Ch. 1 - Types of Accounts
Under a Keogh plan, which of the following is not an acceptable investment? A) Unit investment trust B) U.S. government bond C) Rare oil painting D) International bond fund
C) Rare oil painting
If a customer wants to open an account in the name of her adult son and wants the account to be approved for uncovered option writing, her request should be refused because A) discretionary authorization may not be granted with respect to writing uncovered options. B) uncovered options can only be written in margin accounts. C) opening an account for a third party is prohibited without the consent of that party. D) writing uncovered options is not suitable for minors.
C) opening an account for a third party is prohibited without the consent of that party. An adult cannot open an account and name another adult as the beneficial owner unless approval is granted by that adult. The type of option trades and the third party's investment experience are not relevant. Furthermore, the child is an adult, not a minor, and we have no suitability information.
Dale Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. Wells is looking for favorable tax treatment of earnings and losses. Wells also wants to limit the number of investors but is willing to share control of the enterprise with others to attract them. What business form would you advise? A) Limited partnership B) C corporation C) General partnership D) S corporation
C)General partnership *Types of Business Accounts* Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. Although an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.
Joint account has to be opened with
2 adults (not minors!)
SEC Rule 17a-3 requires delivery of a copy of the account information within
30 days of account opening
An IRA Account at a BD must be set up as
A cash account
An institutional customer would like to use one BD to angle the admin of the acct, but woul like to use various other BDs to execute trades for certain types of securities. Which type of account would meet the customers needs?
A prime brokerage account
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 joint account with a TOD designation. D) a tenants in common account with the percentage ownership in the name of the designated person.
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.
Several investors open an account as tenants in common (TIC). For suitability purposes, financial information is required on which of the following investors?
All of the investors
If one of your clients dies, upon notification of death, you should immediately: I. mark the account Deceased until proper documents are received. II. cancel all good-til-canceled orders for the account. III. obtain a letter from the attorney representing the estate with instructions for transfer. IV. obtain the names and addresses of the beneficiaries of the estate. A) III and IV B) II and III C) I and III D) I and II
D) I and II The account's registered representative must cancel all open orders and mark the account Deceased. The firm must not permit any trades until proper documents are received from the estate representative. It is not the responsibility of the firm to contact the decedent's attorney or the beneficiaries.
Dale Johnston has been a registered representative with Consolidated Investment Services (CIS) for over 20 years. Taylor Kahn has been Johnston's client for most of that time. Kahn recently reached full retirement age for Social Security and has begun using those funds for investment. Johnston's practice is to speak with clients on a quarterly basis, unless something merits a special call. It seems to Johnston that on the last call, Kahn seemed a bit confused over the strategy being used with the Social Security funds. A second call seemed to verify that Kahn was still a bit fuzzy. This morning, a phone call came in from Kahn's son asking Johnston to sell one of the holdings and forward the proceeds to his bank. Kahn's son does have a full power of attorney over the account but has never given instructions to have money sent to him before. What is the most appropriate action for Johnston to take? A) Freeze the account B) Place the trade after receiving approval from your supervising principal C) Refuse to complete the trade D) Place a temporary hold on the withdrawal
D) Place a temporary hold on the withdrawal Financial Exploitation = temporary hold up to 15 business days.
If a person wishes to enter orders in his spouse's account, he A) needs verbal permission from his spouse. B) is free to do so. C) could never be permitted to do so, as there is no provision that would allow for it to occur. D) needs written permission from his spouse through a power of attorney.
D) needs written permission from his spouse through a power of attorney. The only persons permitted to enter orders in an account are the account owners. For a person to enter orders in his spouse's account, the spouse whose name is on the account must sign a power of attorney.
TIC
Each party must specify a percentage interest in the account
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) $7,000 B) $12,000 C) $6,000 D) $14,000
B) $12,000 *Timing of Contributions* April 15th important 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.
Payments received by the owner of a 403(b) plan are A) taxable only to extent of earnings. B) 100% taxable. C) not taxable. D) taxable only to extent of the owner's cost basis.
B) 100% taxable. When tax-sheltered annuity funds are withdrawn, they are fully taxed at ordinary income rates. Funds were contributed pretax and earnings accumulate tax deferred. Because no taxes were ever paid, the full withdrawal is taxable.
Which of the following is not a benefit gained by using a TOD account? A) Probate is avoided. B) Estate taxes are reduced. C) Beneficiaries can be changed at any time. D) Percentage allocations can be changed at any time.
B) Estate taxes are reduced. The TOD (transfer on death) designation offers many benefits, but reducing estate taxes is not one of them. The assets in the account are included in the decedent's estate. However, the hassles of probate are avoided, and without any legal impediments, the owner of the account can make changes at will.
Which of the following statements regarding Roth IRAs are true? I. Contributions are made with pretax dollars II. Earnings can accumulate tax free III. Distributions are not taxable if an age requirement and holding period are met IV. Distributions in excess of growth are always taxable
B) II and III Contributions to Roth IRAs are made with after-tax dollars. Distributions are received tax free if the account holder is at least 59½ and has held the account for at least five years.
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) not permitted to contribute to their traditional IRAs. B) permitted to make nondeductible contributions to their traditional IRAs. C) 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. D) permitted to make tax-deductible contributions to their traditional IRAs.
B) 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. 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.
Community Property (likely a wrong answer on the exam)
Property acquired before marriage is considered to be owned separately, not jointly
3 friends plan to start a new business. It is anticipated it will be several years before the business turns a profit. Which of the following types of business org would e best if they wish to limit their liability while, at the same time, being able to receive favorable tax treatment for the expected loss?
S Corporation the only way to limit liability is through a corp (or LLC or LP). The S corp allows for the flow through of operating losses to S/H, while the C-Corp does not.
Which type of individual accts for investments held on that account to go straight to a named beneficiary outside of probate?
TOD account JTWROS Does too if questions asked for joint acct
JTWROS
all parties have an undivided interest in the account
