Chapter 5 Profile/ Retirement

An investor's securities portfolio has depreciated by $5,000 this year. How much of the loss can the investor deduct on this year's tax return? A0 B$2,000 C$3,000 D$5,000

Explanation The best answer is A. An investor cannot deduct depreciation of an asset that is currently held as a capital loss. To recognize the loss for tax purposes, he must first sell those securities. Investors can only deduct $3,000 of net realized capital losses per year.

What is the earliest age where funds can be distributed from a 401(k) without a tax penalty? A55 B59 1/2 C65 D72

The best answer is A. A little known rule for both 401(k) and 403(b) plans is that if an employee quits or is terminated between the ages of 55 to 59 1/2, the "Rule of 55" can be applied. This IRS rule allows the terminated employee to take payments in equal installments over his or her life expectancy and avoid the 10% penalty tax. Note that regular income tax must still be paid.

The maximum tax rate on cash dividends received for an individual who is not in the maximum tax bracket is: A15% B25% C35% D50%

The best answer is A. A lower tax rate, 15%, is imposed on cash dividends received from both common and preferred stocks. The intent of this tax benefit is to promote long term equity investment. The 15% rate applies to individuals who are beneath the maximum tax bracket of 37%; for those in the maximum bracket, the rate increases to 20%.

A married couple has a joint net worth of $15,000,000. If one dies in 2021, and all assets are left to the surviving spouse, the taxable amount of the estate is: A$0 B$3,300,000 C$10,300,000 D$15,000,000

The best answer is A. An unlimited marital exclusion applies to spouses when 1 party dies. Thus, if a husband dies, no estate taxes are paid at that point by the surviving spouse. When that person dies, the estate is subject to tax, with an estate tax exclusion on the first $11,700,000 in 2021.

Which item is NOT included in a client's income statement? AInterest received from corporate bond investments BDepreciation of the customer's primary residence CDividends from mutual funds that are reinvested in additional share purchases DYear-end bonus received from employer

The best answer is B. A primary residence, at market value (which reflects asset appreciation or depreciation), is included on the client's balance sheet as an asset. The income statement of the client reflects income (wages, commissions, bonuses, dividends, interest on investments) and expenses (living expenses, taxes, interest paid on loans on a mortgage, insurance expenses, etc.). Note that a dividend received from a mutual fund investment is still income, even if it has been reinvested.

You are the agent handling the account of a long-time client, a single gentleman, age 45, who has substantial funds and no heirs. He wishes to open an account with his only sibling, a younger sister who is age 43 and also single. His wishes are that once the account is funded, that his sister be able to draw funds from the account as needed and that if he predeceases the sister, that the account ownership goes to the sister without going through probate. The best recommendation to make is that a(n): Ajoint account should be opened by the brother and sister with rights of survivorship Bjoint account should be opened by the brother and sister as 50/50 tenants in common Cindividual account should be opened in the name of the brother, naming the sister as the TOD beneficiary DTotten trust account should be opened in the name of the brother, with the sister named as the beneficiary

The best answer is A. Because the brother wants to give his sister the ability access funds in the account, a joint account should be opened. If the account is opened as Joint Tenants with Rights of Survivorship, each tenant 100% owns the account - when one dies, the other 100% owns the account, bypassing the estate and probate. In contrast, if the account were opened as a Joint Account as 50/50 Tenants in Common, upon death of 1 tenant, that person's percentage goes to his or her estate, is passed by will and must go through probate (where someone could contest the transfer). Opening an Individual account-TOD (Transfer on Death) does not give the sister the ability to access funds in the account. It does permit the transfer of assets directly to the sister if the brother predeceases her, bypassing the estate and probate. A Totten trust is a bank account, not a securities account. It allows the depositor to name a beneficiary, to whom the funds go upon death, bypassing the estate and probate.

All of the following would be defined as "earned income" under IRS regulations EXCEPT: AInterest payments BCommission payments CRoyalty payments DBonus payments

The best answer is A. Earned income includes wages, salary, tips, commissions, royalties received (such as royalties earned for writing a book), and bonuses. Interest income received is classified as "portfolio" income.

All of the following must act in a fiduciary capacity EXCEPT a(n): Asecurities agent that recommends a security to a customer Binvestment adviser representative that recommends a security to a customer Cexecutor of an estate Dtrustee of a pension plan

The best answer is A. Investment advisers have a fiduciary obligation to their customers. They must always act in the customer's best interests and must always take the same side of a trade as the customer. It is for this reason that if an investment adviser recommends a security to a customer, it cannot be the seller of the security to the customer. In contrast, an agent of a broker-dealer is only obligated to recommend a security that is "suitable" and can take the other side of the trade. Executors of estates and trustees are, by definition, fiduciaries.

A customer has $10,000 in passive losses from a limited partnership investment. If the customer has no other passive income for that tax year, the customer may deduct: A0 B$3,000 C$5,000 D$10,000

The best answer is A. Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. If there is no passive income for that year, then any passive losses generated cannot be deducted.

Which statement concerning distributions from a Coverdell Education Savings Account is TRUE? ADistributions to pay for qualified education expenses are income tax free BDistributions to pay for qualified education expenses are subject to income tax at the student's lower income tax rate CDistributions to pay for qualified education expenses are subject to tax at capital gains rates DDistributions to pay for qualified education expenses are subject to income tax at the parent's tax bracket

The best answer is A. Qualified distributions from educational savings accounts are tax-free. "Qualified" means distributions used to pay for qualified education expenses.

Which statement is TRUE about taxation of capital gains? AShort term capital gains are taxed at higher rates than long term capital gains BShort term capital gains are taxed at lower rates than long term capital gains CShort term capital gains are taxed at the same rate as long term capital gains DShort term capital gains are taxed at ordinary income rates; long term capital gains are tax deferred

The best answer is A. The maximum tax rate on short term capital gains is 37% (the same as for earned (ordinary) income). For assets held over 12 months, the maximum tax rate drops to 15% (this increases to 20% for individuals in the highest tax bracket).

In 2021, a husband gives a $100,000 gift to his spouse. How much of the gift is subject to gift tax? A0 B$15,000 C$85,000 D$100,000

The best answer is A. There is no gift tax due, because the unlimited marital exclusion applies to both gifts and estates.

All of the following are acceptable investments in an Individual Retirement Account EXCEPT: AVariable annuities BU.S. Minted Gold Coins CReal Estate DMortgages

The best answer is A. U.S. Minted gold coins can be held as an investment in an IRA account as can gold and silver bullion (however, the long term merits of such an investment can be debated). All securities can be purchased, including stock options. Also, real estate that is not personally used and mortgage investments are permitted. The purchase of a tax-exempt or tax-deferred security such as a variable annuity is absolutely inappropriate. Because of their tax benefit, these investments offer a lower return than taxable investments. Because the IRA account itself is a "tax-deferred" envelope, the appropriate investments are those that give the highest return (for the level of risk assumed), which will build value tax-deferred.

An investor in a limited partnership generating passive losses can offset these against: Aincome generated from direct investments in real estate Bdividends received from blue chip corporations Ccapital gains generated from the sale of partnership units Dincome generated from investments in municipal bonds

The best answer is A. Under the Tax Code, passive losses can only be offset against passive income. They cannot be offset against portfolio income (interest, dividends, capital gains) or earned income. Passive income and loss is defined as that derived from real estate investments and limited partnership interests. Note that any capital gain on the sale of a partnership unit is "portfolio income;" not passive income.

The defining characteristic of a 401(k) account is funding by: Atax-deductible employer contribution Bemployee salary deferral Cnon-tax deductible employer contribution Dnon-tax deductible employee contribution

The best answer is B. Both 401(k) and 403(b) accounts are funded by voluntary employee contributions that are excluded from the employee's taxable income. These contributions grow tax deferred until distributions are taken. Thus, the employee is deferring taking the portion of his or her salary that is the contribution amount.

What type of employee benefit plan given to executives has no limit on the amount of contribution that can be made annually? A457 plan BDeferred compensation plan C401(k) plan DRoth IRA

The best answer is B. Deferred compensation plans can be established by corporate employers, allowing top-level employees who are high earners to defer taking all of their income, reducing current tax liability. The deferred amount is specified in the agreement between the company and the executive, is recorded on the company's books and earns a rate of return tied to a benchmark index, like the S&P 500 Index. Note that there is no limit on the amount that can be deferred under these plans, since the contribution amount is established by private agreement. When the employee retires, the deferred compensation amount plus growth is paid out as specified in the agreement and is taxable. Such plans are discriminatory, because they are only offered to high-earning top level employees, so these plans are not subject to ERISA. In contrast, a 457 plan is an additional salary reduction compensation plan offered to executives of governmental and not-for-profit employers where the dollar contribution is limited ($19,500 in 2021). A 401(k) plan is a corporate sponsored salary reduction plan, with the same contribution limit as a 457 plan. Roth IRAs have a maximum contribution of $6,000 in 2021.

What is the first age where an individual can claim full social security benefits? A62 B67 C70 D75

The best answer is B. Full retirement age in the social security system is generally 67 - meaning that a full retirement benefit can start being collected. However, individuals can defer collecting benefits until age 70, and then the payment amount will be roughly 20% more than if payments started at age 67. There is no benefit to deferring taking benefits after age 70, because the monthly benefit amount will no longer increase.

Which of the following comparisons between 529 Plans and Coverdell ESAs is TRUE? ASection 529 Plan distributions can be used to pay for qualified educational expenses, but Coverdell ESA distributions can only be used to pay for higher education expenses BSection 529 Plan contributions can be made by high-income taxpayers, but Coverdell ESA contributions phase-out for higher income taxpayers CSection 529 Plans allow rollovers of unused account balances to other family members, but Coverdell ESAs do not permit rollovers DSection 529 Plans allow deductions for contributions made, but Coverdell ESAs do not

The best answer is B. Funds that are in a 529 Plan can be used without limit to pay for higher education expenses. Additionally, starting in 2018, up to $10,000 per year can be used to pay for lower levels of education. Funds in a Coverdell ESA can be used without limit to pay for any "qualifying" educational expense, and these include elementary school, middle school, and high school related expenses, in addition to higher education (college) expenses. There are no income phase-out rules for 529 Plans, while high-earning individuals are prohibited from contributing to a Coverdell ESA. Both 529 plans and Coverdell ESAs allow for rollovers of unused balances to other family members to pay for education expenses. Contributions to both 529 Plans and Coverdell ESAs are not deductible.

When will the rules of intestate succession be followed? AUpon the death of the holder of an individual account - POD where the owner dies without leaving a will BUpon the death of a tenant in a joint account held as tenants in common where the tenant dies without leaving a will CUpon the death of a tenant in a joint account held with rights of survivorship where the tenant dies without leaving a will DUpon the death of any owner of an individual securities account or any tenant in a joint securities account

The best answer is B. If an owner of an individual account or a tenant in a joint account held as tenants in common dies, then that person's assets are passed by will. If the individual dies without leaving a will, then the rules of "intestate succession" are followed. This is established by each State, and the estate's assets are distributed to the closest living relatives, with a surviving spouse being first in line to get the assets; then the children; then the siblings; etc. If an individual account is held as POD (payment on death, which specifies the name of the beneficiary to whom the account assets go on death), then the account assets are distributed based on the instructions in the deceased individual's will. If a tenant in a joint account held as "joint tenants with rights of survivorship" dies, then the other tenant now 100% owns the account.

The BEST income tax filing status for a married couple where both are high earners and at least one has large personal deductions is: Amarried filing jointly Bmarried filing separately Chead of household Dsingle filing 2 returns

The best answer is B. If there are 2 high earning spouses, then choosing "Married Filing Separately" typically results in a lower tax liability where 1 or both have large itemized deductions. This occurs because there are "add-backs" that reduce itemized deductions based on reported adjusted gross income, and this "add back" number is lower when income is split and reported separately. For married couples, where one spouse earns the majority of the income, the lowest tax liability generally results by choosing "Married Filing Jointly." This occurs because the higher income is "averaged down" when it is added to the lower income, where the joint amount is taxed at a lower joint tax bracket.

A medical student will complete her residency and go into medical practice in 4 years. She needs to purchase expensive medical equipment to start the practice. In order to determine the amount of money that must be invested today to meet this capital need, all of the following are needed EXCEPT: Acurrent cost of medical equipment Bexpected level of outstanding student loans Cassumed rate of return Dexpected inflation rate

The best answer is B. In this example, we need to determine the capital need, 4 years from now, to pay for the purchase of the expensive medical equipment. To do so, we would take the current cost of equipment and inflate it over the next 4 years by the expected rate of inflation. Then we need to take this future dollar amount and discount it back by our assumed investment return, to get the dollar amount that must be invested today to fund this capital need. Also note that any student loans that must be repaid are not part of this formula for this specific capital need. However, they are part of the overall bigger picture of this customer's capital needs.

Which of the following MUST act in a fiduciary capacity? I CEO of a company who decides company's matching contribution level in its 401(k) plan II A securities agent who recommends an investment to a client III An investment adviser who prepares financial plans on a "fee only" basis IV A lawyer who is appointed as executor over the estate of a person that is deceased AI and II only BIII and IV only CII and III only DI, II, III, IV

The best answer is B. Investment advisers have a fiduciary obligation to their customers. They must always act in the customer's best interests and must always take the same side of a trade as the customer. It is for this reason that if an investment adviser recommends a security to a customer, it cannot be the seller of the security to the customer. In contrast, an agent of a broker-dealer is only obligated to recommend a security that is "suitable" and can take the other side of the trade. Executors of estates and trustees are, by definition, fiduciaries. The CEO deciding the matching contribution level for the company's 401(k) plan is making a business decision and is a plan settlor. He or she is not acting as a fiduciary to the plan. Plan fiduciaries are persons who control, or have discretionary authority, over plan assets.

The business form that has a limit on the number of owners is a: AC Corporation BS Corporation CGeneral Partnership DLimited Partnership

The best answer is B. S Corporations are limited to 100 shareholders. There is no limit on the number of shareholders in a C Corporation; and there is no limit on the number of partners in either a general or limited partnership.

Which of the following BEST describes S corporations? S corporations are: I limited to 100 investors or less II not limited as to the number of investors III taxable entities IV not taxable entities AI and III BI and IV CII and III DII and IV

The best answer is B. Subchapter S corporations are limited to 100 shareholders. They are not taxable entities - income and loss flows through to the shareholders and any net income is only taxed at the shareholder level - not the corporate level.

The assets in a Coverdell Education Savings Account may be used to pay all of the following expenses EXCEPT: Atuition at a private high school Bprivate music lessons Ctuition at a religious elementary school Dtuition at a public university

The best answer is B. The assets in a Coverdell account may only pay expenses at public, private, or religious schools at any level. Private music lessons are not a "school," so Coverdell account assets may not pay for these lessons. Also note, in contrast, that 529 plans, until 2018, could only be used to pay for higher education expenses. However, tax amendments effective in 2018 permit $10,000 per year to be used from a 529 plan to pay for education costs below the college level.

When comparing Section 529 Plans to Coverdell Education Savings Accounts, which statement is FALSE? AThe account may be opened by any adult BAnnual contributions are limited to $2,000 per beneficiary CEarnings build in the account tax free DDistributions to pay for higher education expenses are not taxable

The best answer is B. There is a maximum $2,000 annual contribution into a Coverdell Education Savings Account; there is no maximum annual contribution into a Section 529 Plan - any contribution limits are set by the State (and are typically quite high). Any adult can open either type of account for a beneficiary; contributions to either are not tax deductible; earnings build tax-free in both; and distributions to pay for qualified higher education expenses are not taxable for both.

An investor in a limited partnership generating passive losses can offset these against: I Passive income generated from other limited partnership investments II Income generated from direct investments in real estate III Dividends received from blue chip corporations IV Capital gains generated from the sale of securities AI only BI and II only CIII and IV only DI, II, III, IV

The best answer is B. Under the Tax Code, passive losses can only be offset against passive income. They cannot be offset against portfolio income (interest, dividends, capital gains) or earned income. Passive income and loss is defined as that derived from real estate investments and limited partnership interests.

A father is writing his will (the testator) and is naming as beneficiaries his 3 adult sons. Each one will get an equal share "per capita" of the father's estate upon the father's death. Each of the sons has 2 children (the grandchildren of the testator) who are not yet adults. If one of the sons predeceases the testator, then the: Adeceased son's share goes into the son's estate Bdeceased son's share passes to his brothers Cdeceased son's shares passes to his children Ddeceased son's share reverts back to the father's estate

The best answer is B. When a will is created, the estate can be distributed either "per capita" or "per stirpes." These 2 ways deal with the issue of a named beneficiary dying before the testator.When it is "per capita," (Latin for "by the head") each NAMED beneficiary gets an equal share of the estate. In this will, there are 3 named beneficiaries - the 3 living sons. Assume they are Son A, Son B and Son C - each gets an equal 1/3rd of the father's estate upon the father's death. If Son A dies before the father, the estate is now divided among the 2 remaining living beneficiaries, Son B and Son C, who will now get 1/2 of the estate each upon the father's death. Because the grandchildren are not named, they get nothing. If the testator had NAMED both the 3 adult sons and their children "per capita," things work out differently. Assume that the 3 adult sons had 2 children each. Then there would have been 9 names (the 3 sons and their 6 children), with each getting 1/9th of the estate. If 1 of them predeceased the testator, then the estate would be divided "per capita" 1/8th each among the remaining 8 living descendants.

Which of the following statements about 403(b) plans are TRUE? I Contributions are tax deductible to the employee II Employees of any organization can contribute to this type of plan III Employees make voluntary contributions through their employers IV Earnings on contributions by employees are tax deferred AI and II only BIII and IV only CI, III and IV DI, II, III, IV

The best answer is C. 403(b) plans are only available to non-profit organization employees, such as school and hospital employees. These are tax qualified annuity plans, where contributions made by employees are tax deductible. Earnings in the plan grow tax deferred. When the employee retires, he or she may take the annuity, which is 100% taxable as ordinary income.

All of the following accounts avoid probate upon death of an owner EXCEPT: ATotten trust BJTWROS CIndividual DPayable on Death

The best answer is C. A Totten trust is a bank account, not a securities account. It allows the depositor to name a beneficiary, to whom the funds go upon death, bypassing the estate and probate. If an account is opened as Joint Tenants with Rights of Survivorship, each tenant 100% owns the account - when one dies, the other 100% owns the account, bypassing the estate and probate. Opening an Individual account-TOD (Transfer on Death, also called Payable on Death) permits the transfer of assets directly to the named beneficiary upon death of the account owner, bypassing the estate and probate. If an account is opened as an Individual account without the TOD feature, then on death, the account goes to the deceased's estate, is passed by will and must go through probate (where someone could contest the transfer).

What portfolio construction is most appropriate for a retired doctor who is age 75? A100% common stocks B75% common stock / 25% bonds C25% common stock / 75% bonds D100% bonds

The best answer is C. As one gets older, portfolio composition should shift to "safer" assets that generate reliable income. The general rule is to take "100 minus the investor's age" to get the appropriate investment portion to be held in stocks. Since this investor is age 75, this gives 25% of the portfolio holding in stocks; with the remaining 75% of the holding in bonds. Note that a 100% bond holding is not appropriate because people are living much longer and they need the "extra return" that is provided by stocks that can grow in value, on top of the somewhat lower fixed return provided by bonds.

Which of the following statements are TRUE about Individual Retirement Accounts? I Contributions are allowed based solely upon personal service income II Contributions may be made if the individual is covered by another type of retirement plan III All contributions reduce the individual's taxable income IV To remain tax deferred, distributions from other retirement plans must be rolled over within 60 days AI and III BII, III, IV CI, II, IV DI, II, III, IV

The best answer is C. Contributions to IRAs are based solely upon personal service income; other income sources such as interest and dividends do not count. Contributions may be made, even if the individual is covered by another pension plan; however, they may not be tax deductible if the person's income is too high (making Choice III wrong). IRA "rollover" rules allow pension plan distributions rolled over into an IRA within 60 days to remain tax deferred.

A sole proprietor: I cannot do business as a DBA II can do business as a DBA III must file an individual return Form 1040 with a Schedule C attached IV must file an individual return Form 1040 with a Schedule E attached AI and III BI and IV CII and III DII and IV

The best answer is C. DBA stands for "Doing Business As." If an individual sets up a business as a sole proprietor, the legal name of the person's business defaults to that individual's name. If the sole proprietor wishes to use a different business name, then the individual must file a form in the State notifying the State of the legal name being used - the "DBA" name (remember, the State wants to know who is doing business there!). Sole proprietorships are simply formed by individuals going into business - there is no State formation procedure that limits liability, such as setting up a corporation or a limited partnership in the State. To report the income and loss from the business, a Schedule C (Profit or Loss from a Business) form is attached to that individual's tax return. Schedule E is used to report passive income and loss from real estate and partnership investments.

When preparing a financial plan for a client, you should inquire whether the client has considered the purchase of disability insurance if the customer tells you that: Athe office where she works is a very stressful workplace Bshe works in a hospital as a nurse with patients that very ill Con weekends, she stays in shape by rock climbing in the nearby mountains Dher husband's family has a history of heart disease on his father's side

The best answer is C. Disability insurance replaces lost income if an individual can't work. In order to obtain it, the insurance company has an individual complete a questionnaire to assess the risk that he or she may become disabled. The questionnaire includes whether that person smokes, has a serious medical condition, risky activities (scuba, skydiving, rock climbing, bungee jumping, racing) and family history (age of relative, state of health, cause of death, medical conditions). Disability insurance only replaces lost income. It does not cover medical bills or long-term care costs.

Which of the following securities are likely to be on a State's "Legal List"? ACCC rated corporate bonds BC rated municipal bonds CU.S. Government agency bonds DPink Sheet stocks

The best answer is C. Each State usually has a "prudent man rule" that applies to fiduciaries that manage assets for beneficiaries. However, many States go beyond this and establish a "Legal List" of permitted investments for fiduciaries. The legal list typically consists of ultra-safe securities - generally U.S. Government bonds, government agency bonds, and AAA rated corporate and municipal securities. The CCC rated corporate and C rated municipal bonds listed are all below investment grade; and Pink Sheet stocks are highly speculative.

A husband and wife wish to form a company as a Subchapter S Corporation, along with their 2 adult children. Which statement is TRUE about this? AThere can only be 1 family member owner per Subchapter S corporation, so this is not permitted BThey are permitted to be owners of the Subchapter S Corporation with the husband and wife counting as 1 shareholder; and the 2 adult children counting as 1 shareholder; against the limit of 100 shareholders in a Subchapter S Corporation CThey are permitted to be owners of the Subchapter S Corporation, with all 4 family members counting as 1 shareholder against the limit of 100 shareholders in a Subchapter S Corporation DThey are permitted to be owners of the Subchapter S Corporation, with each family member counting as 1 shareholder against the limit of 100 shareholders in a Subchapter S Corporation

The best answer is C. Family members in a Subchapter S Corporation count as "1" owner. So the husband and wife, along with their 2 adult children, would count as "1" owner against the 100 owner limit.

A student at a U.S. college wishes to spend her summer year abroad at the American University in Paris, France. Can her 529 Plan be used to pay for tuition? ANo, because the funds can only be used to pay for college in the United States BNo, because the funds can only be paid for college courses that are taught in English CYes, as long as the American University in Paris is on the list of foreign schools that qualify for Title IV federal student aid DYes, because the funds can be used to pay for college or higher education in the United States or in any foreign institution

The best answer is C. Funds in a 529 Plan can be used to pay for college or higher education in the United States and in foreign schools that qualify for Title IV federal student aid. There are about 800 foreign schools that are eligible. Also note that starting in 2018, up to $10,000 per year can be withdrawn from a 529 Plan to pay for below-college level education expenses, but that is not addressed in this question.

In 2021, a person gives a $100,000 gift to a neighbor. How much of the gift is taxable? A0 B$15,000 C$85,000 D$100,000

The best answer is C. If a gift is given to anyone other than a spouse (in this case a neighbor), the first $15,000 is excluded from gift tax in 2021. On any amount above this, the donor must pay gift tax. Since this was a $100,000 gift, $85,000 is subject to gift tax. Also note that the amount excluded from tax is indexed for inflation annually.

Two investors have 50/50 ownership of a stock of a company as tenants in common. After having held the investment for over 5 years, one of the tenants dies. Which statement is TRUE? AThe remaining investor has title and access to the entire investment BThe 50% owned by the investor who has passed away flows automatically to the surviving owner CThe 50% owned by the investor who has passed away is probated according to the deceased investor's will DThe surviving investor is appointed as administrator of the deceased owner's shares until they are sold

The best answer is C. In a Tenants in Common account, each person owns a specified percentage interest, which can be unequal (in this case, it is equal at 50/50). If one dies, his or her percentage ownership interest goes to his or her estate and goes through probate. (Note that if the account were opened as "Joint Tenants" then Choices A and B would be true.)

All of the following investment options would be appropriate for a Section 529 college savings plan EXCEPT a(n): Aequity growth fund Bintermediate term corporate bond fund Cmunicipal bond fund Dbalanced fund

The best answer is C. In general, municipal bonds are not an appropriate investment for any tax-deferred vehicle. The bonds underlying a municipal bond fund are federally tax free, and thus give a lower yield than taxable corporate bonds. Since the earnings in a college savings plan build tax-deferred and qualified withdrawals are not taxed, why accept a lower return?

Income received from partnership investments is characterized under the tax code as: Aearned income Bactive income Cpassive income Dportfolio income

The best answer is C. Income received from partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income or portfolio income.

Limited liability companies: I are limited as to the number of investors II are unlimited as to the number of investors III give limited liability to investors IV give unlimited liability to investors AI and III BI and IV CII and III DII and IV

The best answer is C. Limited liability companies have no limit on the number of investors. They do give limited liability to the owners; and they can be structured to give a flow-through tax benefit.

Limited liability companies: I are limited as to the number of investors II give limited liability to investors III allow for flow through of gain and loss AI only BI and II CII and III DI, II, III

The best answer is C. Limited liability companies have no limit on the number of investors. They do give limited liability to the owners; and they can be structured to give a flow-through tax benefit.

A customer has the following balance sheet: Cash:$ 30,000 Marketable Securities:$100,000 Market Value Retirement Portfolio:$200,000 Market Value - Cars:$ 40,000 Market Value - Home:$250,000 Market Value - Personal Items and Furnishings:$ 50,000 Bills Payable:$ 10,000 Car Loan:$ 20,000 Mortgage on Home:$100,000 The customer's net worth is: A$130,000 B$330,000 C$540,000 D$670,000

The best answer is C. Net worth is all assets minus all liabilities.AssetsLiabilitiesCash$ 30,000 Bills Payable$ 10,000Securities$100,000Car Loan$ 20,000Retirement Port.$200,000Mortgage$100,000Cars$ 40,000Home$250,000Personal Items$ 50,000 Total Assets = $670,000; Total Liabilities = $130,000Net Worth = $670,000 - $130,000 = $540,000

An IAR has been retained to manage the brokerage account of an estate. When examining the account statement, the IAR sees the following holdings:$9,000,000 ABC Corp. AA-rated long term bonds$1,000,000 XYZ Money Market Fund Over the past year, the ABC bond position has appreciated by 30% due to falling interest rates. The IAR notes that the yield curve has steepened its positive slope and believes that the Federal Reserve will start tightening credit to reduce the risk of inflation. The BEST action for the IAR to take is to: Ado nothing because the account assets must be distributed to the heirs within 9 months Bsell the appreciated bond position and reinvest the proceeds in a growth mutual fund Csell the appreciated bond position and reinvest the proceeds in the money market fund Deither hold or sell the appreciated bond position using the prudent investor rule as a guideline

The best answer is C. One of the advantages built into estate taxes is that the assets are valued at market value as of date of death, and if there was any asset appreciation, this is not taxed as capital gains (this is called a "stepped up" basis). The goal of the IAR is to maximize investment returns using a time horizon of a maximum of 9 months (which is when estate tax is due). Because the IAR believes that interest rates will start rising, he or she should sell the appreciated long-term bond position (it has risen a lot!), locking in the gain without any capital gains tax due. Choice B is not good, because if the Fed tightens credit, then the equities market is likely to perform poorly. Choice D seems good and it also mentions "prudent man" - but the fact is that the greatly appreciated long-term bond position should not be held if the IAR believes that interest rates are going to rise. If the position were to be held untouched, it could lose a lot of its value in a falling market, and this is hardly the action that a "prudent man" would take.

A Registered Investment Adviser has been retained by a trustee to develop an investment plan for the trust. Such a plan would consider all of the following EXCEPT: Ainflation forecast Binvestment objectives Cwill for the trustee Dliquidity needs

The best answer is C. The investment plan for a trust must consider the trust's investment objectives, which must be in accordance with the grantor's or settlor's wishes; the liquidity needs (what needs to be paid out of the trust currently to meet the needs of the beneficiaries); and also must take into account any projected inflation (which will influence the investment to be made and the needed payouts in the future). The will of the trustee has nothing to do with this. Remember that the trustee is the fiduciary who oversees the management of trust so that it meets the needs of the beneficiaries. What the trustee does in his or her own will has no bearing on the management of the trust (also, if the trustee dies before the trust is terminated, the trust document will provide for a successor trustee).

Which statement is TRUE about capital gains taxes? A gain on a security held over: A6 months is taxed at a lower rate than a gain on a security held over 3 months B9 months is taxed at a lower rate than a gain on a security held over 6 months C12 months is taxed at a lower rate than a gain on a security held over 9 months D15 months is taxed at a lower rate than a gain on a security held over 12 months

The best answer is C. The maximum tax rate on short term capital gains (a gain on an asset held 12 months or less) is 37% (the maximum individual tax rate). For assets held over 12 months, the maximum tax rate drops to 15% (this increases to 20% for individuals in the highest tax bracket).

A defined contribution retirement plan such as a 401k that is "top heavy" is one which: Apermits larger contributions for employees that are highly compensated and smaller contributions for employees that have lower compensation levels Bis over weighted in securities that have above average risk and must be rebalanced under the "prudent investor" rule Cprovides a disproportionately large retirement benefit to highly compensated key employees that can void the plan's tax qualification Dhas a greater number of employees than that disclosed in the plan's trust document

The best answer is C. Under ERISA, a "top heavy" retirement plan is one that disproportionately favors upper level employees by giving them excessive retirement benefits that are not available to lower level employees. If a plan is deemed to be "top heavy," then the contributions will not be tax deductible.

A married couple, the husband is age 27 and the wife is 25, have 2 young children, no retirement plan and no investments. Based on this information, an agent should: Atell the clients to establish a Roth IRA Btell the clients to establish 529 plans for their children Ctalk to the clients about their financial goals Ddetermine that the clients have cash available for investment

The best answer is C. We certainly don't know much here from the information given. The best of the choices offered is to talk to the clients about their financial needs and goals and then establish an investment plan to get them there, based on the funds that they have available for investment, their risk tolerance, investment time horizon, etc. While determining that the customers have (or will have) cash available for investment is part of the process, Choice C is the better answer. Also note that specific investments (Choices A and B) cannot be recommended until the investment plan is completed.

A father is writing his will (the testator) and is naming as beneficiaries his 2 adult sons - Son A and Son B. Each one will get an equal share of the father's estate "per stirpes" upon the father's death. Each of the sons has children (the grandchildren of the testator) who are not yet adults. Son A has 2 young children - Grandchild A1 and Grandchild A2. If Son A predeceases the testator, then: ASon A's 1/2 share goes into his estate BSon A's share goes to Son B CGrandchild A1 gets 25% and Grandchild A2 gets 25% of the estate's assets upon the death of the testator Dthe deceased son's share reverts back to the father's estate

The best answer is C. When a will is created, the estate can be distributed either "per capita" or "per stirpes." These 2 ways deal with the issue of a named beneficiary dying before the testator."Per stirpes" is Latin for "by the branch." What this means is that each family branch gets an equal share of the estate. So if the father has 2 sons, Son A and Son B, each gets 1/2 of the father's estate upon the father's death. If Son A dies before the father, the 1/2 share now goes to the children of Son A. Since there are 2 children, A1 and A2, each will get 25% of the estate of the testator.

When an agent of an investment adviser prepares a client balance sheet, all of the following are considered to be personal possessions EXCEPT: Aartwork Bfurniture Cjewelry Dinvestments

The best answer is D. A "personal possession" of a customer is an item that is typically kept in the customer's home. These include furniture, artwork, jewelry, clothing, etc. This is basically an "insurance" definition for items that would be covered under a personal possessions insurance policy. A client's home itself is insured separately and is not a "personal possession." Finally, checking accounts, savings accounts and investment accounts are categorized separately as customer assets and are not included in the list of personal possessions.

Which is NOT a feature of a safe harbor 401(k) plan? AMandatory annual employer matching contributions BNo annual "top heavy" benefits testing CImmediate 100% vesting of employer-paid benefits D100% of eligible employees must choose to participate

The best answer is D. A safe harbor 401(k) relieves the employer of having to perform annual benefits testing to show that the plan does not favor highly compensated employees (a so-called "top-heavy" plan). To get the safe harbor, the employer must agree to make annual matching payments into the plan of either 4% of salary of participating employees or 3% of salary of all eligible employees (it is not mandatory that each eligible employee participate). These employer-paid benefits must 100% vest immediately.In contrast, in a Traditional 401(k), the employer can choose whether to make matching contributions and these can vest over a number of years (typically 5 years). Also, in a Traditional 401(k), the employer must complete an annual "top heavy" benefits test.

Which of the following education savings plans contributions may be federally tax deductible? AUGMA account BCoverdell ESA C529 Plan DNone of the above

The best answer is D. Contributions to any education savings plan are not federally tax deductible. In a Coverdell ESA or 529 Plan, the earnings build tax-deferred and distributions to pay for qualified education expenses are not federally taxable. In contrast, earnings in a UGMA account are taxable each year, and distributions taken to pay for education expenses are not taxable - since all of the dollars in the UGMA account have already been taxed.

For a family limited partnership account, who gets the termination benefits? AGrantor BTrustee CIncome beneficiary DRemainder beneficiary

The best answer is D. Family limited partnerships are set up primarily to protect family assets (e.g., a family business or family farm) from creditors and to protect the assets from being sold to someone outside the family. There is a general partner (typically a parent) and limited partners (typically children). The main benefit is that these family assets can be transferred over time to the children at a lower tax basis, since, in theory, they have "lost" value (because they are no longer marketable). This structure can allow parents to gift assets to children yearly with minimal or no gift tax. The beneficiary of such a family limited partnership will be each limited partner (meaning each child). Beneficiaries can be designated to get only income from the partnership; or can be designated to get remaining assets when the partnership is terminated; or can be designated to receive both. The "termination benefit" refers to the distribution of remaining partnership assets when the partnership is dissolved. This can be set up as the date of death of the parent(s); a specified future date; or by majority vote of the partners.

Stock options granted to an officer of a publicly-traded company: I create a tax event at the time of the grant II create a tax event if the options are exercised and the stock is subsequently sold at a profit III are subject to taxation as ordinary income IV are subject to taxation as capital gains AI and III BI and IV CII and III DII and IV

The best answer is D. Stock options granted to an employee are not taxable unless the options are exercised and the stock purchased via the exercise is subsequently sold. The difference between the exercise price and the sale price is a capital gain, and the tax rate applied depends on the holding period of the stock. The holding period starts counting as of exercise date. If the stock is held for 1 year or less as of the date of sale, any gain is taxed at short-term rates. If the stock is held for more than 1 year as of the date of sale, any gain is taxed at long-term rates.

An Investment Adviser Representative (IAR) is helping a client structure a portfolio to pay for the higher education costs of their child. All of the following are items that should be considered in determining the amount of funding needed in the portfolio EXCEPT: ATuition cost BHousing cost CAnticipated inflation rate DParent's income level

The best answer is D. The goal here is to fund a portfolio to pay for higher education expenses - for tuition, housing, board, books, computers, etc. The anticipated inflation rate is relevant to determine how much this will cost at the estimated future date that schooling will start. Once the amount needed is determined (which is what the question is asking), then how the funding will occur is the next question. This is where the parent's income is relevant.

Which of the following can be the beneficiary of a trust? I Grantor II Trustee III Beneficiary AI and II only BIII only CII and III only DI, II, III

The best answer is D. The grantor that sets up a trust can make anyone a beneficiary. Thus, the grantor can name himself (or herself) as a beneficiary; and can name the trustee as a beneficiary as well.

Which statements are TRUE regarding the taxation of capital gains? I A capital gain is first considered to be long term if a position is liquidated at a profit after being held for 1 year or less II A capital gain is first considered to be long term if a position is liquidated at a profit after being held for over 1 year III For investors in the maximum tax bracket, any long term capital gains will be taxed at the same tax rate as that bracket IV For investors in the maximum tax bracket, any long term capital gains will be taxed at a lower rate than that bracket AI and III BI and IV CII and III DII and IV

The best answer is D. Under Internal Revenue rules, a capital gain (or loss) is considered to be short term if a position is liquidated after being held for 1 year or less. Short term capital gains are taxed at ordinary income rates with a maximum rate of 37% (the maximum individual tax rate). If the position is held for over 1 year (1 year and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at a maximum rate of 15% (this increases to 20% for individuals earning in the highest tax bracket).

Qualified withdrawals from 529 college savings plans are, at the federal level: Ataxable to the beneficiary Btaxable to the account owner Ctaxable to both the beneficiary and the account owner Dtax free

The best answer is D. Withdrawals from college savings plans to pay for qualified education expenses are tax-free at the Federal level. Many, but not all, States, accord the same tax treatment at the State level.