Series 7: Unit 1

Regulation S-P (Privacy Notices)

-Enacted by the SEC to protect customer information -Deals with nonpublic information like SS numbers, transaction history, account balances -Firms must provide a privacy notice describing its privacy policies whenever a new account it opened and annually thereafter -Reasonable opt-out methods must be provided to customers so information is not sent out to third party vendors. Check box prepaid envelope, electronic means for e-Delivery people, toll free phone number -Lastly firms must secure private information (locking laptops and computers, and locking document vaults) Reg S-P distinguishes between a consumer and a customer. A consumer is an individual who obtains a financial product or service from a firm and has no further contact with the firm. A customer is an individual who has an ongoing relationship with a firm. Businesses and institutions are not covered by this regulation. Take Note* If a BD sends a customer an initial privacy notice that contains an opt-out provision, the firm may NOT disclose nonpublic, personal information about the customer for how many days from the mailing? 30 DAYS

NEW CHANGES TO IRAs on DECEMBER 20, 2019

1. No more age restriction for Trad Ira. Now same as Roth. There is no upper age limit for contributions with earned income. 2. RMDs will begin after attaining age 72 and not 70.5 3. Early withdrawal exception from the 10% penalty: -Up to 5K during the first year after a child is born -Up to 5K during the first year after an eligible person is adopted. (under 18 or physically/mentally incapable of self-support)(if married, each spouse can make the 5K penalty free withdrawal) 4. Inherited retirement accounts for those dying in 2020 or beyond will now, with certain exceptions, require distributions to be completed in a maximum of 10 years after the original owners death. 5. Rule 529 has added as qualified expenses, amounts paid as principal interest on any qualified education loan for the beneficiary and any siblings. There is a maximum of 10k lifetime per child. 6. ERISA eligible 401k plans, but not 403b and 457 plans: There is an alternative to the 1,000 hours worked per year. An employee working 500 hours or more hours per year for 3 years is now eligible. The purpose of this addition is to make it possible for more part-time employees to qualify for coverage.

Joint Accounts

2 or more adults are named on the account as co-owners, with each allowed some form of control over the account. In addition to filling out the appropriate new account form. A joint account agreement must be signed. ALL owners must sign the account forms for joint accounts. The owners are called "tenants". Joint account agreements allow any or all tenants to transact business in the account. Checks must be made payable to the names in which the account is registered and must be endorsed for deposit by all tenants (although mail need be sent only to a single address). When securities are sold from a joint account, the certificate must be signed by all tenants. The suitability requirements for a joint account follow the same basic rules as all accounts. You must put the interest of the client first. B/c a joint account is really nothing other than a collection of individuals, suitability information must be appropriate based upon that information. In other words, the suitability of recommendations must be based on the group, not on any individual within the group.

Community Property

A "marital property" classification recognized by some, but not all states. (Since its not for universal use, will most likely appear as a WRONG ANSWER on the exam) In these states, most property acquired during the marriage is considered to be owned jointly by both spouses and would be divided at the time of divorce, annulment, or death. Joint ownership is therefore automatically presumed by law in these jurisdictions. Exceptions are made for inheritances, gifts, or any property that is owned by one spouse before marriage. That is considered the separate property of that spouse, unless it was designated to be owned jointly by both spouses during the marriage. Community Property laws differs from state to state. Some states have created separate classifications called community property with rights of survivorship that are similar to joint tenancy with rights of survivorship property designations.

Test Topic Alert

A 401k plan is not considered a payroll deduction plan. For the FINRA exams, 401k plans are considered salary reduction plans, not payroll deduction plans. In exam questions, assume that payroll deduction plans are NQ. Also note that 401k plans are qualified plans, whereas payroll deductions plans are not.

C Corporation

A C corporation is a business structure that distinguishes the company as a separate entity from its owners. If a business expects to need significant capital, this form is almost always the preferred choice. Unlike the management of a partnership [ the general partner(s)], in most cases, the corporation's officers and directors are shielded from personal liability for the corporation's debts and losses. Shareholders are also shielded from corporate creditors. That is the limited liability benefit from owning stock. Corporate income tax applies to the corporation as an entity rather than being passed though to the shareholder. If your client is a C corporation, you will only look at the corporation's financial needs and objectives when determining suitability.

General Partnership (GP)

A GP is an unincorporated association consisting of two or more individuals. In a GP, the partners manage and are responsible for the operation and debts of the business. Partnerships are easy to forma and easy to dissolve, but are generally not suited for raising large sums of capital. Partnerships allow the business' profits and losses to flow directly through to the investors for tax purposes, thus avoiding double taxation of profits at the business and individual levels. B/c the income and losses flow through to the individual partners, an investment policy for a general partnership would have to consider the combined/collective objectives of all of the partners.

Limited Liability Company (LLC)

A LLC is a business structure that combines benefits of incorporation (Limited liability) with the tax advantages of a partnership (flow-through of taxable earnings or losses). The LLC owners are members (not shareholders) and are not personally liable for the debts of the LLC. Just as with the partnership clients described above, the objectives and financial constraints of the individual members must be considered from a suitability standpoint.

Deferred Compensation Plan

A NQ deferred compensation plan is an agreement between a company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement. It is assumed that the employee will be in a lower tax bracket at retirement age. (solely affiliated board members are not eligible) Deferred compensation plans may be somewhat risky because the employee covered by the plan has no right to plan benefits if the business fails. In this situation, the employee becomes a general creditor of the firm. Covered employees may also forfeit benefits if they leave the firm before retirement. When the benefit is payable at the employees retirement, it is taxable as ordinary income to the employee. The employer is entitle to the tax deduction at the time the benefit is paid out. TAKE NOTE* Deferred compensation plans usually benefit highly compensated employees who are a few years from retirement.

Definitions: Negative Response Letter

A Negative Response Letter generally informs the recipient of the letter of an impending action, and requires the recipient to respond or act within a specified time frame if the recipient objects to the action. If the recipient doesn't respond, they are deemed to have consented to the action. These conditions are the following: -the bulk exchange is limited to situations involving mergers and acquisition of funds, changes of clearing members and exchanges of funds used in sweep accounts. -the negative response letter contains a tabular comparison of the nature and amount of the fees charged by each fund. -the negative response letter contains a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased. -the negative response feature will not be activated until at least 30 days after the letter was mailed. TAKE NOTE* There is a current FINRA proposal that would greatly expand the usage of negative response letters for bulk transfers. If that proposal should become effective, the relative information will be added to the content updates and the q-bank.

Internal Transfers

A close "cousin" of the previous discussion is that of internal transfers. It is not unusual for a client to have both a cash account and a margin account. A married couple could easily have five or more accounts between them. There are many good reasons why a client might want to have funds transferred from one account to another, but there could also be cases where a party was acting without proper authority. In general, when a transfer is made to an account from an account of which the recipient is not a signatory, approvals and documentation similar to a change in designation are required.

Definitions: Nondeductible Contribution

A contribution to a qualified plan or an IRA, (Trad or Roth) which is made with after-tax dollars. The funds do grow tax-deferred, but there is no tax benefit from the contribution.

Section 457 plans

A deferred compensation plan set up under Section 457 of the tax code that may be used by employees of a state, political subdivision of a state, and any agency or instrumentality of a state. This plan may also be offered to employees of certain tax-exempt organizations (hospitals, charities, unions, but not churches) Employees can defer compensation in a 457 plan, the amount deferred is not reportable for tax purposes. Therefore, the employee receives a deduction each year for the amount deferred.

Direct Rollovers from retirement plans to IRAs

A direct rollover is a distribution from an employer-sponsored retirement plan to an IRA, either trad or roth. When you terminate employment (or retire), you have the option of moving your employer-sponsored plan assets to an IRA. In some cases, if you go to a new job, your new employer's plan may permit a direct rollover into the plan. The key to a direct rollover is that the money is never seen b the employee and moves directly from the current plan administrator directly to another administrator. Take Note*** There is a specific type of traditional IRA known as a rollover IRA. When a participant in an employer sponsored qualified retirement plan separates from the employer--- whether through retirement or termination--- vested assets in the company sponsored plan may be directly tarnsferred to a separate IRA titled as a rollover IRA. There is a benefit to doing this. B/c these assets have been segregated as having come from a qualified plan, should the individual obtain future employment and wish to have those assets transferred to the new employer's plan, it is a simple task to do so.

Pattern Day Trading Account

A dray trader is someone who buys and sells the same security on the same day to try and take advantage of intraday price movements. A Pattern Day Trader is someone who executes 4 or more day trades in a 5 business day period. The minimum equity requirement for pattern day traders is $25,000. That means they must have on deposit at least $25,000 in the account equity on any day in which day trading occurs.

Profit-Sharing Plans

A psp established by an employer allows employees to participate in the business's profits. PSP plans need not have a predetermined contribution formula. Plans that do include such a formula generally express contributions as a fixed percentage of profits. To be qualified, a PSP must have substantial and recurring contributions according to the IRC. PSPs are popular because they offer employees the greatest amount of contribution flexibility. The ability to skip contributions during years of low profits appeals to corporations with unpredictable cash flows. They are also relatively easy to install, administer, and communicate to employees.

Individual Account

Account with one owner. The account holder is the only person who may Control investments within the account Request distributions of cash or securities from the account Suitability is based solely on the individual

S Corporation

An S corporation, although taxed like a partnership, offers investors the limited liability associated with corporations in general. The profits and losses are passed through directly to the shareholders in proportion to their ownership in the S corporation. Unlike an LLC, which can have an unlimited number of members, an S corporation may not have more than 100 shareholders, none of whom may be a nonresident alien, or more than one class of stock (presumably common) Any business organization client where the entity itself has no liability and is not subject to tax, such as partnerships, LLC, and S Corporation, requires the adviser to look through the entity to the owners to properly meet the suitability standards.

401k Plans

An employee directs and employer to deduct a percentage of the employee's salary to contribute to a retirement account. 401k plans permit an employer to make matching contributions up to a set percentage of the employee-directed contributions, making this a type of defined contribution plan. All contributions are made with pretax dollars. In effect, participating employees are reducing their salary by the amount of their contribution and, therefore, their W-2 will show the actual salary less the 401k contribution. Test Topic Alert* One of the benefits of investing through a 401k plan is that it takes advantage of dollar cost averaging, a technique described in unit 8., which always results in lower cost per share in a fluctuating market.

Definitions: Nonqualified

An employer-sponsored plan, such as a deferred compensation plan, where there are no tax advantages other than that the pay is not received until sometime later when the individual should be in a lower tax bracket. Another advantage is that the employer can discriminate between employees. The term can also apply to an annuity purchased on an individual basis outside of a retirement plan. (described in Unit 9)

Definitions: Qualified Plan

An employer-sponsored plan, such as a pension, 401k, 403b, where the contributions are made with pretax dollars and earnings in the account grow without any tax (tax deferred) until the funds are withdrawn. Qualified plans are usually governed by the Employee Retirement Income Security Act of 1974 (ERISA)

Roth 401k Plans

An option available to an existing 401k plan. This option combines features of Roth IRAs and 401k retirement plans. After tax contributions but allow tax free withdrawals, provided the retiring person is at least 59.5 years old at the time of the withdrawal. 5 years active with the account. to take tax free withdrawals. Like a 401k, it has employer matching contributions, however, the employer's match must be deposited into a regular 401k plan and be fully taxable upon withdrawal. Thus, the employee must have 2 accounts, a regular 401k and a roth 401k. Employees may contribute to either account but may not transfer money between accounts once the money has been contributed. Unlike Roth IRAs, Roth 401k plans have no income limit restriction on who may participate. One may have both a roth 401k plan and a roth IRA, but the income limits would still apply to the roth ira. Unlike Roth IRAs, Roth 401k plans require withdrawals to begin no later than age 72, following the same rules that apply to all RMDs.

Excess Contributions

Annual IRA contributions exceeding the maximum allowed are subject to a 6% penalty tax if the excess is not removed by the time the taxpayer files a tax return, but no later than April 15.

Roth Conversions

Anyone with a Trad IRA is permitted to convert it to a Roth IRA. However, there are income tax consequences for doing so. Basically, the entire amount converted is added to the investor's ordinary income. However, as long as the funds are done in a direct rollover trustee to trustee, or, if distributed to the owner, are rolled over within 60 days, there will be no 10% early distribution tax penalty for those under age 59.5. If some portion of the contributions to the traditional IRA were made with after-tax money, the IRS uses a proportionate system to determine how much is nontaxable, but that type of computation will not be tested. Conversions may also be done from any qualified employer plan such as 401k and 403b plans.

Earnings Limitations for Tax Benefits

As already stated, traditional participants may deduct contributions to their IRAs from their taxable income. The deductibility limits are reduced or even eliminated for individuals who are covered by employer-sponsored qualified plans. These adjusted gross income (AGI) limits increase every year and will not be tested. Individuals who do not participate in qualified plans may deduct IRA contributions regardless of income level. IRA Phaseout Amounts Year 2019: Single Filers: $64,000-$74,000 Joint Filers: $103,000-$123,000 The limits are higher is only one of the spouses participates in a qualified plan, but , as with all of these numbers, it is only the concept that is tested, never the numbers themselves. These limits only deal with the deductibility of contributions. If your client earns in excess of the limits, the full contribution can still be made, but part or none of it can be deducted. The test refers to those as post-tax or after-tax contributions. The earnings still grow tax-deferred. If neither spouse participates in a qualified plan, they may contribute up to $12,000 and deduct the $12,000 even if they make over $123,000. Up to $14,000 if they are over 50. If both are covered by a qualified plan and their income is over $123,000 then no deduction would be allowed, however their contributions would be allowed and all earnings would be tax deferred.

Trusted Contract Person (Rules 2165 and 4512)

As mentioned earlier, there is a requirement to obtain trusted contact information for specified adults. Who is considered a specified adult? Per FINRA rule 2165, specified adult "is a natural person age 65 or older or a natural persona age 18 or older who the member reasonable believes has a mental or physical impairment that makes the individual unable to protect his own interests" *referred to as the FINRA Senior Exploitation Rule* When a specified adult opens and account, FINRA requires members to make reasonable efforts to obtain the name of and contact information for a trusted contact person. This person must be someone age 18 or older who may be contacted about the customer's account. The rules do not require a customer to provide trusted contact information, only that the firm make the effort. Member firms may place a temporary hold on the distribution of funds or securities from the account of a specified adult. The temp hold is allowed in certain circumstances where the member reasonably believes that financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted. FINRA considers temporary to be up to 15 business days. This rule does not require members to place temporary holds on disbursements of funds or securities from the accounts of specified adults. The rule simply gives them permission to do so.

CIP continued

As part of its CIP, a member firm must, before opening an account, obtain the following information at minimum: -Customer name -Date of birth (for an individual) -Address, which must be: -for an individual, a residential or business street address -for an individual who does not have a residential or business street address, an Army Post Office or Fleet Post Office box number, or the residential or business street address of a next of kin or another contact individual. -Social Security number for an individual or TIN for business entity -For a non-US person, one or more of the following: TIN, a passport number and country of issuance, an alien identification card number, or the number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard. An exception is granted to persons who do not currently have, but who have applied for, a SSN. In this instance, the firm must obtain the number within a reasonable period and the account card must be marked "applied for".

Take Note: Business Accounts

C corporation earnings are subject to double taxation. Before distribution, the earnings are taxable to the corporation and then are taxed again to the shareholder when paid out as a dividend. Distributions from LLCs and S corporations are taxed only once because there is no taxation at the business entity level.

Education IRA

Called Coverdell ESAs and the contribution limit is $2000. ESAs allow after-tax contributions for student beneficiaries. COntributions must be made in cash and must be made on or before the date on which the beneficiary attains age 18, unless the beneficiary is a special needs beneficiary. Coverdell ESAs fund educational expenses of a designated bene by allowing after-tax (nondeductible) contributions to accumulate on a tax-deferred basis. When distributions are made from a Coverdell ESA, the earnings portion of the distribution is excluded from income when it is used to pay qualified education expenses. Withdrawn earnings are taxed to the recipient (bene) and are subject to a 10% tax penalty when they are not used to pay qualified education expenses. TAKE NOTE* if the money is not used by the bene's 30th birthday (except for special needs benes) it must be distributed and the earnings are subject to ordinary income taxes and a penalty of 10% In addition to qualified higher education expenses (postsecondary education), the account can be used for elementary and secondary educatino expenses and for public, private, or religious schools. The contribution to a coverdell ESA may be limited, depending on the amount of AGI and filing status.

Fee-Based Account

Charge a single fee (either fixed or a percentage of assets in the account) instead of a commission-based charge for brokerage services. Fee-Based accounts are appropriate for at least moderate level of trading activity. Low level will probs be better off with commission based charges. Before opening a fee-based account, investors must be given a disclosure document describing the services to be provided at the cost. Fee-based tend to reduce chances of abusive sales practices like CHURNING. (rep engages in excessive buying and selling of securities in a customer's account to generate commissions that benefit the broker. Red flag being frequent in-and-out purchases and sales of securities that don't appear necessary to fulfill the customer's investment goals. REVERSE-CHURNING: Where reps recommend switching from a commissions based account to a fee-based account where the fee ends up being more than the commissions would be. Fee-based are not the same as a WRAP account. Wrap accounts are where firms provide a group of services. The account is charged a SINGLE fee, usually a percentage of assets being managed. The firm offering a wrap account has to register as a IA in addition to their BD registration.

Ineligible and Inappropriate Investments

Collectibles, including antiques, gems, rare coins, works of art, and stamps, are not acceptable IRA investments. Life insurance contracts (such as whole life and term) may not be purchased in an IRA. Tax-free municipal bonds, municipal bond funds, and municipal bond UITs are eligible, but generally are considered inappropriate for an IRA (or any tax qualified plan) because their yields are typically lower than those of other similar investments, and the income generated is taxable on withdrawal from the IRA.

Tax Advantages of 403bs

Contributions are excluded from a participants gross income Participants' earnings accumulate tax-free until distribution

Key points to remember about Roth IRA

Contributions are not tax deductible Distributions are tax free if taken after age 59.5 and a roth account has been open for at least 5 years contributions can be made at any age as long as there is earned income. distributions are not required to begin at 72 if b/c of death, disability, or first-time home purchase, the distribution can be qualified and not subject to tax or the 10% early penalty A minor can be named as beneficiary The contributions may always be withdrawn without tax or penalty. It is only the earnings here the five years/age 59.5 rules apply to avoid tax and penalties.

Roth IRAs

Created by the Taxpayer Relief Act of 1997. Contributions to Roth IRAs are NOT tax deductible. Earnings are no just tax deferred, they can be tax-free. Earnings accumulated may be withing tax-free 5 years after the initial deposit provided that: -account holder is 59.5 or older -money withdrawn is used for the first time purchase of a principal residence (up to $10,000) -account holder has died or become disabled Regular contributions may always be withdrawn tax free because they are made with nondeductible contributions.

Margin Account

Customer can use some cash and some credit to purchase securities. Using borrowed money is called financial leverage. You can buy more securities using credit than just using cash. (like a mortgage, not paying in full for the security and borrowing the rest) The securities firm lends the necessary funds at the time of the purchase, with the securities in the portfolio serving as collateral for the loan. This is called buying securities on margin. The term margin refers to the minimum amount of equity a customer must deposit to buy securities. The customer incurs interest costs on the amount of money put in as a loan from the securities firm. Since there is borrowed money, the risk is greater. The borrowed money is deb that must be repaid. The customers who open margin accounts must meet certain minimal suit requirements. Leveraging can allow a greater benefit when the security increases and also a greater loss than the original investment if the security price goes down.

Power of Attorney (POA)

Customer must file written authorization with the BD giving that person access to the account. This authorization in writing HAS to be received for activity in the account to be done. Limited and Full. Also Durable. Durable POA: The person maintains power over the account even upon the grantor's incapacitation. This could be because of physical or mental causes. Most common for aging parents. Upon the death of either principal to the durable power of attorney, the power is terminated. **The durable POA survives the physical or mental incompetence of the grantor but not the death of either party.

Defined Benefit Plans

Designed to provide specific retirement benefits for participants, such as fixed monthly income. Regardless of investment performance, the promised benefit is paid under the contract terms. A defined benefit plan sponsor assumes the investment risk. The benefit is usually determined by a formula that takes into account years of service and average salary for the last five years before retirement. Older, highly compensated employees are likely to have the largest annual contributions on their behalf. B/c of the expenses and complexities involved, only 4% of workers had defined benefit plans in 2018. 1979 had 28%. Take Note**B/c of the actuarial assumptions and computations, the amount of the annual contributions to the plan has to be figured by an actuary.

Withdrawals from Traditional IRAs

Distributions may begin w/out penalty after age 59.5 and must begin by april 1 of the year following the year an individual turns 72. Distributions made before age 59.5 are subject to a tax penalty and withdrawals less than the required RMD after 72 may also incur tax penalties. Take Note* Must take the first RMD after the owner turns 72. It can be delayed until the following april 1. For all subsequent years, the RMD must be taken by december 31. 10% early withdrawal penalty unless they are because: death disability up to 10k for first time home purchase qualified education expenses for immediate family member including grandchildren certain medical expenses in excess of AGI limit THESE exceptions also apply in the case of a nonqualified (taxable) distribution from a roth IRA There is a 50% penalty for the amount falling short of the RMD. The amount is determined by the Internal Revenue Code (IRC).

Testable ERISA Provisions

ERISA was established to prevent abuse and misuse of pension funds. ERISA guidelines apply to private sector (corporate) retirement plans and certain union plans--not public plans like those for government workers. Significant ERISA provisions include: -Participation: this identifies eligibility rules for employees. All employees must be covered if they are 21 years or older and have performed one year of full-time service, which ERISA defines as 1,000 hours or more. -Funding: Funds contributed to the plan must be segregated from other corporate assets. Plan trustees must administer and invest the assets prudently and in the best interest of all participants. IRS contribution limits must be observed. -Vesting: vesting defines when an employer contribution to a plan becomes the employee's money, such as an employer-matching contribution to a 401k plan. ERISA limits how long the vesting schedule can last before the employee is fully vested. Note that an employee is always fully vested in the employee's own contributions to a plan -Communications: the plan document must be in writing, and employees must be given annual statements of account and updates of plan benefits -Nondiscrimination: All eligible employees must be treated impartially through a uniformly applied formula -Beneficiaries: benes must be named to receive an employees benefits at death.

Roth IRAs

Eligibility Requirements: Limits based on income. Anyone with earned income is eligible to open a Roth IRA provided the person's AGI falls below specified income levels. The actual numbers are never tested.

Stock Purchase Plans

Employee Stock Purchase Program: These allow employees to purchase company stock. Employee stock purchase plans are essentially a type of payroll deduction plan that allows employees to buy company stock without affecting the transactions themselves. Money is automatically taken out of a participant's paycheck on an after-tax basis every pay period and accrues in an escrow account until it is used to buy company shares on a periodic basis, such as every 6 months. These plans are similar to other types of stock option plans in that they promote employee ownership of the company but do not have many of the restrictions that come with more formal stock option arrangements. Basis of it: -contributions should be 1%-10% of salary. Contribution is a payroll deduction. This is calculated on pretax salary but TAKEN AFTER TAX. -at end of purchase period, usually every 6 months, the employer will purchase company stock for participants using contributions during the purchase period. There will be a discount on the purchase price. The employer takes the price of the company stock at the beginning of the purchase period and the price at the end of the purchase period, whichever is lower, and gives a discount from that price. -participants can sell the purchased stock right away or hold on to the stocks longer for preferential tax treatment.

Stock Options

Employer may offer stock options that give an employee the right to purchase a specified number of shares of the employer's common stock at a stated price over a stated time period. Unlike qualified retirement plans, there are no nondiscrimination requirements for these plans. For publicly traded stock, the strike price (the grant or exercise price) is usually the market price of the stock at the time the option is granted. In most cases, there is a minimum time the employee must remain with the company to be able to use the option (the vesting period). The hope of the employee is that the market price of the employer's stock will increase in value. Then the employee will be able to purchase the stock by exercising the option at the lower strike price and then sell the stock at the current market price. Only available to current employees of the issuing company. Most states require that the stock option plan be approved by the board of directors. Please note that these are not the same as put and call options.

Limited Partnership (LP)

For a LP, management(and liability) is assigned to the general partner(s), while the limited partner(s) are passive and have liability limited to their investment. This is the typical case with the direct participation programs (DPPs) discussed in unit 11. Suitability decisions are similar to a general partnership except that the limited partners do not have the full liability of the general partner(s).

Take Note

For exam purposes, you can postpone beginning distributions until the later of: -April 1 of the calendar year after you turn 72 or -April 1 of the calendar year following your retirement (but only for qualified plans, not IRAs)

IRA Investments

Funds in an IRA account may be used to buy stocks, bonds, mutual funds, UITs, LPs, REITS, US gov securities, and gold or silver coins minted by the US treasury department (American Eagles), as well as certain platinum coins and certain gold, silver, palladium, and platinum bullion, annuities, and many other investments. IRA investments should be relatively conservative and should reflect the investor's age and risk tolerance profile. B/c an IRA serves as a source of retirement funds, it is important that the account be managed for adequate long-term growth.

Time for Contributions

IRA contributions for a specific taxable year may be made anytime from January 1 of that year through the required filing date of that year's return. (generally April 15 of the next year, unless the 15th falls on a holiday or weekend). If the individual obtains filing extension, the deadline is still April 15. Test Topic Alert* The exam may try to trick you into thinking that you can make a contribution later than April 15 if you have received an extension to file your taxes. You CAN'T! You should know that an extension does not give your more time to pay taxes, it only extends the time that you have to file your return.

Nondeductible Capital Withdrawals

IRA investors who contribute after-tax dollars to an IRA are not taxed on those funds when they are withdrawn from the account, but taxpayers are taxed at the ordinary income tax rate when they withdraw funds resulting from investment gains or income. As stated previously, if the client is in the middle part of the phaseout range resulting in some of the contribution being pretax (deductible) and the rest post-tax, the IRS has a formula to determine how much of the money withdrawn is nontaxable. Take Note* The early withdrawal penalties for all IRAs are waived in the event of death or disability Test Topic Alert* Assume questions are about TRAD IRAs unless they specifically state otherwise. Test Topic Alert* Income and capital gains earned from investments in any IRA account are not taxed until the funds are withdrawn and, if a qualified withdrawal, are not taxed at all in the case of a Roth.

60-Day Transfer

IRA rollover, 60-day rollover. Account owner may take temporary possession of the funds to move the retirement account to another custodian. The account owner may do so only once per 12-month period, and the rollover must be completed within 60 calendar days of the funds' withdrawal from the original plan. 100% of the withdrawn amount must be rolled to the new account or the unrolled balance will be subject to income tax and, if applicable, early withdrawal penalty. A participant in an employer-sponsored qualified plan may move her plan assets to a rollover IRA if she leaves the company and elects to take a lump-sum distribution. If the participant does take possession of the funds, she must complete the rollover within 60 calendar days of withdrawing the funds from the qualified plan. When the participant takes possession of the funds from a qualified plan to make a rollover, the payor of the distribution must, by law, withold 20% of the distribution as a withholding tax. The participant must, nonetheless, roll over 100% of the plan distribution, including the funds withheld, or be subject to income tax and, if applicable, an early withdrawal penalty.

Trustee to Trustee Transfer

IRA transfer, t to t transfer are when account assets are sent directly from one IRA custodian to another, and the account owner never takes possession of the funds. Unlike the one per 12 months maximum with an IRA rollover, the number of IRA transfers an account owner may make per year is unlimited. Direct rollovers and transfers generally make better sense than 60-day rollovers because the 20% federal tax witholding does not apply to direct transfers of portfolios, and beacuse there is no specified time limit, you don't have to rush to meet the 60 day requirement. Take Note* A direct rollover is different from a transfer b/c it involves two different types of plans. For example, one would use a direct rollover to move funds from a 401k plan to an IRA while the transfer is from an IRA at one brokerage firm to an IRA at another.

457 Plans

Important Facts: -these plans are exempt from ERISA--nongovernmental plans must be unfunded to qualify for tax benefits, while government plans must be funded -these plans are generally not required to follow the nondiscrimination rules of other retirement plans -plans for tax-exempt organizations are limited to covering only highly compensated employees, while any employee (or even independent contractor) of a government entity may participate. -distributions from 457B nongovernmental tax-exempt employees may not be rolled over into an IRA, but there is no 10% penalty for early withdrawal. -it is possible to maintain both a 457 and 403b or a 457 and 401k and make maximum contributions to both. You could also have an IRA along with a 457. ***Government section 457 plans must be funded, must hold plan assets in trusts or custodial accounts for the benefit of individual participants. Non government 457 plans may NOT be funded.

Delivery vs Payment (DVP) Receipt vs Payment (RVP)

In a DVP/RVP arrangement, payment for securities purchased is made to the selling customer's agent, and or delivery of securities sold is made to the buying customer's agent in exchange for payment at time of settlement. Normally used for institutional accounts, this is a cash-on-delivery settlement. The BD handling the trade must verify the arrangement between the customer and the bank or depository, and the customer must notify the bank or depository of each purchase or sale. There is a unique 35-day rule that applies to these transactions.

Contributory vs Noncontributory Plans

In a contributory plan, both the employer and employee make contributions to the account. In a noncontributoryplan, only the employer makes the contributions. 401k = contributory, the employee determines how much to contribute and the employer may match it up to a certain percentage.

New Account From continued

In addition to earlier stipulations, FINRA asks that each member also make reasonable efforts to obtain, before the settlement of the initial transaction in the account, the following information to the extent it is applicable to the account: -The customer's TIN or SSN -The occupation of customer and name and address of employer -Whether the customer is an associated person of another member *Take note: The firm wants to know if any person opening an account is an insider (office, director, or major shareholder) of a public company. This is due to insider trading and restricted stock) Member firms must make a good-faith effort to obtain this information. However, if the customer neglects or refuses to provide all the information, or is unable to provide it, then the rule excuses the firm.

Definitions: Tax-Deferred

Income tax is put off (deferred) to a later time. In most retirement plans, tax on the amount of the contribution is usually deferred until withdrawal. Tax on earnings is always deferred until withdrawal.

Adjusted Gross Income

Is computed on the bottom of the first page of your form 1040. When you do your taxes, you begin by listing all your earned income plus other income such as interest and dividends, capital gains, alimony received, and profits from a business you may own. From that total, you deduct certain items to arrive at the AGI. Amount the more testable items that are deductible are: -TRAD IRA contribution -alimony paid as part of a pre-January 1, 2019, divorce decree -self-employment tax -penalties paid on early withdrawal from a savings account Take Note* These numbers will not be tested because they change every year. It is the concept that is importnant. Test Topic Alert* Please note that although tax-exempt income from municipal securities is shown on form 1040, it is not included in AGI.

Joint Tenants with Rights of Survivorship

JTWROS, ownership states that a deceased tenant's interest in the account passes to the surviving tenant. MOST COMMON FOR SPOUSES. Ownership is EQUAL

Moving IRAs

May move investments and funds from one IRA to another through one of 3 methods: 60-day rollover Direct Rollover Trustee to trustee transfer

Pattern Day Trading Account continued..

Member firms who promote day trading strategies must implement procedures to approve day trading accounts. Before opening an account, the member must: -provide the customer with a risk disclosure statement that outlines all the risks associated w/ day trading (the statement can be furnished in writing or electronically) -approve the account for a day trading strategy or receive from the customer a written statement that the customer does not intend or engage in day trading.

Coverdell ESA continued

More than one person can contribute to a Coverdell ESA for a single bene. The total contribution for a single bene can't exceed $2,000 in any given year. Key features: -contributions can be made by multiple adults for one child totaling $20000 for a single year -Up to $2000 per year until the child's 18th BDay. (exception for special needs) -Contributions are not tax deductible, but all earnings are tax deferred -distributions are tax-free if they are taken before age 30 and used for eligible expenses -If the accumulated value is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty on the earnings or rolled over into a different Coverdell ESA for another family member. Their definition of family is extremely broad and allows cousins, aunts, uncles, and even in-laws.

Employer Sponsored Retirement Plans: Tax-Sheltered Annuities 403b Plan

Most common for those employed by the public school system. This plan, the 403b plan, is also available to many nonprofit organizations under section 501(c)(3) of the Code. Tax-Sheltered Annuities (TSAs) offered through 403b plans are available to employees of: -Public educational institutions -Tax-exempt organizations -Religious organizations Qualified employees may exclude contributions from their taxable incomes provided they do not exceed limits. Qualified annuity plans offered under section 403b of the IRC sometimes referred to as TSAs, are intended to encourage retirement savings. To ensure this objective, 403b plans, are subject to tax penalties if withdrawn before age 59.5 Clergy, employees of charitable institutions, private hospitals, colleges, and universities, elementary, 2ndary schools, zoos, museums, all eligible as long as they are at least 21 years old and have completed one year of service. TSAs are funded by elective employee deferrals. The deferred amount is excluded from the employee's gross income, and earnings accumulate tax-free until distribution. A written salary reduction agreement must be executed between the employer and employee. An employer can make contributions to a 403b solely on behalf of the covered employee or in conjunction with an employee deferral. Distributions are 100% taxable, and a 10% penalty is applied to distributions taken early before age 59.5 Test Topic Alert* Students can't be a participant in an educational institutions TSA. The plan is only available to employees.

Investments of 403bs

Mutual funds are allowed but mote than 85% of all 403b money is invested in either fixed or variable annuities.

Roth IRA withdrawals

NO RMD. The account can grow tax-free until the holder decides to take it out.

Nonqualified Plans

NQ plans may be used to favor certain employees (typically executives) because nondiscrimination rules are not applicable to nonqualified plans. That is because these plans do not have to comply with ERISA.

Ineligible Investment Practices

No short sales of stock, speculative option strategies, or margin account trading is permitted in an IRA or any other retirement plan. Covered call writing is allowed.

Defined Contribution Plans

Offer no specific end result, but, focus on current, tax-deductible contributions. Include money purchase pension plans as well as PSP and 401k plans. The maximum employer contribution is significantly greater. Defined contribution plan participants' funds accumulate until a future event, generally retirement, when the funds may be withdrawn. The ultimate account value depends on the total amount contributed, along with interest and capital gains from the plan investments. In this type of plan, the plan participant assumes the investment risk.

Custodial Accounts

Only one owner but two names are on the account. Custodian and beneficial owner (minor). Used to be UGMA, but now only one state uses that. Now the rest uses UTMA. The minor is not considered a legal person, the minor cannot be held to contracts. The custodian for the minor enters all trades. UTMA expands the types of property you can transfer to a minor and provides that you can make other types of transfers besides gifts. The essential principles of both acts are the same, the difference is greater flexibility of UTMA.

New Account Form

Opening an account begins with the new account form. FINRA Rule 4512 requires that member firms create a record for each account with an individual customer that includes the following information: -Customer's name and residence address -Whether the customer is of legal age -Name(s) of the firm's associated person(s), if any, responsible for the account -If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity. -signature of the partner, officer, or manager denoting that the account has been accepted in accordance with the member's policies, and procedures for acceptance of accounts -Subject to the Trusted Person Contact Rule, (2165), name of and contact information for a trusted contact person age 18 or older who may be contacted about the customer's account

Corporate Sponsored Retirement plans

Pension plans, psp, 401k Employee Retirement Income Security Act (ERISA) regulates the establishment and management of corporate pension or retirement plans, also known as private sector plans. All qualified corporate plans must be established under a trust agreement. A trustee is appointed for each plan and has a fiduciary responsibility for the plan and the beneficial owners (plan holders).

Key Advantage of Prime Brokerage Accounts

Provides the client with the ability to trade with multiple brokerage houses while maintaining a centralized master account with all of the client's cash and securities. A prime brokerage account includes a list of specialized services, such as securities lending, margin financing, trade processing, cash management, and operational support. Prime brokerage accounts are likely to be offered to a broker-dealers more active trading clients -like hedge funds-who may require a number of executing broker outlets to conduct their transactions and who can benefit by having margin requirements that are netted across all of the prime broker's position

Qualified Plans

Qualified Plans offer several specific tax benefits differing from those in nonqualified ones. Benefits of qualified plans are that: -Employer contributions are a current deductible expense -Employee contributions are generally made with pretax money -all earnings and growth in the account is tax-deferred until withdrawal -Certain protections are offered to employees under ERISA

Employer-Sponsored Retirement Plans

Qualified and Nonqualified. Qualified: allow pretax contributions to be made Nonqualified: Funded with after-tax money. Both plans can allow money to grow tax-deferred until needed. Contribution limits for qualified retirement plans vary and are adjusted from time to time. A taxable distribution from any retirement plan is taxed as ordinary income, never as a capital gain. In a qualified plan, if all of the funds were contributed by the employer (noncontributory plan), the employee's tax basis (cost) is zero. If the employee's contribution was pretax, the basis for that is zero as well. Because everything above the cost is taxed at the employee's ordinary income rate af the time of distribution, in most cases all funds received are fully taxable.

Opening Accounts for Other Members' Employees

Regulatory bodies have rules and special procedures regarding the establishment of accounts for certain individuals, including: -employees of member firms and -spouses or minor children of member firm employees FINRA rule requires that a person associated with a member, before opening an account or placing an initial securities order with another member, notify the employer and the executing member (where the new account is to be maintained), in writing, of her association with the other member. Before the account can be opened, the employing FINRA member firm must grant written permission. Prior written consent from the employer is specified within the rule. Upon written request from the employing member firm, the executing member must supply to the employing member duplicate copies of confirmations, account statements, or any other account information requested. There are some exceptions. If the employee is purchasing MFs or VAs directly from the issuer, the rule does not apply. In addition, the rule does not apply when the employee is purchasing non-securities products, such as fixed annuities or term life insurance. The MSRB rule is almost the same. The major difference is that sending duplicate confirmations is required, not optional. One of the exceptions is the purchase of municipal fund securities. These are better known as 529 college savings plans. Take Note** These rules only apply when the individual opening the account is employed by or registered with a member firm of FINRA or the MSRB.

Custodial Accounts continued...

Reps should know the following UGMA/UTMA custodial account rules: -All gifts are irrevocable -An account may only have one custodian and one minor or beneficial owner -A donor of securities can act as custodian or appoint someone to do so -unless acting as a custodian, parents have no legal control over an UMGA/UTMA account or the securities in it. -A minor can be the beneficiary of more than one account, and a person may serve as custodian for more than one UGMA/UTMA provided each account benefits only one minor. -The minor has the right to sue the custodian for improper actions -These can only be opened as cash accounts--margin is not allowed.

Keogh Plans

Retirement plans for self-employed people. They were formerly referred to as H.R 10 Plans after the law that first allowed unincorporated businesses to sponsor retirement plans. B/c the law no longer distinguishes between corporate and other plan sponsors, the term is seldom used. However, you may still see it on your exam.

Required Beginning Date

Roth 401k plans have the same age 72 rule as IRAs. A participant must begin to receive distributions from her qualified retirement plan by april 1 of the later of the following years: -first year after the calendar year in turning 72 -first year after the calendar yeaar in which they retire from employment with the employer maintaining the plan -if still working over age 72 for that employer, RMDs are not required until retirement.

Additional Corporate Plans:

SEP Ira Simple Ira Keogh Plan Stock Purchase Plans and Stock Options

Simplified Employee Pension (SEP-IRA)

SEP plans are qualified individual retirement plans that offer self-employed persons and small businesses easy-to-administer pension plans. SEPs allow employers to contribute money to SEP IRAs that their employees set up to receive employer contributions. Under IRS rules, an eligible employee is an individual who meets all of the following: -21+ years old -worked for the employer in at least 3 of the last 5 years -has received at least $600 in compensation from the employer during the year. Self employed individuals may contribute up to a max amount each year to a SEP IRA for themselves or employees. Catch up contributions are not allowed for self employed persons. If an employee is enrolled in a SEP and the SEP permits non-SEP IRA contributions to be made into the SEP account, they may also make additional catch up contributions to the SEP if they are 50+ years old. Generally, an employer can take an income tax deduction for contributions made each year to each employee's SEP. The amounts contributed to a SEP by an employer on behalf of an employee are excludable from the employee's gross income.

Savings Incentive Match Plan for Employees (SIMPLEs)

SIMPLE plans are retirement plans for businesses with 100 employees or few who earned $5,000 or more during the preceding calendar year. In addition, the business cannot currently have another retirement plan in place. The employee makes pretax contributions into a SIMPLE up to an annual contribution limit. The employer makes matching contributions. Matching contribution requirements and limits for employers specified by the IRS and include catch up contributions up to $3,000 for those age 50+. SIMPLE plans require immediate vesting. For small business wanting to have an inexpensive retirement plan for their employees, SIMPLE is the way to go.

Examples of nonpublic personal informations

SSN, account balances, transaction history, information collected through internet cookies

Custodial Accounts continued

Securities in an UGMA/UTMA account are manged by a custodian until the minor reaches the age of maturity, or in the case of UTMA, the age determined by the specific state. The custodian has full control over the minor's account and can: -buy or sell securities -exercise rights or warrants -liquidate, trade, or hold securities Custodian may use the property in the account to help the minor's support, education, maintenance, general use, or benefit. However, the account is not normally used to pay expenses associated with raising a child, such as the basic needs of food, clothing, and shelter.

Joint Account: Tenants in Common

TIC ownership provides that a deceased tenant's fractional share in the account goes to that tenant's estate. TICs are most commonly used for nonspousal relatives or friends. Ownership can be UNEQUAL.

Transfer on Death (TOD)

TOD is a type of account registration that allows the owner of the account to pass all or a portion of it, upon death, to a single or multiple beneficiaries. No specific legal documents are needed. Furthermore, the bene's and percentages can be changed as often as desired. TODs AVOID probate, but the assets in the account do not avoid estate tax, if applicable. TOD accounts are available for individual accounts and certain joint accounts like JTWROS but not TIC.

Traditional IRAs

TRAD IRA allows a maximum tax-deductible annual contribution of the lesser of $6,000 per individual or $12,000 per couple, or 100% of taxable compensation for the taxable year 2019. The income and capital gains earned in the account are tax-deferred until the funds are withdrawn. Compensation for IRA purposes: -Wages, salaries, and tips -commissions and bonuses -self-employment income -alimony -nontaxable combat pay Not Compensation for IRA purposes -Capital Gains -Interest and dividend income -Pension or annuity income -Child support -Passive income from DPPs Catch-Up Contributions for Older IRA owners The Economig Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was the source of the legislation permitting certain individuals to make additional contributions to their IRAs. Individuals aged 50 and older are allowed to make catch-up contributions to their IRAs above the scheduled maximum annual contribution limit. Can catch up in either a TRAD or a ROTH IRA. Amoun tis $1,000 TEST TOPIC ALERT** The exam may require you to know the EGTRRA is responsible for the catch-up provisions. Any taxpayer of any age who reports earned income for a given tax year may contribute to a TRAD IRA. If one spouse has little or no earned income and a joint tax return is filed, a spousal IRA may be opened for that person and the contribution limits and tax treatment are the same as for any other IRA.

IRAs

Take Note* Although Individual Retirement Arrangements is the technical IRS term, b/c everyone refers to these as IRAccountss, we're going to use this common phrase to avoid confusion. IRAs were created to encourage people to save for their retirement. Any individual with earned income can open and contribute to an IRA. Two types of IRAs may be tested, with different contribution, tax, and distribution characteristics: TRAD and ROTH IRAs. IRAs are not to be confused with retirement plans used by businesses such as 401k plans and 457 plans. TAKE NOTE** Although we may include some actual contribution limits, it is unlikely that you will have to know any other than the IRA and Coverdell numbers

CIP continued.....

The CIP must include procedures for responding to circumstances in which the BD can't form a reasonable belief that it knows the true identity of a customer. These procedures should describe: -when the BD should not open an account -the terms under which a customer may conduct transactions while the BD attempts to verify the customer's identity -When the BD should close an account after attempts to verify a customer's identity fail -when the BD should file a suspicious activity report (SAR) in accordance with applicable law and regulation

Cash Account

The basic investment account. Anyone eligible to open an investment account can open one. The customer MUST pay in full for any securities purchased.(some exceptions though). Accounts that may ONLY be opened with cash include: -personal retirement accounts (IRAs) -corporate retirement accounts (401ks) -custodial accounts (UTMA, Coverdell ESAs)

Definitions: Deductible Contribution

The contribution made by the individual, whether an employee contribution to a qualified plan such as a 401k plan, or by any individual to a traditional IRA. This means the amount contributed is pretax or otherwise deductible on the tax return.

Test Topic Alert: New Account

The customer's signature is not required on the new account form. The only signature required to open an account is a partner, officer, or manager (a principal) signifying that the account has been accepted in accordance with the member's policies and procedures for acceptance of accounts. SEC Rule 17a-3 requires delivery of a copy of the account information within 30 days of opening (and every 36 months thereafter). Customers are to verify the information and note any relevant changes to the information.)

Employer Deductions

The employer can usually deduct, subject to limits, contributions made to a qualified plan. The deduction limit for those contributions to a qualified plan depends on the kind of plan in place. Test TOPIC alert* Unlike an annuity payout or life insurance premium, contributions to a defined benefit plan are not affected by the participant's sex. Test Topic alert** Employer contributions to defined benefit or defined contribution (money purchase) pension plans are mandatory. Although profit-sharing plans and 401k plans are technically defined contribution plans, they are not pension plans, and employer contributions are not mandatory. In all cases, allowable employer contributions are 100% deductible to the corporation. There is no tax obligation to the employee until withdrawal.

Business Accounts: Sole Proprietorship

The simplest form of business organization and is treated like an individual account. The same issues of suitability that apply to individual accounts apply to the management of sole proprietorship accounts. In a SP, all income or loss, is that of the individual. One of the risks of operating in this fashion is that all of the owner's assets are liable for the debts of the business. You can lose everything.

Payroll Deduction Plan

This plan allows employees to authorize their employer to deduct a specified amount for retirement savings from their paychecks. The money is deducted after taxes are paid and may be invested in any number of retirement vehicles at the employee's option.

Definitions: Qualified

This term by itself means that contributions made with pretax dollars and earnings in the account are tax-deferred until the funds are withdrawn. This can apply to either a qualified plan or a traditional IRA.

Approval and Documentation of Changes in Account Name or Designation

Under FINRA rules, no change in any account name(s) can be made unless the change has been authorized by a qualified and registered principal designated by the member. This principal must, before giving her approval of the account designation change, be personally informed of the essential facts relative thereto and indicate her approval of such change in writing. The essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records.

Substantially Equal Periodic Payment Exception

Under IRS rule 72(t): states that if you receive IRA payments at least annually based on your life expectancy (or the joint life expectancies of you and your beneficiary), the withdrawals are not subject to the 10% penalty. The IRS has tables for determining the appropriate amount of each payment at any given age.

Customer Identification Program (CIP)

Under provisions of the USA PATRIOT Act of 2001, financial institutions, such as BDs, are required to insitute a CIP designed to Verify the identity of any new customer -for an individual, an unexpired government-issued identification such as a drivers license, passport, military ID, or state ID -for a person other than an individual, documents showing the existence of the entity, such as a certified articles of incorporation, a government-issued business license, a partnership agreement, or trust instrument Maintain records of the information used to verify identity Determine whether the person appears on the OFAC list of known or suspected terrorists or terrorist organizations. OFAC regulations prohibit transactions with certain persons and organizations listed on the OFAC website such as Terrorists and Specially Designated Nationals and Blocked Persons, as well as listed embargoed countries and regions. Firms must check this list on an ongoing basis to ensure that potential customers and existing customers are not prohibited persons or entities and are not from embargoed countries or regions before transacting any business with them. These rules are designed to prevent, detect, and prosecute money laundering and financing of terrorism.

Bulk Transfers

When customers sell securities held in their accounts, cash representing the proceeds of those sales are deposited into their accounts. In many cases, that cash is swept into a money market mutual funds where it will earn income until the money is either withdrawn or used for a new purchase. This is known as a SWEEP ACCOUNT. Sometimes the BD has a reason to select a different money market fund for its clients. Contacting each of the clients individually to receive their consent is not practical. Many member firms have thousands or even millions of clients. FINRA rules do permit member firms to make bulk exchanges at net asset value of money market mutual funds utilizing negative response letters without obtaining affirmative consent, but only when specific conditions are met.

Prime Brokerage Account

Where a customer(institution) selects one member firm(prime broker) to provide custody, trading, and other services, while other firms, called executing brokers, typically execute most of the trades placed by the customer. The prime broker must sign an agreement with the customer spelling out the terms of the agreement as well as names of all executing brokers the customer has contracted with. The prime broker will enter into written contracts with each executing broker named by the client. Customer receives trade confirms and account statements from the prime broker and the responsibility of the compliance of certain trading rules rests with the executing brokers.

Test topic alert

You may see a question that asks for the type of plans that ERISA regulates. ERISA applies to private sector corporate plans only. It does not apply to plans for federal or state government workers (public sector plans), nor is it applicable to nonqualified plans