vocab 3 Flashcards
What U.S. Government agency, created by the ‘34 Act, enforces securities laws?
The Securities and Exchange Commission (SEC)
Define an insider.
Officers, directors, partners, greater than 10% owners, and immediate family members of all listed
Trading on material, non-public information is considered __________________.
insider trading.
A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?
Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.
The criminal penalties for insider trading by individuals is a maximum of $____________ and/or ____ years in prison.
$5 million and/or 20 years
What is the criminal penalty for insider trading by corporations?
$25 million per violation
Who is eligible to contribute to a qualified annuity?
Public school employees [403(b)] and certain non-profit organization employees [501(c)3]
____% of earned income up to $_______ is the maximum contribution to an IRA.
100% of earned income up to $5,000 is the maximum contribution to an IRA.
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 $6,000.
A contribution of $_______ can be made to a Spousal IRA for a non-working spouse.
$5,000
What is the penalty for making excess contributions to an IRA?
6% of the excess
True or False: Excess contributions made to an IRA will still be deductible and will grow tax-deferred.
False. Excess contributions are non-deductible and will not grow on a tax-deferred basis
IRA contributions must be made in what form?
Cash
What are some of the acceptable investments for IRA contributions?
Stocks, bonds, mutual funds, and CDs
What are some of the investments that are not suitable for IRA contributions?
Collectibles, insurance, and metals (except U.S. gold and silver coins)
When is an individual (single filer) eligible to make tax-deductible contributions to a Traditional IRA?
When not covered by an employer-sponsored plan and he is below an adjusted gross income limit.
Rollovers must be completed within ____ days.
60
Only one rollover is allowed per rolling ____ months.
12
There is a ____% penalty for early withdrawals from an IRA.
10%
True or False: To avoid a late withdrawal penalty, IRAs have a required minimum distribution (RMD) provision.
True
What is the late withdrawal penalty?
50% of the amount that should have been taken (an actuarial amount).
How is a Roth IRA contribution different from a Traditional IRA contribution?
The Roth IRA contribution is always made on an after-tax basis.
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.
How are withdrawals from a Roth IRA treated for tax purposes?
Withdrawals will be tax-free if the account is open for at least 5 years and is not considered an early withdrawal.
Early withdrawal without penalty is allowed for what reasons?
Death, disability, qualified higher education expenses, or first-time home buyer ($10,000 limit)
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
private pension
According to ERISA, are there any standards that must be followed regarding how money is invested?
Yes. The plan’s trustee must abide by the Uniform Prudent Investor Act.
Does ERISA permit the writing of covered calls in retirement plans?
Yes
Describe the employees who must be eligible to contribute to an ERISA qualified plan.
Employees who are 21 years or older with one year of full-time service
What retirement plans are available to the self-employed?
Keogh Plans and SEPs
Contributions to a Keogh plan are solely based on _________________ income.
self-employment
May an employee of a corporation who contributes to a corporate pension plan also contribute to a Keogh plan?
Yes, provided the Keogh contribution is solely based upon the employee’s self-employment income
May an individual with a Keogh Plan also fund an IRA?
Yes, but since the Keogh is a qualified plan, the IRA contributions may not be tax-deductible.
_____ Plans are college savings plans with high contribution limits set by the state sponsor.
529
Describe the tax treatment of contributions made to a 529 Plan.
They are after-tax contributions that may possibly grow tax-free.
True or False: 529 Plans allow for a 5-year front-end contribution of $65,000, which avoids gift tax.
True ($13,000 x 5 years)
Grandparents contributing to a grandchild’s 529 Plan may give how much money and still avoid gift tax consequences?
Front-loading 5 years of contributions is allowed; therefore, each could contribute $65,000 for a total of $130,000.
A savings plan which funds both elementary and higher education is referred to as the ____________________________.
Coverdell Education Savings Plan.
How much may be contributed to a Coverdell each year?
An after-tax contribution of $2,000 is allowed per year.
Is it a 529 Plan or Education IRA that imposes income limitation on the contributors?
The Education IRA (Coverdell)
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.
If not needed for a child’s education, may the funds in a 529 Plan be transferred to a relative’s 529 Plan?
Yes
For employers with SEP Plans, where are the contributions they make for their employees directed?
The employee’s individual SEP-IRA.
Define vesting.
The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits
True or False: Keogh plans follow a vesting schedule.
True. A scale would indicate how long an employee must remain with the employer to be fully vested.
True or False: SEPs require employees to become immediately vested in the full amount contributed.
True
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.
True or False: If a mutual fund investor chooses to reinvest dividends, taxes will be deferred.
False
True or False: Regulated Investment Companies (under Subchapter M) may relieve their burden of paying tax on income.
True. Regulated Investment Companies will only be taxed on the income retained.
What are the requirements for being considered a Regulated Investment Company?
The fund must be a domestic company that distributes at least 90% of its net investment income.
A Regulated Investment Company’s net investment income will ultimately be taxed to the __________________.
shareholders.
When a fund distributes a capital gain, is it the fund’s or shareholder’s holding period that is considered?
The fund’s holding period is used to determine whether long-term or short-term.
A fund distributes a gain on shares held for 3 yrs. Joe has owned the fund shares for 6 months. How is Joe’s gain taxed?
As a long-term capital gain, since the fund held the shares for three years. Joe’s holding period is irrelevant.
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
Qualified
Which annuity is funded with after-tax dollars - Qualified or Non-Qualified?
Non-Qualified
In a Non-Qualified Annuity, how is the payout taxed?
Only the earnings portion is subject to tax as ordinary income
How is interest on corporate bonds treated for tax purposes?
Fully taxable (taxed at the federal, state, and local level)
How is interest on Treasuries treated for tax purposes?
Exempt at the state and local level, but subject to federal tax
Cash dividends received by individuals are generally taxed at a maximum rate of ____%.
15%.
What is the tax consequence for an investor who receives a stock dividend?
Her cost basis must be adjusted
Does the receipt of a stock dividend create a taxable event?
No, not until the stock is actually sold.
Joe owns 100 shares of MNO at $20 (total cost $2,000). If MNO declares a 10% stock dividend, what is Joe’s new basis?
Original cost ÷ new total number of shares ($2,000 ÷ 110 shares = $18.18)
If an asset was held for one year or less prior to its sale, any gain or loss would be ____________.
short-term.
For a gain to be considered long-term, the asset must be held for ______________________.
more than one year.
What are the capital gains tax rates?
Short-term gains are taxed at ordinary income rates, and long-term gains are taxed at a maximum of 15%.
What is the first use of capital losses?
They are first used as deductions against capital gains.
If there are losses remaining after offsetting gains, what amount may be used against ordinary income?
A maximum of $3,000.
What happens to losses that remain after offsetting gains and also taking $3,000 against ordinary income?
They are carried forward to subsequent years.
If not designated by a client at the time of sale, what method will the IRS use to determine which shares were sold?
FIFO (first-in, first-out
A client selling shares would like to determine the specific shares being sold, he should use ________________________.
Specific Identification.
If an investor does not use Specific Identification when selling securities, the IRS assumes __________________.
FIFO (first-in, first-out)
A sale for a loss would trigger the wash sale rule if the same security is repurchased within ____________________.
30 days of the sale.
What generates a capital gain or loss?
The sale of an asset at a price that exceeds its basis (gain) or at a price lower than its basis (loss)
According to the wash sale rule, what securities are considered substantially the same?
Same stock, rights, warrants, a bond or preferred stock convertible into the stock, or the purchase of a call option
Joe sells XYZ and claims a 5-point loss, but triggers the wash sale by repurchasing XYZ at $40. Joe’s cost basis is:
$40 + 5 point loss = $45 (The disallowed loss is added to the new purchase.)
Is a gift of $13,000 per person, per year, exempt from gift tax?
Yes
Is a gift of $26,000 per married couple, per year, exempt from gift tax?
Yes
How large can a gift be between spouses and remain exempt from the gift tax?
An unlimited amount
Progressive taxes are also referred to as ____________ taxes.
graduated
Regressive taxes are also referred to as _______ taxes.
flat
Income or estate tax is an example of a _______________________ tax.
progressive or graduated
Define the term basis.
The total cost to acquire an asset.
Is the conversion of a bond a taxable event?
No, it is a tax-free exchange. The taxable event would occur when the stock is sold.
If securities are inherited, a beneficiary’s holding period is automatically ____________.
long-term (regardless of previous owner’s).
Pete just inherited securities from his grandfather and is asking about his basis. What is the correct response to Pete?
His basis is the market value at the time of his grandfather’s death (stepped up basis).
How is basis determined for the recipient of gifted securities?
Basis will be the donor’s cost or market value, whichever is lower.
When securities are gifted, the recipient’s holding period will be _______________________.
the same as the donor’s.
What is the role of an SRO?
Maintain fair and orderly securities markets and establish rules and regulations for protecting investors
The __________________________________________ is the SRO for the OTC market.
The Financial Industry Regulatory Authority (FINRA) is the SRO for the OTC market.
Underwriters that have made a firm commitment to an issuer are acting in a ________________ capacity.
principal/dealer
Underwriters operating under a best-efforts agreement with an issuer are acting in a ________________ capacity.
agency/broker
What is the difference between a syndicate member and a firm in the selling group?
Syndicate members assume liability, while firms in the selling group do not.
A BD must file Form U5 with FINRA when a person’s association with that firm ______________.
ends/ceases.
What are the justifiable reasons for denying an individual’s registration?
Conviction for any felony or securities-related misdemeanor within the last 10 years
What is the net yield for an investor in the 28% tax bracket who owns an 8.5% corporate bond?
The formula is: Taxable Yield x (100% - Tax Bracket %). 8.5 x 72% = 6.12%.
When an individual reaches age ______, they may begin withdrawing from an IRA without penalty.
59 1/2
Who uses 457 Plans?
Employees of state and local governments
Accredited investors have net worth of at least $_________ or pre-tax income in each of the last two years of $________.
1,000,000 $200,000.
True or False: Firm Element CE must be completed every three years after initial qualification.
False. Participation in firm element CE is an annual requirement.
FINRA maintains information regarding RRs on the _______ system.
CRD (Central Registration Depository)
For how long may an RR leave the financial services industry without having to requalify?
2 years
May a Series 6 registered person engage in the sale of closed-end funds?
Only if the product is being sold in a primary (new issue) distribution.
May a Series 6 registered person engage in the sale of individual stocks or bonds?
No. Series 6 RRs may only sell packaged products, such as mutual funds and annuities.
