Client Investment Recommendations and Strategies

Which retirement vehicle is specific to government employees?

457(b)

Real Rate of Return =

Actual Return - Inflation Rate (measured by the CPI)

When are dividends taxed?

After the security is eventually sold

Which asset will has the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application?

An UTMA account

Current yield on a dividend paying stock

Annual Dividend Payment / Stock price (remember to note if its a semiannual, annual, or quarterly dividend)

Your customer opens a Coverdell ESA for his niece. In order to meet qualified education expenses of $9,000, she takes a distribution of $10,000. What are the tax consequences and who bears the tax?

Any funds in excess are taxed to the beneficiary

What is it called when people invest based on their own personal feeling rather than traditional market tactics?

Behavioral finance

Which vehicles make use of the unified estate tax credit?

Bypass and Generation Skipping trusts because they reduce the estate taxes by putting the money into a minor account

A feature of which business entity is limited liability but no flow-through of earnings or losses?

Corporation

Difference between a Credit Agreement and a Loan Consent Agreement

Credit Agreement allows for a customer to buy a FIRM's securities on margin Loan Consent Agreement allows for the firm to sell a client's securities on margin

Contributions to Koegh (HR-10) plan can me made only from what?

Earned income through self-employment

3 Components of Sharpe Ratio

Expected return, risk free rate, and standard deviation

For tax purposes, how is the step up in basis done for inheritance and gifts?

Inheritance is the value on the date of death of the giver Gifts are based on the value that the giver paid for it originally

Which investment analysis tools can be used most efficiently to predict the probability of outcomes of portfolio performance recognizing that variables such as holding periods and rates of return are generally uncertain?

Monte Carlo

According to Employee Retirement Income Security Act of 1974 (ERISA) guidelines, can the plan have assets inside the company?

NO, they must be segregated because this would become a form a stock option if it was not

When someone dies and their IRA account goes to another person, what is the premature distribution tax consequences for the recipient?

None, regardless of age of the recipient

How is the beneficiary taxed on an inherited IRA?

Not on gain, but on any withdrawal in general from the account in a given year

When can you claim a loss in a Roth IRA on your tax return?

Only if the proceeds upon liquidation are less than the cost basis, you itemize deductions, and the loss is above 2% of the AGI

Definition of POD and TOD

POD = Pay on Death TOD = Transfer on Death

ERISA rules only apply to the _______ sector

Private

Agatha has an account with her Aunt Sally that is registered as TIC. If Sally predeceases Agatha, the assets in the account go to:

Sally's estate

What documents must a sole proprietor be responsible for?

Tax reporting through Schedule C and other routine paperwork

The type of trust created in the grantor's will is a ________ trust

Testamentary

When someone gifts stock, what is the cost basis for the person receiving it?

The cost basis and holding period is taken over by the recipient

Totten Trust

When someone sets up a bank account to TOD or POD to another party that has no real legal right to it

When may a trust trade on options?

When the trust specifically states that the trustee can trade options and that it is an objective of the trust itself

Loan Consent Agreement

an agreement that a BD can sell a client's securities on margin

Requirement to open an IRA?

any earned income

For tax purposes, the sale of an investment at a profit will result in

capital gain

Who is the beneficial owner of securities in an UTMA account?

the minor

457 Plans are __________________ plans for which types of employees?

they are non-qualified deferred compensation plans for municipal employees and independent contractors performing services for the country

Monte Carlo Simulations

uses simulations to predict the probability of portfolio performance in light of multiple and uncertain variable conditions

Koegh Eligibility Requirements

- full time employee - 21 years of age - at least 1 year of service

Difference between defined contribution and defined benefit?

Defined benefit allows the employee to receive a specific amount ($ or %) with the sponsor bearing the investment risk Defined contribution allows for the employee to contribute a defined amount ($ or %) and the employee themselves bear investment risk

If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability?

None

What is the limit on the number of investors in an LLC?

None (S Corp is 100)

At the NYSE, buying and selling of stocks occur on the ________ market

Secondary

A client of a broker-dealer is obligated to replace stock she sold after borrowing it from the broker-dealer. From this information, you can conclude that she had what position on the stock?

Short sale

What is the other name for "paper profits"

Unrealized gain

Low price-to-book and low price-to-earnings ratio are characteristics of a ________ stock:

Value

Efficient Market Theory

holds that securities are efficiently priced and therefore, it makes no sense to analyze particular stocks; or rather, picking stocks out of a hat is as effective as technical or fundamental analysis.

Technically, 529 Plans are considered _________

municipal fund securities

What type of trades does the OTC facilitate?

sale of stocks not traded on an exchange

The duties and responsibilities of a fiduciary are spelled out in ________

the Uniform Prudent Investors Act of 1994

An investor's holding period return would be less than the bond's yield to maturity if:

the coupons were reinvested at a rate below the yield to maturity

When someone is gifted shares of stock, what is their cost basis?

the original purchase price of the stock that the donor paid

A buy stop order may be used to:

to protect against loss in a short position to protect a profit in a short position. to acquire a long position as a stock breaks through resistance.

A client has just finalized her divorce and intends to sell her gold wedding band. Because the price of gold has risen significantly since she married 20 years ago, she will be able to realize a profit on the sale, but she does not know what to use as the cost basis. You suggest she speak to a tax specialist who will tell her to:

use the original cost of the ring

Under current tax laws, what is the limit for a gift to someone without incurring a tax obligation?

$14,000/individual $28,000/married couple (both can give up to that amount to multiple individuals, not an overall spending limit)

Qualified Money Purchase Plan

- must make a contribution to the plan each year for the plan participants - plan states the contribution percentage that is required - a participant's benefit is based on the amount of contributions to her account and the gains or losses associated with the account at her retirement.

Benefits of reinvesting mutual fund distributions include:

- reinvestment of dividends at NAV - reinvestment of capital gains at NAV - compounding of returns (taxes are paid at the end of the year that they are received in)

Maximum contribution for an IRA

100% of earned income OR $5,500 (whichever is less)

Capital needs analysis is used to determine:

Amount of life insurance an individual will need to provide for their family in the event of death

Are dividends included in adjusted gross income on an individual's federal income tax return?

CASH dividends are included, STOCK dividends are not because they reduce the cost basis for investor and taxes come into play when they sell the stock

Uniform Gift to Minor Account (UGMA) must be what type of account?

Cash account

A "margin account" is a type of brokerage account in which the broker-dealer lends the investor cash, using the account as collateral, to purchase securities. What account document authorizes the use of the account as collateral?

Credit Agreement (sometimes referred to as the margin agreement)

Which index is based on the prices of only 65 stocks (30 industrial, 20 transportation, and 15 utility)?

Dow Industrial Composite Average

What are the components of a capital needs analysis?

The agent would factor in the client's projected earnings until retirement and, in order to do that, would need to know the current age. In addition, to be sure to allow for enough to keep up with the rising cost of living, the projected inflation rate is needed.

Under the current gift tax marital deduction, how much can an individual give a spouse who is a U.S. citizen without incurring a gift tax?

There is none, it's unlimited (if the spouse is not a U.S. citizen, then the maximum is $147,000)

How are withdrawals from 529 plans taxed when used for education purposes?

They are exempt from both state and federal taxes

A popular funding technique that involves investing the same amount at regular intervals is known as dollar cost averaging. Participating in this funding approach tends to lessen which risk?

Timing risk

Which retirement plan would there be mandatory withdrawal requirements once you are past age 70½?

Traditional IRA

When are distributions required to be made from a Traditional and Roth IRAs?

Traditional requires distributions after age 70 1/2 Roth requires distributions be made after death

Can you roll over a qualified plan into a Roth IRA?

Yes, they are eligible and distributions from the qualified plan may be rolled over into a Roth

What type of companies file Form K-1 for tax purposes?

only those that have the pass through of losses and gains

When a will calls for property to be distributed per stirpes, it means that:

the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants

What is the method for determining the internal rate of return to an investor based on cash flow in and out of the portfolio?

Dollar-weighted return

When someone dies and leaves an portfolio full of stocks, what is the cost basis to the person inheriting it?

It is stepped up in basis and the cost is the price of the securities on the date they are inherited

Due dates for taxes on: LLCs (other partnerships) and S Corps C Corps

LLCs + is on March 15 C Corps is on April 15

A life insurance policy provides what to the beneficiary at time of death?

Liquidity (cash benefit) that will provide for expenses incurred at death and other costs

Regressive v. Progressive Taxes

Progressive taxes are subject to an increase (estate, gift, personal income, etc.) Regressive taxes are those that remain constant (sales, excise, etc.)

When receiving stock dividends, what are the tax consequences?

The shares are not currently taxable and must be factored into the investors new cost basis. there must be a new calculation in which the total number of shares are multiplied by the average cost per share to compute the cost basis

An investor would have to pay the alternative minimum tax when:

it exceeds the investor's regular income tax

When may RMDs be deferred?

only from the current plan sponsor (For example, assume you retire from Company A and get a job with Company B, and both companies have a 401(k) plan. You can only defer RMDs from the Company B plan, because that is your current employer; you will have to take RMDs from the Company A plan. The same would be true if it were two different school systems with 403(b) plans.)

In a trust, who is the person that gets taxed?

the person(s) with economic interest