t: substantially equal periodic payments
• If RMDs do not begin by April 1 of the year after the person turns 70 1/2, a 50% insufficient distribution penalty applies.

Question 17

ROTH IRA

Answer 17

• allows same contribution amounts as IRA.
• max contribution is 100% of earned income up to indexed maximum.
• catch up provision for those over 50.
• contributions are nondeductable (after tax)
• contributions can be made beyond age 70 1/2
• withdrawals need not begin at age 70 1/2.
• Withdrawals can be made at any time without tax liability. -If initial contributions to the ROTH IRA are less than 5 years before withdrawal, no matter what age, earnings withdrawn will trigger ordinary income tax plus a 10% penalty.
• In order for the withdrawal of earnings to be 100% tax free, owner must be at least 59 1/2 and initial contributions must also have been made at lease 5 years before funds are withdrawn.
• Biggest advantage to ROTH IRAs is that distributions (including earnings) are income tax free.

Question 18

What the the 2 categories of Corporate Retirement Plans

Answer 18

Defined Benefit and Defined Contribution. Both require an annual contribution except for profit-sharing plans.

Question 19

Defined Benefit Plan

Answer 19

A defined benefit plan promises a specific benefit at retirement that is determined by a formula involving typical retirement age, years of service and compensation level achieved. Amount of contribution is determined by plan’s trust agreement. May be used by firms to favor older employees.

Question 20

Defined contribution Plan

Answer 20

Easier to administer. Current contribution amount is specified by the plan’s trust agreement and individual employee accounts created. Benefit paid at retirement is unknown. Tend to favor younger employees as there is more time for money to grow. Two types:
Money purchase plans. Employer contributes a specified fraction of the employee’s compensation up to an indexed maximum.
Profit-sharing plans: Do not require a fixed contribution formula and allow contributions to be skipped of low profits.

Question 21

Roth 401K

Answer 21

No income limitations like a Roth IRA

Question 22

SEP

Answer 22

Simplified Employee Pension Plans. Qualified individual plans that offer self-employed persons and small businesses easy-to-administor pension plans. SEPTs allow employers to contribute money to SEP IRAs that their employees set up to receive employee contributions.

Question 23

SIMPLEs

Answer 23

Savings incentive match plans for employees. Retirement plans for businesses with fewer than 100 employees that have no other retirement plan in place. Employee makes pretax contributions up to annual contribution limit. Employer makes matching contributions. Includes catch up for employees over 50.

Question 24

Keogh Plans

Answer 24

Retirement plans for self-employed.

Question 25

When must distributions begin under a qualified corporate retirement plan?

Answer 25

April 1st of the later of…
The first year after the calendar year in which the employee reaches 70 1/2 or the first year after the calendar year in which the employee retires from employment with the employer maintaining the plan.

Question 26

What types of employees are eligible for Tax-sheltered Annuities?

Answer 26

TSAs.  403 (B) plans. 
-public education institutions
-tax-exempt organizations (501(c)(3)
-religious organizations
TSAs are funded by elective employee deferrals which is excluded from the employee's gross income and earnings accumulate tax free until distribution.

A 403(b) plan is a qualified retirement plan; contributions to the plan are made before taxes and the growth of the contract is tax-deferred. Any distribution from a 403(b) plan is fully taxable to the participant at the ordinary income tax rate.

Question 27

ERISA

Answer 27

Employee Retirement Income Security Act was established to prevent abuse and misuse of pension funds. ERISA guidelines apply to private-sector retirement plans and certain union plans - not public plans like those for gov’t workers. Provisions include:
Participation - all employees over 21 and who have performed one year of full time service are covered.
Funding: Funds must be segregated from other corporate assets
Vesting: Defines when money contributed becomes employees money. ERISA limits how long the vesting schedule can last.
Communcation: Plan documentation must be in writing and employees given annual statements
Nondiscrimination
Beneficiaries: Must be named to receive an employee’s benefits at death.

Question 28

Wrap account

Answer 28

Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap accounts are generally investment advisory accounts.