Unit 1 and Unit 2

If a journalist receives payments for appearing at a conference, the payments will be taxable as which of the following types of income? A)Earned income B)Portfolio income C)Passive income D)Not taxable

A)Earned income The individual received royalties as a result of an active trade or business; therefore, the payments are considered earned income.

An employer-sponsored retirement plan that pays a specific benefit to participants at their normal retirement age is A)a defined benefit plan. B)a Section 401(k) plan. C)a defined contribution plan. D)a supplemental employee retirement plan.

A)a defined benefit plan. A traditional defined benefit plan promises to pay a specific benefit to a participant at his normal retirement age, as specified by the plan document.

On March 1, an individual, age 40, wants to open and fund a Roth IRA at the maximum permitted level. She earns less than the adjusted gross income level that would limit her contribution. What is the maximum amount that she may place in a new Roth IRA? A)$14,000 B)$12,000 C)$7,000 D)$6,000

B)$12,000 Based on her age (less than 50), her maximum contribution would be $12,000, specified as $6,000 for two separate years of contributions. Because she is opening the account on March 1, she would be permitted to make contributions for the prior tax year (up until the April 15 tax filing deadline), as well as for the current tax year.

One of your customers has maintained a traditional IRA for the past 15 years. Some of her annual contributions were not tax deductible due to her income level and participation in another qualified plan. At age 60, the customer elects to make a lump-sum withdrawal. Which of the following statements is true? A)The portion representing earnings from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. B)The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. C)The portion representing earnings and principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. D)The entire withdrawal is taxable as ordinary income.

B)The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. All earnings, whether from deductible or nondeductible contributions, are tax deferred. Therefore, all earnings are taxable as ordinary income upon withdrawal. Only the nondeductible contribution is returned tax free.

The requirements of ERISA apply to pension plans established by A)municipal governments. B)private sector organizations only. C)public entities only. D)both public and private sector organizations.

B)private sector organizations only. ERISA was established to protect the retirement funds of employees working in the private sector only. It does not apply to employees of public sector entities such as city and state governments.

When an investor opens a new account at a member firm, FINRA rules require A)the applicant's date of birth. B)the signature of the principal signifying that the account has been accepted. C)the applicant's Social Security number. D)the applicant's signature.

B)the signature of the principal signifying that the account has been accepted. The only signature required on the new account form for an individual client is the signature of the partner, officer, or manager (a registered principal) denoting that the account has been accepted in accordance with the member's policies and procedures for acceptance of accounts. It is the customer identification program (CIP) that requires the date of birth and Social Security or tax ID number. All FINRA requires is a statement that the applicant is of legal age. FINRA states that each member shall also make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, the applicant's Social Security or tax ID number. Please notice that the question is differentiating between what is "need to know" and what is "nice to know."

Which of the following forms of business is preferred when the goal is raising a significant amount of capital? A)General partnership B)S corporation C)C corporation D)LLC

C)C corporation When there is a need for significant capital, it is the C corporation that is the form to use.

Which of the following plans requires an actuary's services? A)401(k) B)Profit-sharing C)Defined benefit D)Defined contribution

C)Defined benefit In a defined benefit plan, the payout is established, and employers must contribute annually to assure payment of the benefit amount. An actuary must calculate the annual contribution amount necessary to meet the benefit requirement.

The amount paid into a defined contribution plan is set by A)the employee's age. B)the ERISA-defined contribution requirements. C)the trust agreement. D)the employer's profits.

C)the trust agreement. A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.

Under a Keogh plan, which of the following is not an acceptable investment? A)Unit investment trust B)International bond fund C)U.S. government bond D)Rare oil painting

D)Rare oil painting Investments not permitted in Keogh plans are commodities, collectibles and antiques, precious metals (other than U.S. government-issued gold and silver coins), and uncovered options.

Under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered calls on the securities in the portfolio? A)If this strategy is consistent with the objectives of the plan B)If specifically approved by the covered employees C)If specifically approved by the SEC D)Under no circumstances

A)If this strategy is consistent with the objectives of the plan As covered calls are not considered to be a speculative option strategy, they would be permitted as long as the strategy is deemed prudent and is consistent with the objectives of the plan. No outside approval is required.

All of the following are eligible investments in a traditional IRA except A)collectibles. B)limited partnerships. C)shares of a municipal bond fund. D)platinum bullion.

A)collectibles. Collectibles are ineligible investments. Municipal bond funds are inappropriate, but not ineligible. Eligible investments in an IRA include platinum bullion and limited partnerships

Two friends would like to open a joint account but have the tax filed under the name of the nonemployed individual. That could be done in A)a JTWROS account with the Social Security number of the designated person used. B)an account opened as a partnership. C)a tenants in common account with the percentage ownership in the name of the designated person. D)a joint account with a TOD designation.

A)a JTWROS account with the Social Security number of the designated person used. In a JTWROS account, the assets are considered jointly owned. Only one tax identification number (Social Security number) is placed on the account. If it is the number of the nonemployed individual, the Form 1099 will go to that person and that is whom the IRS will expect to pay the taxes. That might be the correct answer to a test question. In the real world, it might not satisfy the IRS that the one in the lower tax bracket is being credited with all the income and gains. If the IRS audits the account and sees that the funds came from the working individual, there could be tax issues. However, the exam does not always deal with the real world and we won't either on this one.

Features of an employee stock purchase program (ESPP) include all of the following except A)contributions are made with pre-tax dollars. B)the purchase price is discounted. C)contributions are a percentage of pre-tax income. D)participants can sell the stock at any time.

A)contributions are made with pre-tax dollars. Employee stock purchase plans (ESPPs) are not qualified plans. That means that the employee purchases the stock with after-tax dollars. For example, an individual has a monthly salary of $5,000 and elects to contribute 10% of gross salary to the plan. The employer will take $500 per month out of the paycheck after subtracting withholding tax and Social Security contributions and any other deductions. Before enrolling in the plan, this employee's monthly take-home pay might have been $3,700. Now it will be $3,200.

You are at a social gathering speaking with an individual who is a tenured professor of astrophysics at the state university. She mentions that she participates in the school's TSA plan. That means she A)is participating in a retirement plan likely offering tax sheltered annuities. B)has qualified for additional compensation because she has earned tenure. C)is training employees of the Transportation Security Administration. D)is a participant in the teacher-student-administration plan for school betterment.

A)is participating in a retirement plan likely offering tax sheltered annuities. TSA stands for tax-sheltered annuity and is the most common name for the 403(b) retirement plan. Although investments can be made into mutual funds, some 85% of the funding is through annuities.

One of your customers is a self-employed insurance agent specializing in long-term care insurance. She employs her eight-year-old daughter to perform certain clerical duties, such as filing and mailing. The daughter's hourly wage is competitive with industry standards. Your customer asks about her daughter's eligibility for a Roth IRA. The proper response is A)no child under the age of majority may open any IRA. B)because the daughter has earned income, she may contribute up to 100% of that or the current limit. C)as a self-employed person, the mother would have to open a Keogh plan and then cover her daughter. D)the daughter can open the account only if her parents' income does not exceed the Roth limit.

B)because the daughter has earned income, she may contribute up to 100% of that or the current limit. Any natural person, of any age, can open a Roth IRA as long as they meet two requirements. The first, as with any IRA, is that the person must have earned income. The second is that the income must not exceed certain limits. The daughter's hourly wage is evidence of meeting the earned income requirement. We do not know the amount of the wage, but it is highly unlikely that a competitive wage for a clerical worker, regardless of age, is going to exceed the Roth limits. This is an example of the test-taking tip of not reading anything into a question to make it more complex.

A 45-year-old employment counselor has a savings incentive match plan for employees (SIMPLE) plan for herself and three full-time employees who have been working for her for the past four years. If she earns $150,000 this year and contributes the maximum amount allowed to her SIMPLE plan, how much may she invest in a traditional IRA? A)She may not have an IRA. B)She may invest any amount up to 100% of his earned income. C)She may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. D)She may have an IRA but may not make a contribution for this year.

C)She may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. Regardless of how much is invested in a SIMPLE IRA through work, an investor may still invest in an IRA if she has earned income. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible. Please note this reflects the SECURE Act which removed any age restriction on contributions to a traditional IRA.

A 45-year-old employment counselor has a savings incentive match plan for employees (SIMPLE) plan for herself and three full-time employees who have been working for her for the past four years. If she earns $150,000 this year and contributes the maximum amount allowed to her SIMPLE plan, how much may she invest in a traditional IRA? A)She may have an IRA but may not make a contribution for this year. B)She may not have an IRA. C)She may invest any amount up to 100% of his earned income. D)She may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less.

D)She may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. Regardless of how much is invested in a SIMPLE IRA through work, an investor may still invest in an IRA if she has earned income. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible. Please note this reflects the SECURE Act which removed any age restriction on contributions to a traditional IRA.

If a 40-year-old customer earns $65,000 a year, and his 38-year-old spouse earns $40,000 a year, how much may they contribute to IRAs? A)They may not contribute because their combined income is too high. B)Only the higher wage earner may contribute to an IRA. C)They may contribute up to the maximum annual allowable dollar limit split evenly between both accounts. D)They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA.

D)They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA. Regardless of the amount, individuals or couples may contribute to their IRAs if they have earned income. Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.

One of the differences between a traditional IRA and a Roth IRA is A)traditional IRAs offer tax-deferred growth while a Roth does not. B)traditional IRAs have higher annual contribution levels. C)both allow for tax-free withdrawals in retirement. D)deductible contributions are possible with a traditional IRA, but not with a Roth IRA.

D)deductible contributions are possible with a traditional IRA, but not with a Roth IRA.

Bob and Tori are a married couple in their 40s filing a joint tax return. Both contribute to their employer's qualified retirement plan and will have a combined adjusted gross income of $4,000,000 this year. Bob and Tori are A)permitted to make fully deductible contributions to their traditional IRAs, as long as their contributions to their employer-sponsored plans do not exceed certain limits. B)permitted to make tax-deductible contributions to their traditional IRAs. C)not permitted to contribute to their traditional IRAs. D)permitted to make nondeductible contributions to their traditional IRAs.

D)permitted to make nondeductible contributions to their traditional IRAs. Once both parties to a joint tax return participate in qualified employer-sponsored retirement plans, there are limits beyond which contributions are no longer tax-deductible. The exam will never ask for those exact numbers because they change every year. As example of the numbers is found in your LEM. That said, the earnings level for this couple is so far above the allowable limits that you are expected to recognize that their contributions would not be tax favored. The key point this question is making is that anyone with earned income, regardless of how much, can open a traditional IRA and receive tax deferral on the earnings in the account. Compare this to the Roth IRA, where there is a limit beyond which contributions are nonallowable.

You have two customers who are a couple. Each person has an individual account. They also have a JTWROS account in both names. One of the customers asks you to transfer funds from the other person's individual account in order to meet a margin call in the requesting customer's margin account. To do this, A)because they are both signatories on the joint account, you need the authorization of this customer only. B)you need the authorization of both parties on the account and approval of a designated principal. C)you need the approval of a designated principal. D)you need the authorization of both customers.

D)you need the authorization of both customers. Because the customer asking for the transfer is not a signatory on the other customer's individual account, you need the authorization of both of them. As long as both consent, there is no need for authorization by a principal. However, in the real world, your firm may want to look at transfers of this type. Just remember, we are teaching the test world.