Series 65: Unit 18

A client has invested $25,000 in after-tax dollars in an IRA currently worth $75,000. If the client were to withdraw $75,000, only $_________ would be taxable.

$50,000

A single individual earning $250,000 a year may open a Coverdell ESA not open a Coverdell ESA open a 529 college savings plan not open a 529 college savings plan II & III I & III I & IV II & IV

A

Although tax-exempt income from municipal securities is shown on Form 1040, it is NOT included in ____.

AGI

The first RMD payment can be delayed until _______ of the year following the year in which the account owner turns 73. For all subsequent years, including the year in which the first RMD was paid by April 1, the account owner must take the RMD by ________ of the year.

April 1st, Dec 31st

As a rule, loans from a 401(k) plan must be repaid within how many years? 20 5 15 10

B

SEP IRAs are used primarily by large corporations. are used primarily by small businesses. are set up by nonemployees. cannot be set up by self-employed persons.

B

IRAs and Keogh plans are similar in each of the following ways except distributions without penalty may begin as early as age 59½ rollovers are allowed once every 12 months and must be completed within 60 days the maximum allowable cash contribution is the same taxes on earnings are deferred

C

Who of the following would not be eligible to contribute to a 403(b) plan? The principal of the local elementary school A nurse working in the local public school who also helps out in the local hospital on weekends A retired math teacher who works most evenings tutoring local high school students for the SAT exams The maintenance supervisor in the local high school who does office cleanups on the weekends

C

A client is covered by a noncontributory pension plan. If his employer has terminated the pension plan and made lump-sum distributions, which of the following actions should the client take? Purchase municipal bonds to avoid tax Purchase a single premium annuity to maintain tax-deferred status Place the distribution in a Section 529 account to avoid tax Roll over the distribution into an IRA within 60 days to maintain tax-deferred status

D

Section 404(c) of ERISA deals with eligibility requirements distribution options tax qualification of the plan fiduciary responsibilities

D

The ______ is responsible for the catch-up provisions.

EGTRRA

A ____ is a tax-exempt trust or custodial account that individuals can set up with a qualified trustee to pay or reimburse certain medical expenses they incur.

HSA

The early withdrawal penalties for all IRAs are waived in the event of death or disability.

NOTE

Just as with the spouse continuing the IRA as the beneficiary, if the account were a Roth IRA and it had not been opened for the five-year minimum, any earnings distributed will be subject to ordinary income tax but not the ___% penalty.

10%

All of the following are characteristics of Section 529 savings plans except contributions are deductible on the donor's federal tax return. contributions may be state tax deductible. withdrawals are tax free if used for qualified education expenses. Contributions grow tax-deferred

A

For purposes of the maximum allowable annual contribution, an individual would have to aggregate contributions made to a 401(k) and a 403(b). a 401(k) and a 457. a 403(b) and a 457. a 401(k) and a Roth IRA.

A

Harry Thomas has turned 19 and decided that he is going to join the Marines and postpone going to college. If Harry decides to stay in the military, the unused funds contributed to his Coverdell ESA may be transferred into another Coverdell ESA for Harry's 25 year-old cousin, Julia must be returned to the donor with tax plus a 10% penalty on the earnings must remain in the plan until Harry's 30th birthday must be distributed to Harry no later than 30 days after his 21st birthday

A

Keogh Plans are qualified plans intended for those with self-employment income and owner-employees of unincorporated businesses or professional practices filing a Form 1040 Schedule C with the IRS. Which of the following statements relating to Keogh Plans is not true? A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan. Owner-employee businesses and professional practices must show a gross profit in order to qualify for a tax-deductible contribution. The maximum allowable contribution to a Keogh Plan is substantially higher than that for an IRA. A participant in a Keogh Plan may also maintain an IRA.

A

One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan, and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to use the net unrealized appreciation (NUA) approach when taking the distribution of the company stock, the tax treatment would be ordinary income on the $25,000 cost basis, long-term capital gain on the appreciation when sold long-term capital gain on the entire $125,000 ordinary income on the entire $125,000 ordinary income on the $25,000 cost basis, short-term capital gain on the appreciation when sold

A

Two of the most popular methods for saving for education are the Coverdell ESA and the Section 529 plan. Although there are many similarities, there are some significant differences between the two. One of those differences is that the Section 529 plan: does not place a limit on the earnings of the donor, while the ESA does place such a limit. allows the funds to be used for any K-12 expense, while the ESA considers tuition to be the only qualified expense. places a limit on the age by which the funds may be used, while the ESA permits the funds to be used by a beneficiary of any age has a federally imposed maximum annual contribution, while the ESA's limit is determined by each state.

A

What is the maximum amount a taxpayer may contribute each year to a Coverdell Education Savings Account (ESA) for one student? $2,000 $1,000 $500 $100

A

Which of the following statements regarding ERISA and qualified plans is correct? Qualified plans must meet the requirements of ERISA. ERISA requires the fiduciary to invest for maximum gain under the prudent person rule. ERISA regulations are primarily focused on the income tax aspects of qualified plans. ERISA applies only to defined benefit pension plans.

A

Who of the following will not incur a penalty on an IRA withdrawal? Man who has just become totally disabled Woman who turned 59 a month before the withdrawal Woman, age 50, who decides on early retirement Man in his early 40s who uses the money to buy a second home

A. Early withdrawals, without penalty, are permitted only in certain situations (such as death or qualifying disability).

A taxpayer opened a Roth IRA seven years ago. Last year, the individual opened a new Roth IRA at your brokerage firm. The individual is 60 years of age and liquidates $3,000 from the new Roth IRA. $1,000 of the withdrawal represents earnings in the account. The tax consequence of this withdrawal is No tax is due Tax is due on $1,000 of its earnings Tax is due on the entire $3,000 withdrawal Tax plus 10% penalty is due on its earnings

A. It's a tax-deferred account. He's already had the first Roth IRA for longer than the 5 yr limit

Harry, age 52, is an unmarried individual currently earning $55,000 per year. He consults you about the possibility of establishing both a traditional IRA and a Roth IRA this year and making contributions to each. You have determined that Harry should make a $3,000 contribution to the traditional IRA for 2023. What amount, if any, can Harry also contribute to the Roth IRA? $4,500 $0 $2,500 $3,000

A. You can contribute a total of $7,500 between IRAs and Roth IRAs

A frequent concern of parents initiating a savings plan for the college education of their child is the lack of control over the assets, particularly if the child decides to forego higher education. When you have a client who shares this concern with you, it would be most appropriate to suggest U.S. Treasury zero-coupon bonds. 529 plans An UTMA account opening a new account in the client's name for this purpose.

B

A significant portion of ERISA deals with fiduciary responsibility. Which of the following would be considered a prohibited transaction? Using plan assets to build a collection of rare automobiles The fiduciary selling 1,000 shares of a personally owned stock to the plan Investing more than 50% of the plan's assets in the company's stock The purchase of art or antiques for the plan

B

Although there is no specific rule requiring it, most qualified plans have an investment policy statement. For those plans that do have an IPS, it would include all of the following information except investment parameters to be followed by the portfolio managers the information in the summary plan document specified by the Department of Labor how the plan measures investment performance the schedule for future needs of the plan

B

When completing an individual tax return on Form 1040, one of the most important numbers is the adjusted gross income (AGI). Which of the following would not be included in AGI? Salary and commissions Tax-exempt interest received from municipal bonds Alimony received from pre-2019 divorce decree Qualifying dividends on common stock

B

Which of the following does not provide for a change of beneficiary? 529 plan UTMA account Coverdell ESA Roth IRA

B

Which of the following sources of income is eligible for funding an IRA? Income received as a shareholder of an S corporation Income received as a sole proprietor Child support Income received as a limited partner

B

Which of the following statements is most accurate regarding employer-sponsored retirement plans? In a defined contribution plan, the payments received are related to the number of years of service and the individual's final salary. In a defined benefit plan, the client can have some reasonable certainty about the amount of income that will be received in retirement. In a defined benefit plan, the payments provided are related to the contributions made and investment performance achieved. The employee in a defined benefit plan bears the shortfall risk.

B

Which of the following statements regarding IRAs are correct? One may have both a Roth IRA and a traditional IRA, contributing the maximum to each one. One may have both a Roth IRA and a Roth 401(k) contributing the maximum to each one. Neither Roth IRAs nor Roth 401(k) plans have RMDs at age 73. If one is a participant in a Roth 401(k) plan, the earnings limits are waived for opening a Roth IRA. III & IV II & III I & IV I & II

B

Which of the following statements regarding a qualified profit-sharing plan is true? It can permit regular direct cash payouts to participants before retirement. It must be established under a trust agreement. Contributions are required annually. It must define a specific contribution amount.

B

A taxpayer has earned income of $25,000 in 2021. Contributions to that individual's IRA may be made on November 15, 2021. January 4, 2022. April 15, 2022. October 15, 2022 (if the automatic extension has been filed). II & III I & II I, II, & III I, II, III, & IV

B. A contribution for the current year may be made anytime that year. The contribution may also be made anytime the following year up until the due date for payment of the previous year's income taxes. Note that an extension is only extending the time for filing, not the time for payment of taxes. That day is April 15.

Which of the following would best describe a prudent investor? A person in a fiduciary capacity who invests in a prudent manner A trustee who invests with reasonable care, skill, and caution An investment adviser representative handling a discretionary account The custodian for a minor under the Uniform Transfers to Minors Act

B. Although all of these may have a fiduciary responsibility, the definition, as expressed in the Uniform Prudent Investor Act of 1994, requires reasonable care, skill, and caution.

Grandma Abigail died at age 82 with a traditional IRA valued at $100,000. Her daughter Betsy, 53 years old, was the sole beneficiary. Betsy's choices would include rolling over this IRA to her own IRA. taking distributions over a period not to exceed 10 years. taking the cash by December 31st and paying the 10% tax penalty because she is under 59½. leave the IRA in the name of the deceased and continue with the RMDs.

B. Among the options available to a nonspouse beneficiary is receiving the payout over a 10-year period. The distributions may be taken as desired but must be completed within 10 years. Betsy, being a daughter and not a spouse, could not roll over the IRA into her own IRA. Even though Ishe is under 59½, inheritors of IRAs do not incur the 10% penalty tax on withdrawals.

If a customer would like to open a custodial UGMA or UTMA account for his nephew, a minor, the uncle can open the account provided the proper trust arrangements are filed first. open the account and name himself custodian. open the account, but he needs a legal document evidencing the nephew's parents' prior approval of the account. be custodian for the account only if he is also the minor's legal guardian.

B. The donor may name himself the custodian of a UGMA or UTMA account. No documentation of custodial status is required to open these accounts, and the custodian is not required to be the minor's legal guardian.

One of the reasons you might suggest that a client with an 8-year-old child open a UTMA account rather than a UGMA is that the UTMA offers better tax advantages. more investment flexibility. more investment control to the parent. greater flexibility in the appointment of a custodian.

B. There are two testable UTMA advantages: The money does not have to automatically transfer to the child once the age of majority is reached—it can be delayed, depending on the state, until as long as age 25; and The range of investments permitted under a UTMA is much larger, giving the custodian greater flexibility in building the portfolio, which makes B the best choice.

A corporation has set up a qualified retirement plan for its employees. Which of the following plans requires mandatory contributions from the employer? 401(k) plan Defined contribution pension plan Defined benefit pension plan Profit-sharing plan I & III II & IV II & III I & IV

C

All of the following statements regarding a Section 529 QTP are true EXCEPT the plan owner can rollover any unused funds to a member of the beneficiary's immediate family without incurring any tax liability as long as the rollover is completed within 60 days of the distribution. the plan owner can rollover the assets into a different plan no more frequently than once every 12 months. agents selling a Section 529 Plan must deliver a currently effective prospectus. a beneficiary may be covered under both a Coverdell ESA and a Section 529 QTP.

C

An individual has served with the local police force for 15 years. The plan is to remain on the force for another five years to be able to earn a nice pension benefit. Instead of simply retiring, the individual wishes to pursue a B.A. in accounting and then work in corporate tax. The individual approaches you for suggestions on the best way to save for the upcoming college expenses. You would probably suggest opening An UTMA account A Coverdell ESA A section 529 plan An options account

C

GEMCO Manufacturing Co. has appointed the company's CFO as the trustee for their employee retirement plan. You are an IAR and you advise a substantial portion of the plan's assets. You are contacted by the CFO requesting a short-term loan from the plan assets for which he will pay the plan prime + 2%. Your best course of action would be to permit the loan once you have been satisfied that there is adequate collateralization in place permit the loan because the CFO is the plan trustee refuse to allow this to happen because it would be a violation of your fiduciary responsibility refuse to allow this to happen because the plan assets will suffer

C

One of your clients asks about a Coverdell Education Savings Account for college savings. To avoid income taxation and penalties, your advice is that these funds must be used before the student reaches age 32 25 30 24

C

Terry Bolton employs his two sons in the family gardening business. Josh is 12 years old and was paid $2,000 for the year. Drake is 14 years old and was paid $3,000 for the year. Which of the following are correct statements regarding the taxation of the income? Josh's income is taxed at his tax rate. Drake's income is taxed at his tax rate. Josh's income is taxed at his parents' marginal rate. Drake's income is taxed at his parents' marginal rate. III & IV I & IV I & II II & III

C

Under Keogh plan provisions, a full-time employee is defined as one working at least how many hours per year? 500 2,000 1,000 100

C

Which of the following parties may be an alternate payee pursuant to a qualified domestic relations order (QDRO)? An aunt or uncle of the plan participant A spouse or former spouse A child An individual who is legally a dependent of the plan participant I, II, III, & IV II & III II, III, & IV I & IV

C

Which of the following statements regarding a traditional IRA is true? Distributions before age of 59½ are subject to a 10% penalty in lieu of income taxes. Because contributions to a traditional IRA are not currently tax deductible, all qualifying withdrawals are tax free. The income and capital gains earned in the account are tax deferred until the funds are withdrawn. The income and capital gains earned in the account are tax deferred until the funds are withdrawn.

C

William and Kat, a married couple, are advisory clients of yours. Each is employed and covered by a qualified plan. Which of the following statements are correct? Employees covered by a qualified plan are not eligible to open Roth IRAs. Employees covered by a qualified plan are eligible to open Roth IRAs. Distributions from a qualified plan may be rolled over into a Roth IRA. Distributions from a qualified plan may not be rolled over into a Roth IRA. I & III II & IV II & III I & IV

C

Withdrawals from a traditional IRA made by an owner aged 54 would be exempt from the 10% penalty in all of the following circumstances except to pay for certain medical expenses. when the taxpayer is disabled. when the withdrawal is done under a qualified domestic relations order (QDRO) the first-time purchase of a primary residence ($10,000 lifetime maximum).

C

A 52-year-old taxpayer has earned income of $50,000 in 2021. If the individual has a traditional IRA and a Roth IRA, the maximum contribution for the year is $7,000 into the traditional IRA and a like amount into the Roth IRA. $6,000 combined in any fashion. $7,000 combined in any fashion. $6,000 into the traditional IRA and a like amount into the Roth IRA.

C.

Which of the following is designed to help a corporation retain high-value executives? Simple SEP SERP TSA

C. The SERP (supplemental executive retirement plan) is sometimes called the supplemental executive retention plan. Its purpose is to go beyond the normal retirement plan with extra benefits for these executives. Because it is a nonqualified plan, discrimination is permitted.

One of your customers has a 14-year-old child with a high level of interest in investing. The child's special passion is real estate. What would you suggest that would probably be the best type of account to open for the child? A. Uniform Gifts to Minors Act (UGMA) B. Joint account with right of survivorship (JTWROS) C. Uniform Transfer to Minors Act (UTMA) D. Coverdell ESA

C. The UTMA account has far greater investment flexibility than the UGMA. Included would be various real estate investments that could not be made in a UGMA. The JTWROS account cannot be opened with a minor, and the Coverdell is for education savings.

Among the requirements for accumulated earnings in a Roth IRA to be withdrawn free of tax is the owner of the account is at least 73 years old. the money is withdrawn for a first-time purchase of a vacation home. the initial deposit to a Roth IRA was made at least 5 years ago. the owner's spouse is declared disabled.

C. The first requirement for tax-free withdrawals from a Roth IRA is that the initial deposit to a Roth must have been made at least 5 years ago (choice C). The other primary requirement is that the owner must be at least 59½, not 73. If the 5-year requirement is met, then owners under 59½ can receive distributions of accumulated earnings tax free they wish to use up to $10,000 for a first-time purchase of a primary residence, not a vacation home. The disability requirement only applies to the owner of the Roth, not a spouse.

Which of these statements regarding nonqualified deferred compensation (NQDC) plans is correct? Although not covered by most ERISA rules, nonqualified deferred compensation plans must meet the vesting rules. NQDC plans are not flexible. NQDC plans can discriminate in favor of key executives. NQDC plans generally provide coverage for rank-and-file employees.

C. There are no non-discrimination rules

A basic difference between a Section 457 plan established on behalf of a governmental entity and one established by a private tax-exempt organization is that a tax-exempt plan participant does not have to include plan distributions in taxable income a tax exempt plan's distributions are not eligible for a favorable lump sum 10-year averaging treatment. a governmental plan cannot make a distribution before the participant attains age 70½ a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants

D

It is not uncommon to find individuals working full time well after normal retirement age. You have a 79-year-old client who still puts in a 40-hour work week. The employing company offers an HSA to those employees who qualify. If this is your customer, one thing to note that likely could affect eligibility is the individual has selected a high-deductible health plan provided by the employer. the individual is claimed as a dependent on their grandchild's tax return. the individual is over 72 years of age. the individual is covered under Medicare.

D

One member of a married couple in their 30's earns an annual salary of $45,000, while the other earns $2,000 annually from a home-based business. If they file a joint tax return, their maximum IRA contribution for the year is $6,500. $8,000. $12,000. $14,000.

D

Taxable withdrawals before age 59½ are subject to a 10% early withdrawal penalty in addition to the normal income tax unless they are due to death. disability. qualified education expenses for a nephew. the purchase of a vacation home, but not to exceed $10,000 lifetime. I, II, & IV I, II, & III I & III I & II

D

A taxpayer is a participant in a 401(k) plan. The vested value in the account is $90,000. If the individual wishes to take out a loan, the maximum permitted amount is $90,000 $9,000 $50,000 $45,000

D. Assuming the plan permits loans, the IRS limits them to a maximum of the lesser of 50% of the vested value or $50,000. In this case, 50% of $90,000 is less than $50,000.

Complying with the safe harbor provisions of ERISA Section 404(c) requires meeting three specific conditions. Which of the following is not one of those three? Communicating required information Investment selection Investment control Investment performance

D. The Section 404(c) safe harbor places limits on the responsibility of certain plan fiduciaries when the required conditions are met. There is no standard of investment performance. Plan participants must have the ability to make investment decisions in their account (control). There must be at least three different types of investments to choose from (selection). Certain information, such as accessibility to participant accounts by phone or online, is also a requirement.

To comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must offer plan participants at least 10 different investment alternatives. allow plan participants to exercise control over their investments. allow plan participants to change their investment options no less frequently than monthly. provide plan participants with information relating to the risks and performance of each investment alternative offered. I and III I and IV II and III II and IV

D. To comply with the safe harbor provisions of ERISA's Section 404(c), the plan trustee must allow each participant control over their investments and furnish them with full performance and risk information. Choice D contains both of these. The rule only mandates a minimum of three alternatives and quarterly changes.

________ is often referred to as the Pension Reform Act, but it regulates almost all types of employee benefit plans and personal retirement plans.

ERISA

No short sales of stock, trading on margin (covered in detail in Unit 23), or speculative option strategies (think uncoveredcalls) is permitted in an _____ or any other __________ plan.

IRA, retirement plan

An IRA owner who reaches age 72 on January 1, 2021, must begin withdrawals by April 1, 2022. However, if this individual is covered by an employer-sponsored plan other than a SEP IRA, there are no RMDs from that plan (but there are from any traditional IRAs) until after retirement.

NOTE

A UGMA/UTMA custodian assumes fiduciary responsibilities in managing a minor's account. Limitations include:

UGMAs/UTMAs may be opened and managed as cash accounts only. A custodian may never purchase securities on margin or pledge them as collateral for a loan. A custodian must reinvest all cash proceeds, dividends, and interest within a reasonable period of time. Cash proceeds may be held in an interest-bearing custodial account for a reasonable period. Investment decisions must consider a minor's age and the custodial relationship; examples of inappropriate investments are commodity futures, naked options, and high-risk securities. Options may not be bought in a custodial account because no evidence of ownership is issued to an options buyer. Covered call writing is normally allowed. Stock subscription rights or warrants must be either exercised or sold.

A plan participant or beneficiary who controls his or her specific plan account is not a ________.

fiduciary