Series 66 Chapter 24

Which of the following statements regarding a traditional IRA for someone filing a 2021 tax return is TRUE? A) With sufficient earned income, a taxpayer who contributes $6,000 to a Roth IRA can also contribute $6,000 to a traditional IRA. B) Distributions without penalty may begin after age 59½ and must begin by April 1 of the year preceding the year an individual turns 72. C) The income and capital gains earned in the account are tax deferred until the funds are withdrawn. D) Distributions before age 59½ are subject to a 10% penalty in lieu of income taxes.

C

A 61-year-old wanting to take a lump-sum distribution from his Keogh will A) be taxed at ordinary income rates B) incur a 50% penalty tax C) incur a 10% penalty tax D) be taxed at long-term capital gains rates

A

​In terms of being considered compensation for determining the allowable contribution to an IRA, receipt of which of the following would be included? A) Alimony received as part of a divorce decree signed in 2018 B) Deferred compensation C) Child support D) Taxable interest income

A

Your client is the sole beneficiary of her late father's IRA, which is valued at $500,000. The client indicates that she has no need for the money and would rather it go to her children. To accomplish this, she would have to A) skip the IRA B) refuse the IRA C) disclaim the IRA D) reject the IRA

C

Which of the following permits the highest annual contributions? A) A traditional spousal IRA for which the contribution has been deducted B) A SEP IRA C) A Coverdell Education Savings Account D) A traditional nondeductible IRA

B

You are discussing features of qualified pension plans with a client. You state that in one type of plan "the eventual amount of pension benefits will depend upon the fund's investment performance." You must be referring to which of the following? A) IRA B) Defined contribution plan C) Deferred compensation plan D) Defined benefit

B

Probably the most significant benefit of saving for retirement using a Roth IRA is A) tax-deferred accumulation B) larger contributions than a traditional IRA C) tax-free treatment at withdrawal D) tax-deductible contributions

C

Prohibited investments in an IRA would include all of the following EXCEPT A) gems B) artwork C) municipal bonds D) stamps

C

If an employer installs a Keogh plan, it must include all full-time employees A) with at least 1 year of service. B) age 25 or older. C) with at least 3 years of service, regardless of age. D) age 21, with at least 1 year of service.

D

If Janet established a Coverdell Education Savings Account for her grandson, in each successive year, she may contribute A) $2,000.00 B) $1,000.00 C) $3,000.00 D) $4,000.00

A

Who is obligated for the payment of taxes in an UTMA account? A) Parent B) Child C) Custodian D) Donor

B

Gail's minimum required distribution this year from her IRA is $5,000. If she takes $8,000, the penalty will be A) $1,500 B) $0 C) $2,500 D) $2,000

B There is no penalty if a participant withdraws more than the required minimum distribution.

A 40-year-old schoolteacher would find her retirement needs best served by contributing to A) a 401(k) B) a Roth IRA C) a 403(b) D) a traditional IRA

C

A tax-advantaged medical savings account available to employees enrolled in a high-deductible health plan is A) a Section 162 plan. B) Medicare, Part C. C) an HSA. D) an FSA.

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? A) Purchase a single premium annuity to maintain tax-deferred status B) Place the distribution in a Section 529 account to avoid tax C) Purchase municipal bonds to avoid tax D) Roll over the distribution into an IRA within 60 days to maintain tax-deferred status

D

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 A) U.S. Treasury zero-coupon bonds. B) opening a new account in the client's name for this purpose. C) an UTMA account. D) a Section 529 plan.

D

Minnie's Uncle Bob would like to contribute to his one-year-old niece's education expenses. He is able to contribute a maximum of $1,200 per year. There is no other family member in a position to make a contribution. If minimizing the taxes at withdrawal and low cost investing, such as index mutual funds, is the objective, which of the following would you recommend? A) Section 529 plan B) UTMA C) Dollar cost averaging D) Coverdell ESA

D When you see contribution levels at $2,000 per year or less, that is a signal that Coverdell is the proper recommendation. Higher levels would be the 529 plan. There are no specific tax benefits to the UTMA. In fact, tax rates on unearned income can be rather high. Although Uncle Bob might dollar cost average by investing $100 per month, that does not specifically answer the question.

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

B

Under ERISA, a fiduciary must act in all of the following ways EXCEPT A) confining investments to only those most likely to achieve growth B) with care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character C) in accordance with the governing plan documents unless they are not consistent with ERISA D) solely in the interest of plan participants and beneficiaries

A

When a nonspouse inherits an IRA, the beneficiary can choose from all of the following options except A) keeping the money in the deceased's IRA B) opening a separate inherited IRA in the name of the deceased FBO the beneficiary C) withdrawing all of the funds immediately D) withdrawing the funds over a 10-year period following the death of the owner

A

Which of the following does not provide for a change of beneficiary? A) UTMA account B) Section 529 plan C) Roth IRA D) Coverdell ESA

A

Which of the following investments could be found in an UTMA but not an UGMA? A) Real estate B) Bonds C) Preferred stock D) Sector mutual fund

A

Which of the following plans does NOT allow a catch-up contribution for individuals who are at least 50 years old? A) 529 B) 401(k) C) 403(b) D) IRA

A

Gaston is a police officer and wishes to contribute to a retirement plan sponsored by the city. Gaston wants the flexibility of being able to have unfettered penalty-free access to his funds before reaching age 59½. This can only be accomplished if Gaston contributes to A) a 403(b). B) a 457 plan. C) a SEP-IRA. D) a 401(k) plan.

B

Which of the following statements about 401(k) plans are CORRECT? 401(k) plans are a type of defined benefit retirement plan. An employee's elective deferrals are made with pre-tax dollars. Earnings on the contributions to a 401(k) accumulate on a tax-deferred basis.

2, 3

In the administration of a qualified retirement plan, which of the following individuals is considered to be a fiduciary? A) A financial planner acting as a trustee over the plan assets B) The marketing director of the plan sponsor C) A highly-compensated employee who participates in the plan D) A CPA who prepares the plan's Form 5500 for an annual fee

A

In which of the following retirement plans would there be mandatory withdrawal requirements once you are past age 72? A) A traditional IRA B) A Roth IRA C) A qualified plan while you are still working for that employer D) An annuity, but you are still working

A

Jesse Liverless is the trustee of the Short Circuit Electric Corporation 401(k) plan. Jesse would be able to reduce his ERISA fiduciary exposure if A) the plan offered a broad index fund, a medium-term government bond fund, and a cash-equivalent fund B) the plan provided for account reports no less frequently than annually C) loans to participants were permitted D) the firm provided educational sessions to participants covering the basics of investing

A

Mrs. Jones, age 70, is retiring, and her employer has 3 investment options for her 401(k). You should advise her to A) leave the investments with her employer B) do a rollover to a traditional IRA C) do a rollover to a variable annuity under a Section 1035 exchange D) take a distribution of 100% of the funds in the account

B

One of your clients, a couple in their early 30s, asks you to recommend a plan to save for their newborn child's education. They are only able to contribute $1,800 per year. Which of the following would most likely be the best fit for their situation? A) Coverdell ESA B) Equity index annuity C) UTMA D) Section 529 plan

A

Employee contributions to a 401(k) plan are subject to Social Security taxes federal unemployment taxes federal income tax withholding state income tax withholding

1, 2

Which of the following statements are NOT true? The kiddie tax applies to any income received by a child under the age of 19. IRAs have advantages over other estate assets when left to charity. Simple trusts have to distribute income annually. For U.S. citizens, there is an unlimited marital estate tax deduction.

1, 2 The kiddie tax applies to unearned income only such as that received in an UTMA account. Leaving IRA assets to a charity offers the same estate tax benefits as any other asset. Simple trusts must distribute income annually, and there is an unlimited marital estate tax deduction between spouses who are U.S. citizens.

Which of the following is (are) TRUE regarding qualified pension plans? They must not discriminate. They must have a vesting schedule. They must be in writing. Every month the employer must update the current status of all accounts.

1, 2, 3

ERISA regulation does not apply to public school district retirement plans publicly traded utility company retirement plans federal government employee retirement plans

1, 3 ERISA rules only apply to private sector plans. Government or public sector plans are not subject to the Employees Retirement Income Security Act of 1974.

Which of the following statements are TRUE about both an individual Roth IRA and a Roth 401(k) plan? Contributions are made with after-tax dollars. One must have AGI below a certain level in order to maintain either Roth. If all the conditions are met, withdrawals are tax free. There are no RMDs at age 72.

1, 3 In any Roth plan, contributions are made with after-tax dollars, and assuming all conditions are met, withdrawals are tax-free. However, unlike the individual Roth IRA, there are no earnings restrictions on participants in a Roth 401(k) plan and RMDs must begin at age 72.

Which of the following statements is TRUE regarding Section 529 plans? Funds withdrawn for qualified education expenses are always free of federal income tax. Funds withdrawn for qualified education expenses are always free of state income tax. The maximum contribution limits are determined on a federal level. The maximum contribution limits are determined on a state level.

1, 4

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. Both traditional IRAs and Roth 401(k) plans have RMDs at age 72. If one is a participant in a Roth 401(k) plan, the earnings limits are waived for opening a Roth IRA.

2, 3 A Roth IRA and Roth 401(k) are 2 separate items, and maximum allowable contributions may be made to both. This is unlike the IRAs, where one can maintain both but the total contribution is the annual limit (currently $6,000 with a $1,000 catch-up). One of the things about a Roth 401(k) that is different from the Roth IRA is that RMDs must start at the same time as with traditional IRAs. Although one may participate in a Roth 401(k) without regard to AGI limits, that is not so with the Roth IRA.

Which of the following circumstances must be met for a fiduciary to trade options in a trust account? Special circumstances determined by the broker-dealer The trust agreement states the trustee has the power to trade options The trust's investment objectives are determined to be compatible with options trading Only covered options may be traded by a fiduciary

2, 3 A fiduciary account may only trade options if expressly authorized to do so and if suitable for the beneficial owner of the account.

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

2, 3 There are income limits that apply to Coverdell ESAs. Single individuals earning more than $110,000 per year are not permitted to open a Coverdell account, and married couples lose the ability to contribute when earnings exceed $220,000. However, there are no income limits restricting who is eligible to open and contribute to a Section 529 college savings plan.

Which of the following statements about plan fiduciaries under ERISA are TRUE? Plan fiduciaries sometimes have conflicting obligations to plan participants and other parties in interest. Plan fiduciaries must ordinarily diversify plan investments. Plan fiduciaries are personally liable for fines if they violate their fiduciary duties.

2, 3 Under ERISA, plan fiduciaries must act solely in the interests of plan participants and beneficiaries, and they may not place the interests of other interested parties above those of the plan participants and beneficiaries. They must diversify plan investments to minimize the risk of large losses, unless it would not be wise to do so. If they violate any of their fiduciary duties, they may be personally liable for large fines.

Terry Bolton opens a UTMA for each of his sons, Josh, age 12, and Drake, age 14. Under current tax regulations (2020 and beyond), after deductions and exemptions, how will the income in the UTMAs be taxed? Josh's income is taxed at his tax rate. Drake's income is taxed at his tax rate. Josh's income in excess of $2,200 is taxed at Terry's marginal tax rate. Drake's income in excess of $2,200 is taxed at Terry's marginal tax rate.

3, 4

A 55-year-old investor makes a withdrawal from his qualified pension plan. Which of the following can he do to avoid tax liability? A) Roll over the funds into an IRA within 60 days B) Transfer it as a gift to an UGMA account for his son C) Use the withdrawal to pay his current year's taxes D) Roll it over into a nonqualified annuity

A

Which of the following statements regarding Coverdell ESAs and QTPs is NOT correct? A) Coverdell ESAs currently permit up to $5,000 in annual contributions, whereas QTPs allow large contributions reaching as high as $300,000 and above. B) If a portion or all of the withdrawal (QTP) is spent on anything other than qualified higher education expenses, the distributee will be taxed at her own tax rate on the earnings portion of the withdrawal. C) Coverdell ESAs are designed to offer tax benefits to those individuals who wish to save money for a child/grandchild's higher education expenses. D) QTPs are extremely useful tools that provide significant tax savings, allow for substantial investments for a child's education and provide a tool for avoidance of gift and estate taxes if used correctly.

A

Which of the following statements regarding Section 529 plans is CORRECT? A) Qualified expenses could include tuition for attendance at a foreign university. B) Qualified expenses would include all residence costs incurred by a full-time student. C) Residents of some states receive a deduction on their federal income tax returns. D) Funds not used for qualified expenses by age 30 must be distributed or rolled over.

A

Which one, if any, of these transactions will be treated as a prohibited transaction under the provisions of the ERISA legislation? A) An investment adviser using the interest from plan assets to cover the adviser's office expenses B) A loan between a 401(k) plan and plan participant C) None of these transactions constitute a prohibited transaction under the provisions of the legislation D) The furnishing of office space to a plan trustee for reasonable compensation and fair rental value

A An investment adviser, as a fiduciary and disqualified person under the plan, is prohibited from using plan assets in payment of personal obligations (such as outstanding office expenses). Loans from a 401(k) plan to a participant are not prohibited transactions. The plan trustee may rent space from the plan (one of the plan's assets is an office building).

An employer whose 401(k) plan complies with ERISA Section 404 is placing investment risk with the A) plan participant B) Internal Revenue Service C) employer D) Securities and Exchange Commission

A In a 401(k) plan, a plan sponsor can shift investment risk to the employee by complying with ERISA Section 404(c) rules. In this case, the employee is making the investment decisions rather than the investment managers employed by the plan.

You have a client who is switching jobs. The HR department of the new company delivered a beautiful brochure describing all the benefits offered to employees. One of these is a noncontributory money purchase pension plan. When asked by your client for an explanation, you would reply that this plan has mandatory contributions of A) the employer but no employee contributions. B) both the employer and the employee. C) the employee but none for the employer. D) the employer and optional employee contributions.

A In a contributory plan, both the employer and employee make contributions to the account. In a noncontributory plan, only the employer makes the contributions.

One of your clients has just completed a divorce. The client is a participant in a 401(k) and has a traditional IRA. The divorce settlement includes a QDRO providing for half of the client's account to go to the ex-spouse. The ex-spouse also receives half of the client's IRA. With regard to the ex-spouse, which of the following statements is correct? A) Withdrawals from the IRA prior to age 59½ may be subject to the 10% penalty. B) The ex-spouse has 60 days to rollover the distribution. C) Withdrawals from the 401(k)prior to age 59½ may be subject to the 10% penalty. D) The name of the former spouse must appear on the ex-spouse's IRA.

A QDROs apply only to qualified plans and, therefore, if the ex-spouse withdraws funds from the 401(k) prior to age 59½, it will generally qualify for the exemption from the 10% penalty. In the case of withdrawals from the IRS, unless due to one of the allowable exceptions (death, disability) the 10% tax penalty applies. When there is a divorce and an IRA is split, the ex-spouse now has an IRA in his or her name with no mention of the previous owner. There is technically no distribution so there is nothing to rollover.

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) 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. B) The maximum allowable contribution to a Keogh Plan is substantially higher than that for an IRA. C) A participant in a Keogh Plan may also maintain an IRA. D) Owner-employee businesses and professional practices must show a gross profit in order to qualify for a tax-deductible contribution.

A Rollovers are permitted into an IRA regardless of any plans maintained. Tax-deductible contributions are not allowed unless there is potentially taxable income against which to deduct. Anyone with earned income may have an IRA, regardless of participation in another qualified plan, and the Keogh Plan contribution limits are much higher than those for an IRA.

Where would you be most likely to find an IPS? A) Defined benefit plan B) SPD C) GRAT D) IRA

A The investment policy statement (IPS), although not required under Department of Labor (DOL) rules, is generally found in corporate qualified plans, such as the defined benefit or defined contribution plan. Because the investor manages the IRA, there is no need to prepare an IPS for participants to review.

One of the ways that individuals can accumulate funds for retirement is through individual retirement arrangements (IRAs). There are a wide range of investments eligible for inclusion in an IRA and would include all of the following except A) fixed annuity contracts. B) life insurance contracts. C) exchange-traded funds. D) specified collectibles.

B

All of the following are true about education funding plans except A) Section 529 plans allow a gift tax exclusion equal to five times the annual limit that may be repeated every 5 years B) a beneficiary of an ESA who withdraws the funds for nonqualified expenses will be taxed on the entire amount of the withdrawal plus a 10% penalty C) proceeds in 529s may be withdrawn income-tax free only if used for qualified educational expenses. D) proceeds in ESAs may be withdrawn income tax free for qualified education expenses even if the child is under age 18

B

Among the reasons why a corporation might choose to utilize a deferred compensation plan for retirement planning would be A) current tax savings on money contributed to fund the plan B) employees who leave the company prior to retirement would not receive benefits C) compliance with ERISA D) the plans are nondiscriminatory

B

Suzy Stanton's wealthy Uncle Ray is a client of yours and is asking for some advice on funding a program to save for Suzy's college education with the lowest possible tax impact. Ray tells you that he set up an UGMA account for Suzy's older brother, Sammy; but, when Sammy turned 18, he took the money, bought a motorcycle, and joined a commune. Ray wants to avoid seeing something like that happen again. What would probably be the best suggestion to help Ray meet his objectives? A) A Roth IRA for Suzy with Ray's name as co-owner B) A Section 529 plan C) A living trust D) An UTMA account

B

Two years after their wedding, Pam and Jim became the proud parents of child. Both grandparents want to help ensure educational funds for their new grandchild by using the Coverdell ESA. Assuming they are within the earnings limitations, which of the following would be permitted? A) $2,000 from Pam's parents and $2,000 from Jim's parents into separate ESAs B) $1,000 from Pam's parents and $1,000 from Jim's parents into separate ESAs C) $2,000 from Pam's mother, $2,000 from Pam's father, $2,000 from Jim's mother, and $2,000 from Jim's father D) $2,000 from Pam's parents and $2,000 from Jim's parents into a single ESA

B

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding EXCEPT A) corporate pension plans B) deferred compensation plans C) Keogh plans D) profit-sharing plans

B

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

B

Under which of the following circumstances would a premature distribution from a traditional IRA be exempt from the premature distribution penalty? A) A distribution taken at age 55 if the owner is retired B) When the distribution is paid in equal annual amounts over the owner's life C) When the account is fully funded with nondeductible contributions D) A distribution taken to satisfy the terms of a court-ordered property settlement

B A distribution from an IRA taken in equal annual amounts over the owner's life is not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs. The exception for qualified domestic relations orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs.

With regard to ERISA and a qualified retirement plan, which of the following would NOT constitute a conflict of interest between the plan and a fiduciary? A) A fiduciary sells a real estate investment to the plan at the current market rate. B) The fiduciary receives fees for acting as a trustee to the plan. C) A fiduciary participates in a transaction on the plan's behalf that involves a party with interests adverse to those of the plan, to ensure favorable terms for the plan. D) A fiduciary offers reduced commissions to the plan for transactions that are executed through his employing financial institution.

B A fiduciary may receive compensation from the plan's sponsor for acting as a trustee, if fees are reasonable and consistent with duties performed. When one is acting as a fiduciary for a retirement plan, no self-dealing is permitted. That means no buying from or selling to the plan.

A widower wants to fund a Section 529 plan for his daughter. What is the maximum amount he may initially contribute in 2019 without having to pay gift taxes? A) An unlimited amount because a gift occurs only when he irrevocably changes the beneficiary B) $75,000 C) $15,000 D) $150,000

B A special rule under Section 529 allows the donor to load front-end load contributions and avoid paying gift taxes. Five years' worth may be used under this method (5 × $15,000 = $75,000). If he remarries, his wife may also consent to gift split, thereby doubling this amount to $150,000. Please note: The annual exclusion was increased to $15,000 effective January 1, 2018.

ERISA, a federal retirement law, was created to protect which of the following? A) Banks and insurance companies B) Employees in the private sector C) Employees in the public sector D) Individual retirement accounts (IRAs)

B The Employees Retirement Income Security Act of 1974 (ERISA) is designed to cover employees in the private sector. In this context, private sector means corporate employees; public sector means government employees.

All of the following statements regarding qualified corporate retirement plans are true EXCEPT A) all qualified retirement plans are either defined contribution or defined benefit plans B) they are covered under ERISA C) with defined benefit plans, the employee bears the investment risk D) all corporate pension and profit-sharing plans must be established under a trust agreement

C

An agent taking which of the following actions would be committing a violation? A) Selling securities from a corporate account by using limited power of attorney trading authority for the account B) Buying securities in a cash account with the consent of the customer C) Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent D) Buying securities in a joint account at the request of one party only

C

An employer offers its employees the opportunity to use tax-deductible funds to pay for health costs, as long as they enroll in a high-deductible health plan. This would be a description of A) a TSA. B) an ETF. C) an HSA. D) a FSA.

C

To comply with ERISA Section 404(c), a 401(k) plan must satisfy all the following requirements EXCEPT A) sufficient information must be provided to plan participants about investment alternatives available under the plan to permit informed decision making. B) plan participants must have the ability to transfer assets among investment options at least quarterly. C) plan participants must be provided with the services of a Certified Financial Planner at least annually to assist them with investment decision making. D) plan participants must have access to at least 3 core diversified investment options.

C

Under ERISA, a pension portfolio manager may engage in writing covered options A) under any circumstances B) only during declining markets C) only if it fits with the objectives of the plan D) at no time; writing options is too high a risk

C

Under the Uniform Transfers to Minors Act, Ralph wants to give some stock to his brother's son, Jose. Jose's father, Bob, is the legal guardian, but he has failed the Series 7 exam 11 times. Which of the following is CORRECT? A) Ralph can be the custodian only if the securities are on the legal list of the state. B) Uncle Ralph cannot be the custodian, because he is not the legal guardian. C) Either Ralph or Bob can be the custodian. D) Bob cannot be the custodian because he is not qualified.

C

Which of the following is TRUE of the tax consequences when a participant in a noncontributory pension plan withdraws a monthly income at retirement? A) The income is taxable as capital gains. B) The income is nontaxable. C) The income is taxable as ordinary income. D) The income is partly taxed as ordinary income and partly taxed as capital gains.

C

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

C

With respect to a qualified retirement plan, fiduciaries must act in all of the following ways except A) solely in the interest of plan participants and beneficiaries. B) to diversify investments to minimize the risk of large losses, unless doing so is clearly not prudent under the circumstances. C) solely in the interest of the sponsoring employer. D) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent professional would use.

C

Your customer opens a Coverdell ESA for his niece. In order to meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be A) automatically reinvested back into the plan B) taxable to the uncle, the donor to the plan C) taxable to the niece, the beneficiary of the plan D) nontaxable to either party

C

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 rollover the entire account into an IRA, the tax treatment would be A) no current tax on the portion applicable to the mutual funds; ordinary income on the cost basis of the company stock; and long-term capital gains on the unrealized appreciation of the company stock when it is sold B) current tax at ordinary income rates on the unrealized appreciation of the company stock, ordinary income rates on the balance when withdrawals are taken C) no current tax, but any withdrawals would be taxed as ordinary income D) no current tax, but any withdrawals representing the gain on the company stock would be taxed as long-term capital gains

C As with any rollover from a qualified plan to an IRA, there is no current tax, but withdrawals are taxed at ordinary income tax rates. This client would have saved had he taken advantage of the NUA (net unrealized appreciation) approach. In that case, taking the company stock and putting it into a taxable account would have resulted in ordinary income tax on the $25,000 cost basis, and long-term capital gain rates on the appreciation whenever the stock was sold.

All of the following are advantages of a 401(k) plan EXCEPT A) the owner of the business may participate in the plan B) employees and the business may reduce current taxes C) the employer may make unlimited contributions, which generate unlimited tax deductions for the business D) tax deferral on the plan earnings is advantageous to employees

C Contributions are deductible by the employer but are not unlimited because contributions to a 401(k) are subject to a number of limits. Tax deferral on plan earnings is advantageous to employees. The owner of the business may participate in the plan.

Under ERISA, which of the following activities may a fiduciary employ for a corporate retirement plan? A) Lease office space to the plan. B) Charge a reasonable commission for the purchase of interests in a real estate partnership that the fiduciary owns. C) Employ third-party pension consultants to advise the plan on the purchase of complex financial instruments. D) Loan funds to the plan at favorable interest rates.

C Employing third-party consultants to advise the plan on complex financial instruments is permissible, but parties in interest cannot engage in self-dealing under ERISA.

Each of these would be considered an advantage of using a 529 plan rather than a Coverdell ESA to fund a child's future education except A) the 529 plan has no age limits. B) the 529 plan has no earnings limitation on the donor. C) the 529 plan is counted at a lower percentage of assets when applying for financial aid. D) the 529 plan allows for higher contribution levels.

C Funds in both plans are counted as assets of parents at 5.64% if owner is a parent or dependent student, so there is no difference. The 529 plan allows for far greater contribution levels and there is no income limitation on the donor as exists with the Coverdell ESA. The funds in the ESA must be used by the time the beneficiary is 30; no such age restrictions apply to the 529 plan.

Jason, a recently divorced individual, is currently 55 years old and has built up approximately $400,000 in several initially funded and rollover individual retirement accounts (IRAs). He now wants to take an early distribution from one of these IRAs. Which one of the following distributions will escape the imposition of a tax penalty for early withdrawal? A) A distribution made on account of financial hardship as determined by Jason's financial planner B) A distribution made to Jason's ex-wife under a qualified domestic relations order (QDRO) C) A distribution made in payment for higher-education costs of Jason's granddaughter D) A distribution made upon separation of service from Jason's current Employer

C Jason can take a distribution from any of his IRAs without imposition of a tax penalty as long as it is made in payment of higher-education costs (tuition, fees, books, supplies, and equipment) for his granddaughter. QDROs do not apply to IRAs. Separation from service will not affect Jason's ability to take a distribution from his IRA. A distribution due to financial hardship is always subject to the early distribution penalty if the participant is not yet age 59½.

The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is NOT true? A) Even though these plans are generally under state control, the rollover rules are federal law. B) Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. C) This may be done, but only if the entire account is rolled over. D) If there is a distribution of the assets, the rollover must be completed within 60 days.

C Partial rollovers are permitted.

One of the major changes incorporated into the Uniform Prudent Investors Act of 1994 was the ability of a trustee to delegate certain responsibilities to qualified third parties. However, a fiduciary would not be able to delegate A) the selection of different managers for different asset classes B) which investment style to be used for managing the portfolio C) the amount and timing of distributions D) the ability to decide on the specific securities to be acquired

C The UPIA allows a fiduciary to delegate the investment decisions to a qualified third party. Determining distribution amounts and timing is not part of portfolio management and can only be done by the fiduciary (trustee).

A pension plan administrator hires an investment adviser to oversee the investment decisions of the plan. The adviser's primary responsibility is to which of the following? A) The adviser B) The plan sponsor C) The plan D) The pension plan administrator

C The adviser's primary fiduciary responsibility is to the plan itself. By maintaining proper fiduciary responsibility to the plan, the interests of the participants of the plan are protected.

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 A) refuse to allow this to happen because the plan assets will suffer B) permit the loan once you have been satisfied that there is adequate collateralization in place C) permit the loan because the CFO is the plan trustee D) refuse to allow this to happen because it would be a violation of your fiduciary responsibility

D

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

D

On retirement, if your customer who is a corporate executive will receive retirement income equaling a percentage of the average of his last 5 years of compensation, this is which type of plan? A) Keogh B) Defined contribution C) TSA D) Defined benefit

D

One of your clients wishes to reallocate the assets in his 401(k) plan. Specifically, he plans to assist his parents in the purchase of a retirement home. He claims that it makes sense to have about 10% of his plan assets in real estate. A) This would only be permitted if the home were for his personal use. B) An asset allocation model would not have 10% in real estate. C) This is prohibited as qualified plans cannot own real estate. D) This is not permitted because a prohibited party will benefit.

D

Under ERISA Section 404(c), plan participants must be able to reallocate plan assets A) once every week B) annually C) daily D) once every 3 months

D

Under UTMA, the custodian must be A) a member of the minor's family. B) a trustee. C) appointed by the court. D) an adult.

D

What is the maximum amount a taxpayer may contribute each year to a Coverdell Education Savings Account (ESA) for one student? A) $500.00 B) $100.00 C) $1,000.00 D) $2,000.00

D

Why are ERISA Section 404(c) and the accompanying Department of Labor regulations important for an employer who sponsors a Section 401(k) retirement plan and who offers at least 3 diversified categories of investments with materially different risk and return characteristics? A) This section permits the employer to avoid certain coverage and participation rules that would otherwise apply to a qualified plan. B) If followed, the employer need not provide a Summary Plan Description (SPD) to any employees participating in the plan. C) Union-negotiated contracts are exempt from Department of Labor review under this safe harbor section. D) If followed, the employer is relieved of fiduciary liability for any unsatisfactory investment results experienced by the employee.

D

Without the need to meet any special conditions, a participant in which of the following retirement plans would be able to withdraw funds prior to age 59½ and not incur a 10% tax penalty? A) 401(k) B) 501(c)(3) C) 403(b) D) 457

D

Which of these is an advantage of using a Coverdell ESA rather than a 529 plan to fund a child's future education? A) The Coverdell allows for transfer of beneficiary. B) Contributions to the Coverdell are eligible for the annual gift tax exclusion. C) The Coverdell has greater tax advantages. D) The Coverdell offers greater investment flexibility.

D A Coverdell ESA works similar to a self-directed IRA where stocks, bond, mutual funds, ETFs, and other investment vehicles are options. With a 529 plan, the donor is limited to whatever is available in the state plan chosen. Tax advantages might be better for the 529 plan because many states allow a portion of the contribution to be taken as a deduction or credit against state income taxes. Both allow for transfer to a new beneficiary as long as that individual is a member of the original beneficiary's family. In both cases, whatever is contributed to the program is treated as a completed gift and is eligible for the annual gift tax exclusion.

Which of the following statements regarding a QDRO is correct? A) A QDRO applies only to assets in a traditional IRA. B) A QDRO applies to assets in a qualified employer plan and a traditional IRA. C) A QDRO must comply with ERISA to be effective. D) A QDRO applies only to assets in a qualified employer plan.

D A QDRO applies only to assets in a qualified employer plan; it would not be applicable to an IRA or a SEP. Under IRS regulations, early distributions that are taken pursuant to a qualified domestic relations order, or QDRO, are exempt from the 10% penalty. A QDRO is a court-issued order that gives someone the right to an individual's qualified plan assets, typically an ex- (or soon-to-be-ex-) spouse, and the QDRO is usually issued in the course of divorce proceedings or to satisfy child support obligations.

A nonqualified, single premium variable annuity differs from a Keogh plan in that A) earnings are tax deferred B) both are subject to early withdrawal penalties C) it is open to self-employed persons D) all payouts are fully taxable in a Keogh plan

D Earnings on investments made in both a Keogh plan and nonqualified annuity grow on a tax-deferred basis; they are not taxed until withdrawn. The cost basis in a Keogh plan is zero because contributions are tax deductible, but distributions are fully taxable upon receipt. However, in a nonqualified annuity, the cost basis is equal to the amount invested because the contributions are nondeductible; only the earnings portion of the distributions is taxable.

A QDRO is a judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant. The QDRO must contain certain specific information as stated in whose regulations? A) DOL B) NASAA C) ERISA D) IRS

D It is the IRS who states the QDRO must contain certain specific information, such as: the participant and each alternate payee's name and last known mailing address, and the amount or percentage of the participant's benefits to be paid to each alternate payee. This is not part of ERISA or the Department of Labor and, least of all, NASAA.

A grandparent wishes to contribute funds to an account for the benefit of the college education of a grandchild. In which of the following does the donor have the greatest amount of control over the assets in the account? A) An UTMA account B) An UGMA account C) A Coverdell ESA D) A Section 529 plan

D It is the Section 529 plan that offers the greatest amount of control to the donor. In the case of the ESA, on the IRS form used to open the account, it states: "The 'responsible individual"' named by the depositor shall be a parent or guardian of the designated beneficiary." Unless we are told that the grandparent has been appointed as legal guardian, there is a lack of control. And, even then, one thing the "responsible individual" cannot do that the donor to a 529 plan can is take the money back. Although the grandparent could be named the custodian of the UGMA or UTMA account, the only authority there is to make the investment decisions and disbursements until the termination age of the account.

What new benefit did the TCJA of 2017 bring to 529 plans effective 2018? A) Tax-deductible contributions of up to $10,000 per year to pay for K-12 tuition B) Qualified withdrawals of up to $10,000 per year to pay for K-12 expenses C) Withdrawals may be made for qualified expenses at certain foreign educational institutions. D) Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition

D ONLY TUITION The big change was the ability to use a 529 plan for K-12 expenses. However, the only expense that qualifies is tuition and there is a maximum limit of $10,000 per year. No contribution to any 529 is tax deductible. The use of the 529 for foreign educational institutions pre-dates the TCJA of 2017.

Which of the following assets will have the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application? A) A prepaid tuition plan B) A Coverdell ESA C) A Roth IRA D) An UTMA account

D READ THE QUESTION Although the exact percentages will likely not be tested, 20% of the money in an UTMA (or UGMA) account is counted, while only 5.64% of a Section 529 plan (either option) is counted. Retirement accounts are not considered assets on the application for student aid, which means the value of a Roth IRA won't hurt the individual's chances for financial aid eligibility.

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 A) must be returned to the donor with tax plus a 10% penalty on the earnings B) must remain in the plan until Harry's 30th birthday C) must be distributed to Harry no later than 30 days after his 21st birthday D) may be transferred into another Coverdell ESA for Harry's 25 year-old cousin, Julia

D TRASFEREE HAS NO AGE LIMITATIONS Funds that are not used for qualified education expenses may be withdrawn, but the earnings are subject to income tax plus a 10% tax penalty. To avoid this, the IRS permits the funds to be transferred into another Coverdell ESA for someone related to the first beneficiary (Harry), who is under 30 years of age. In the case of the Section 529 plan, the transferee has no age limitations. Related parties include immediate family members of the original beneficiary, parents, cousins, aunts and uncles, and even in-laws. If funds remain unused in the Coverdell ESA, they must be distributed to the named beneficiary on the account by 30 days after the child's 30th birthday, not the 21st. By statute, there is no age limit for the Section 529 plan, but some states set a time limit for distribution of unused funds. In either case, there would be the tax and penalty.

Which of the following regarding customer accounts is NOT true? A) In some cases, a TOD account is referred to as a POD account. B) Margin trading in a fiduciary account requires special documentation. C) Asset held under JTWROS goes to the survivor(s) in the event of the death of one of the tenants. D) Stock held in a custodial account may be registered in the name of the minor.

D The reason behind UTMA (or UGMA) accounts is because securities may not be registered in the name of a minor. Trading on margin is generally not permitted in fiduciary accounts except under special circumstances and with the appropriate documentation. TOD and POD are essentially the same. TOD is the preferred term in the securities business while banks generally use POD.

Which of the following could reduce the amount that an individual may contribute to a Traditional IRA? Roth IRA contributions made for the year High income level Participation in an employer-sponsored plan Marital status

1 only The maximum annual contribution applies as a total among your Roth and your traditional IRA. So, if the maximum is $6,000 and you put $3,000 into your Roth, you could only put $3,000 into your traditional IRA. You could do a total of $7,000 if you were 50 or older. High income level and participation in an employer-sponsored plan will affect the amount you may deduct but not the amount you may contribute. Even though a married couple can have their own IRAs or set up a spousal IRA if one is nonworking, that doesn't reduce the amount that either spouse can contribute.

In the construction of a qualified retirement plan portfolio, which of the following investment vehicles would be considered generally inappropriate? A guaranteed investment contract (GIC) A municipal bond fund A leveraged real estate limited partnership A corporate bond rated A or higher

2, 3

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.

2, 3

Becky Biggins has an executive position with a large corporation that covers her under its defined benefit pension plan. This year, Becky's salary will top $435,000. Becky has no dependents and wishes to maximize funds that she can accumulate for her retirement. Becky could not open a traditional IRA open a traditional IRA but would not be able to deduct her contributions open a Roth IRA not open a Roth IRA

2, 4 Anyone with earned income can open a traditional IRA. Deductibility of contributions may be disallowed if the individual is covered under a corporate plan and has earnings in excess of a certain level. Becky's salary exceeds the maximum permitted for a single person so her contributions would be made with after-tax dollars. In the case of a Roth, nothing is deductible, so it doesn't matter if you are covered at work. However, Becky's salary is far in excess of the maximum permitted for a single person to contribute to a Roth IRA.

One of your clients will be separating from his current employer and asks you for your suggestion as to what should be done with the assets in his contributory 401(k) plan. The plan documents indicate that plan assets must be distributed upon termination. Given the following choices, your recommendation would be to A) use a direct rollover to have the assets placed into a rollover IRA B) take the distribution in cash and rollover the assets into an IRA within 60 days C) take the cash and put it into a managed account D) reconsider the decision to separate

A

Your client, Jane, died, and her 53-year-old son, Patrick, is the beneficiary of her IRA account. There is $750,000 in the account at the time of her death. All contributions were made with pre-tax dollars. Ten years later, the account has grown to $1.2 million, and Patrick begins to take distributions. The distributions will be A) taxed on the amount withdrawn in a given year B) tax free because the estate paid the taxes at the time of Jane's death C) 100% taxable on the amount over $1 million D) taxable on the growth and earning since Jane's death

A The account beneficiary is responsible for the taxes due on the funds that are withdrawn. One hundred percent of the distribution is taxable in the tax year the withdrawal is made.

Which of the following statements regarding Roth IRAs is TRUE? A) Roth IRAs are not subject to the minimum distribution rules until the death of the owner/participant of the plan. B) Like traditional IRAs, Roth IRA contributions may not be made after the participant reaches age 72. C) Roth IRA withdrawals are tax free in their entirety regardless of the participant's age at withdrawal. D) Like traditional IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan.

A Unlike traditional IRAs, Roth IRAs are not subject to the minimum distribution rules regarding a participant's age (72). Rather, distributions need not be made until the death of the owner/participant. For a Roth IRA withdrawal to be entirely tax free, it must be made following a 5-year holding period after the first contribution and after the participant reaches age 59½. Effective with the SECURE Act, there are no age limitations for contributions for any retirement plan.

Each of the following are advantages offered by a nonqualified deferred compensation plan that are not found in a qualified plan EXCEPT A) they are an attractive benefit to the employer because participation requirements and nondiscrimination restrictions do not apply. B) deferred compensation plans are not subject to most of the requirements of the Employee Retirement Income and Security Act of 1974 (ERISA). C) they are an attractive benefit for highly compensated employees because they're free from the contribution limits. D) employer contributions to the plan are not subject to current taxation to the employee.

D Tax deferral is found in both NQDC plans and qualified plans, so there is no advantage that one has over the other. However, NQDC plans have much more flexibility without the burdensome compliance issues with ERISA.

Distributions from which of the following can be rolled over into an IRA? Another IRA Corporate pension plan Corporate profit-sharing plan Keogh plan

1, 2, 3, 4 Assets from any QUALIFIED corporate plan or from another IRA may be rolled over into an IRA.

Dr. Smith is resigning from the clinic where he was an employee covered under its profit-sharing plan. The plan document requires distribution of vested amounts once an employee leaves the clinic. Under the Internal Revenue Code, what can he do to avoid current-year taxation of the distribution? A) Roll over the distribution into an IRA within 60 days B) Place the distribution in a Keogh Plan C) Invest the distribution in municipal bonds D) Invest the distribution in a government zero-coupon bond

A

If your 39-year-old customer is the sole owner of a business, earns $260,000 a year, and makes the maximum contribution to a Keogh plan, how much money may he contribute to his IRA in 2019? A) $6,000.00 B) $64,000.00 C) $56,000.00 D) $0.00

A The maximum contribution is the lesser of 100% earned income or $6,000; in this case, the amount of the Keogh contribution is irrelevant.

Which of the following is the primary advantage to the employer who offers a nonqualified plan when compared to one that offers a qualified plan? A) The qualified plan is permitted to discriminate in favor of key employees. B) The nonqualified plan is permitted to discriminate in favor of highly compensated employees. C) The qualified plan costs less to administer than the nonqualified plan. D) The nonqualified plan allows for an immediate employer deduction for contributions.

B

Which of the following investments would be permitted in a client's IRA? A) Variable life insurance B) Art C) Municipal bonds D) Term life insurance

C Although not generally recommended for a retirement plan, municipal bonds are permitted. The other choices are not.

If an investor received a lump-sum distribution from a 401(k) plan when he left his job, he may roll over his account into an IRA within 60 days transfer his account without taking possession of the money keep the funds and pay ordinary income tax invest in a tax-exempt municipal bond fund to avoid paying tax

1, 3 Because the client has already received the lump sum, he may either roll the money into an IRA account within 60 days, or retain the money and pay income tax (and possibly a penalty) on it. Any amount the client does not roll over will be taxed as income, even if invested in tax-exempt bonds. A direct custodian-to-custodian transfer is not permitted because the client has already received the distribution.

Which of the following regarding a Roth IRA are TRUE? The contributions are nondeductible. One may not contribute to a Roth IRA if concurrently contributing to a traditional IRA. The contributions are deductible. Withdrawals after age 59½ may be tax free.

1, 4

Allowable investments in an IRA would include A) U.S. government-issued silver eagles B) cash value life insurance C) collectible art D) rare stamps

A

In general, in a defined benefit plan, the pension to be received upon retirement is based on the number of years of service and the individual's A) final salary. B) life expectancy. C) agreed salary. D) current salary.

A

The type of tax-favored retirement plan that is available to nonprofit entities such as schools and hospitals and that is sometimes called a tax-sheltered annuity is A) a 403(b) plan B) a 401(k) plan C) a simplified employee pension (SEP) D) a SIMPLE retirement plan

A

IRAs and Keogh plans are similar in the following ways except A) identical amounts of contributions are allowed B) there is a 50% tax penalty for insufficient distributions C) distributions without penalty can begin as early as age 59½ D) deferral of taxes

A IRAs and Keogh plans do not have identical contribution amounts; IRAs allow a maximum of $6,000 per individual or $12,000 per couple per year (with a catch-up of $1,000 for each individual aged 50 or older), whereas Keogh plans allow substantially more. Both IRAs and Keoghs allow tax-deferred growth until the individual withdraws the funds. IRAs and Keoghs have premature distribution penalties before age 59½. Once the participant reaches 72, required minimum distributions must be made or a 50% tax penalty will be assessed.

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

A Only earned income can be used to fund an IRA. When a business is run as a sole proprietorship, the income reported on the taxpayer's Schedule C is considered earned. As a shareholder of an S corporation or a limited partner in a partnership, the income received is considered passive rather than earned and may not be used to fund an IRA. Child support is not earned income and alimony received from a divorce settlement dated January 1, 2019 or later is also not considered earned.

If Geraldine turned age 72 on November 15, 2020, when was she required to take her first IRA distribution? A) 31-Dec-21 B) 1-Apr-21 C) 1-Apr-22 D) 31-Dec-20

B

If Maria turned 72 on August 16, 2020, when must the first required minimum distribution (RMD) be made from her IRA? A) December 31, 2020 B) April 1, 2021 C) December 31, 2021 D) April 1, 2022

B

John and Martha, both in their early 40s, were divorced on November 22, 2018. Because Martha is unemployable, the terms of the divorce require John to pay Martha $300 per month in alimony and $1,000 per month in child support for their 4 children. Given that information, which of the following statements is CORRECT? A) Martha could contribute a maximum of $6,000 this year to an IRA. B) John is able to deduct $12,000 from his taxable income. C) Martha has reportable taxable income of $12,000 for the year. D) John is able to deduct $3,600 from his taxable income.

D Alimony is considered eligible income for an IRA to Martha and tax deductible to John. Child support is neither income to Martha nor deductible to John. Because Martha receives $3,600 in alimony, that would be her maximum allowable IRA contribution.

When a participant in a 401(k) plan dies before retirement, the proceeds are distributed A) according to the terms of the will after going through probate. B) according to the terms of the will without going through probate. C) to the designated beneficiary after going through probate. D) to the designated beneficiary without going through probate.

D Most qualified retirement plans require naming a designated beneficiary (or beneficiaries). Upon the death of the participant, the account proceeds are distributed without going through the probate process. This is done without regards to the terms of the will, similar to the beneficiary of a life insurance policy.

A nurse has been participating in her employer's qualified retirement plan. Upon leaving the clinic, she wishes to know what options she has that will keep the money growing tax-deferred without current tax consequences. You would tell her that she may arrange for a direct rollover of the plan assets into an IRA she may roll over the plan assets into an IRA as long as it is completed within 30 days she may roll over the plan assets into an IRA as long as it is completed within 60 days her only option is to withdraw the funds, pay the taxes and begin a new IRA

1, 3

A client has made both tax-deductible and nondeductible contributions to a traditional IRA. When distributions are taken from the IRA, A) they are taxed on a pro rata basis B) that portion derived from the nondeductible contributions is not subject to penalty if withdrawn before age 59½ C) they are treated as being from the tax-deductible portion first and the nondeductible last D) they are treated as being from the nondeductible portion first and the deductible portion last

A The portion of the distribution that is nontaxable must be prorated with amounts that are taxable. For instance, if the individual contributed $2,000 in after-tax amounts and $8,000 in pre-tax amounts, a distribution of $5,000 would be prorated to include $1,000 after-tax and $4,000 in pre-tax assets.

When a corporation establishes a qualified money purchase plan, A) discrimination in favor of lower-compensated employees is encouraged B) the corporation can adjust the contribution rate based on company profits C) the employee is obligated to make annual contributions at the rate stated in the plan D) the corporation is obligated to make annual contributions at the rate stated in the plan

D Money purchase plans have required contributions. The employer must make a contribution to the plan each year for the plan participants. With a money purchase plan, the plan states the contribution percentage that is required. For example, let's say that the money purchase plan has a contribution of 5% of each eligible employee's pay. The employer needs to make a contribution of 5% of each eligible employee's pay to each employee's account. A participant's benefit is based on the amount of contributions to her account and the gains or losses associated with the account at her retirement.

One of your clients has told you that his employer has just instituted a Roth 401(k) plan. If the employer wishes to make matching contributions, A) the employee may choose whether he wants the matching contribution to be made to the Roth 401(k) or a regular 401(k) B) current tax law does not permit matching contributions to be made on behalf of any employee participating in a Roth 401(k) plan C) it may contribute a specified percentage of the employee's pay to the Roth 401(k) D) it may contribute a specified percentage of the employee's pay to a regular 401(k)

D In order to have matching contributions, participants in a Roth 401(k) plan must actually have 2 accounts—the Roth and a regular 401(k). The employer contributions are made on a tax-deductible basis to the regular 401(k) and are fully taxable upon withdrawal.

A 457 plan could cover which of the following? Employees of a corporation Independent contractors providing services to the county Employees of a nonincorporated business City employees

2, 4 The 457 plan is a nonqualified deferred compensation plan for municipal employees, as well as for independent contractors performing services for those entities.

You have a 62-year-old client who opened a Roth IRA with your firm one year ago. The account was funded with a $6,500 deposit and the account's value is now $7,500. The client has another Roth, opened eight years ago at another firm. The client would like to withdraw $7,000 from this account rather than the one at the other firm. The tax consequences of this withdrawal would be A) no tax. B) ordinary income tax on the entire amount because the account has not been open for 5 years. C) ordinary income tax on the $1,000 growth because the account has not been open for 5 years. D) ordinary income tax on the $500 that exceeds the original cost.

A An individual can always withdraw the initial principal in a Roth without tax or penalty - it is only the earnings that will be subject to tax if not meeting the requirements of the Internal Revenue Code. In order for withdrawals of earnings from a Roth IRA to be free of any tax, there are two primary requirements: The first is that the owner be at least 59½ years of age. The second is that it is at least 5 years since the first deposit to a Roth IRA in the individual's name. Both of those conditions are met here. The client is 62 and the initial Roth IRA deposit was made 8 years ago. It is irrelevant which account the money is taken from as long as there is an account that has been open for at least 5 years.

Maria, age 49, was discussing with some coworkers the recent family vacation she took. She commented that she was able to afford it by taking a penalty-free withdrawal from her retirement plan. Based on that statement, Maria must be covered under A) a defined benefit plan. B) a 401(k) plan. C) a 457 plan. D) a 403(b) plan.

C The 457 plan is unique in that it is the only tax-qualified retirement plan permitting withdrawals, for any reason, before reaching 59½ without penalty. All qualified plans have exceptions to the 10% penalty tax, but only the 457 allows the withdrawals for any reason. Even though there is no early distribution tax, Maria will still owe ordinary income tax on the amount withdrawn - the 457 benefit is only that there is no additional 10% tax.

What is the latest date that an IRA participant may make a contribution based on the current year's income? A) July 15 of the following year, if extensions have been filed B) December 31 of the current year C) April 15 of the following year or the first business day following if the 15th is a Saturday or Sunday D) April 15 of the current year or the first business day following if the 15th is a Saturday or Sunday

C Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made. If April 15 falls on a Saturday or Sunday, contributions can be made up to the 1st business day after the 15th. If the taxpayer has received an extension, that does not affect this deadline.

Which of the following may NOT be used to fund an individual retirement account (IRA)? A) Bank accounts B) Stocks C) Mutual funds D) Life insurance

D

Which of the following would be permitted to contribute to an IRA? An individual whose sole income consists of dividends and capital gains A divorced mother whose sole income is alimony and child support under the terms of a divorce agreement signed on October 31, 2018 A self-employed attorney who has a Keogh plan A corporate officer covered by 401(k)

2, 3, 4

Mrs. Beech, age 52, as the sole survivor of her mother, recently inherited, among other assets, an IRA. After receiving a distribution of the account's assets, she dutifully rolled over 100% of the account value into a new rollover IRA. As a result, Mrs. Beech A) should have left the funds in her mother's IRA, because she is not yet 59½ B) will be able to avoid taxation on the distribution until she begins to take distributions from the rollover IRA C) will only be liable for the 10% premature distribution penalty tax D) will have to declare the entire IRA value as ordinary income

D When an IRA is inherited, other than from a spouse, the only way to avoid a reportable distribution is to do a trustee-to-trustee transfer. Because Mrs. Beech received the distribution, the normal rollover rules do not apply. However, Mrs. Beech will not have to pay the 10% penalty tax.

One of your clients is discussing various options for funding his IRA. Current tax law would permit investing in which of the following vehicles? Collectible stamps issued by the U.S. Postal Service Gold or silver coins minted by the U.S. Treasury Department Fixed annuities REITs

2, 3, 4

Which of the following is an allowable early withdrawal from a traditional IRA without penalty? A) A single parent supplements a home equity loan with $5,000 from her IRA to pay for an additional home (a vacation home). B) A person withdraws funds from his IRA to buy a principal residence after he sold his first home as a result of medical expenses. C) A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence. D) A single parent withdraws funds from her IRA to pay for the education of a nephew.

C Any individual withdrawing $10,000 from his IRA to purchase his first principal residence would have the penalty waived. The wealth of the individual is not relevant. The purchase must be a first-time purchase as well as the primary residence. A single parent who withdraws funds from her IRA to pay for the education of a nephew will pay a 10% tax penalty. Educational withdrawals are limited to the taxpayer or a spouse, child, or grandchild. A single parent who supplements a home equity loan with funds from her IRA to pay for an additional home will pay a penalty because only a primary residence can be purchased with early withdrawal funds. A person who withdraws funds from his IRA to buy a principal residence after he sold his first home as a result of medical expenses will pay a penalty because the purchase is not for his first principal residence.

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

C Disregarding the catch-up provision for those age 50 and older, the maximum annual contribution in 2022 for the employer-sponsored plans is $20,500 (never tested). An individual covered by a 401(k) or a 403(b) may contribute that plus another $20,500 to the 457. Likewise, contributing to an employer-sponsored plan does not affect the Roth IRA limit. What is tested is knowing that maintaining a 401(k) and a 403(b) is similar to maintaining a Traditional and Roth IRA. The maximum is not doubled; it is aggregated.

Which of the following qualified retirement plans offer tax advantages to both the employer and the employee? Individual retirement arrangements (IRAs) 401(k) plans Deferred compensation plans Defined benefit plans

2, 4 In both 401(k) plans and defined benefit plans, tax advantages accrue to both the employer and the employees. Employer contributions are deductible, and earnings growth is tax deferred to the employee. IRAs offer no benefit to the employer (note that the answer choice did not say "SEP IRA"), and deferred compensation plans are nonqualified.

When Felicity died, she left her estate, including her IRA, to her daughter, Courtney. Because of her financial circumstances, Courtney decided to abjure the inheritance. This would lead to her A) contesting the estate B) becoming the executrix of the estate C) disclaiming the IRA D) accepting the estate

C

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) a governmental plan cannot make a distribution before the participant attains age 70½ B) a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants C) a tax exempt plan's distributions are not eligible for a favorable lump sum 10-year averaging treatment. D) a tax-exempt plan participant does not have to include plan distributions in taxable income

B

George and Martha Washington are both in their mid-70s, are very active in their community, and both plan to start working part time at the local community bank. They would like to contribute a small portion of their earnings to some form of retirement plan. Which of the following choices would be the most appropriate for this couple? A) A traditional IRA B) A Keogh Plan C) The bank's 401(k) plan D) A Roth IRA

D One of the distinguishing characteristics of the Roth IRA is that there are no required minimum distributions (RMDs) once the taxpayer attains age 72. At their age, opening a traditional IRA would mean they would be investing into the plan, but withdrawing at the same time. That does not help them accumulate funds for the future. Because they will be employed by the bank, they are not eligible for a Keogh plan. If the bank offers a 401(k) plan, it is unlikely they would be eligible. Although part-time employees who work at least 500 hours per year may be covered, coverage does not start until they've worked for at least three years.

Mr. Adam Samuels suffers a massive heart attack and dies at the age of 62. As part of his estate, there is an IRA with a current value of $170,000. A review of the IRA documents reveals that Mrs. Eve Samuels, the wife, is the primary beneficiary and their 2 children have been named as contingent beneficiaries. Eve is 50 years old and does not need the income from the IRA and would like to preserve the IRA for her children to inherit. Which of the following steps would you recommend Mrs. Samuels take? A) Disclaim the IRA and let it pass to the contingent beneficiaries. B) Cash in the IRA because as a spouse of a deceased, she will avoid the 10% tax penalty. C) Execute a rollover into an IRA in her name. D) Execute a rollover into an inherited IRA.

C This is a highly complicated question and there is room for disagreement. However, if a question similar to this were to appear on your exam, the answer selected is the one that NASAA would mark as the correct one on its test. The key to this question is the word "PRESERVE." By executing a rollover into an IRA in her name, tax deferral of the assets continues and RMDs are not required until after Mrs. Samuels turns 72. Thus, the assets are preserved for at least 20+ years. If she took the distribution, she would not have to pay the penalty tax, but there would be ordinary income tax due and this would not meet her objective of preservation of the IRA. If she disclaimed, the assets would then go to the children, but they would have to begin taking RMDs over a 10-year period. Not a bad choice, but the assets are being distributed and taxed, not preserved. The benefit of rolling over into an inherited IRA (sometimes called a beneficiary IRA) instead of one in her own name is that she can begin taking distributions right now without the 10% penalty, even though she is only 50. However, the question stated that she did not need the income, and RMDs must begin at the time they would have been required for Mr. Samuels, 12 years earlier than if she chooses to rollover into her own IRA.

Hal and Amy are covered by a pension plan at Benson Industries, Inc., where they are both employed as executives. Their incomes total $300,000 per year, and they file a joint tax return. Which of the following best describes what they can do in a regular IRA program for the year 2021? A) They may make an $12,000 deductible contribution. B) They may each make a $6,000 deductible contribution. C) They cannot have an IRA because they are covered by a pension plan. D) They may contribute $6,000 each, but they cannot take a deduction.

D They may each contribute to their own IRA and enjoy tax-deferred growth within their IRAs, but neither may take the $6,000 annual contribution as a deduction to taxable income on a tax return. For married couples covered by retirement plans at work, the phaseout begins at a joint MAGI (modified adjusted gross income) of $105,000 and is complete at $125,000. This probably won't be tested because the amounts change yearly. Also, don't ask yourself, "What if one or both are age 50 or older?" You can safely assume that if a contributor can qualify for the catch-up provision, age will be given in the question.

Which of the following would have the effect of reducing a taxpayer's taxable income? Net capital loss Traditional IRA contribution Public purpose municipal bond interest Earnings in a deferred variable annuity

1, 2

Ineligible investments in an IRA would include all of the following EXCEPT A) American Silver Eagles B) stamps C) cash value life insurance D) Kruggerands

A

A customer earns $31,432 this year and mistakenly overcontributes to her IRA. To avoid paying a penalty, she should A) never contribute to the IRA again B) remove the excess, plus associated growth, from the IRA C) make her usual contribution next year D) remove the entire contribution from the IRA

B

Your married client has an AGI of $105,000 per year and is covered by his employer's defined benefit pension plan. When inquiring about opening a Roth IRA, you would respond that A) the client's earnings exceed the Roth limits so the plan could not be opened B) the client could open the Roth IRA without any restriction C) the client could open a Roth but, depending on future earnings, might not be able to deduct all of the annual contribution D) one cannot be a participant in a qualified plan and a Roth IRA at the same time

B As long as a married couple's AGI does not exceed 208,000 (for 2021), a Roth IRA can be opened without any restrictions. Contributions are never deductible.

An individual works for an accounting firm that does not have a retirement fund. She is paid $18,000 per year. During her spare time, she is a commercial artist and earned $16,000 doing this work last year. What is the basis for her contribution under a Keogh plan (HR-10)? A) $0.00 B) $18,000.00 C) $16,000.00 D) $34,000.00

C

An investor wishes to use funds in his IRA to purchase a condominium for personal use. Under current regulations, A) real estate, such as a personal condominium, would be a permitted investment. B) real estate, like life insurance, cannot be purchased in an IRA. C) this would be a prohibited transaction. D) this would not be a prohibited transaction unless the investor personally used the property more than 14 days per year.

C

Which of the following statements regarding Roth IRAs is NOT true? A) Distributions prior to age 59½ may be subject to penalty. B) There is no age limit on making contributions to Roth IRAs. C) Roth IRAs have higher contribution limits than traditional IRAs. D) Roth IRAs do not have required distributions.

C

A person providing which of the following services to an ERISA plan would be performing in a fiduciary capacity? A) Determining the age at which benefits are to be provided B) Changing the level of employer contributions C) Selecting and monitoring third-party service providers D) Amending the plan

C The issue here is the distinction between fiduciary functions and something called settlor functions. ERISA defines fiduciary not in terms of formal title but rather in functional terms of control and authority over the plan. ERISA provides that a person is a fiduciary with respect to an employee benefit plan to the extent that such a person does any of the following: exercises any discretionary authority or control over the management of a plan or over the management or disposition of plan assets; renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of such plan; or has any discretionary authority or discretionary responsibility in the administration of such plan including appointing other plan fiduciaries or selecting and monitoring third-party service providers. The other choices given in the question are known as settlor functions. The most common settlor functions are design decisions involving: establishment of the plan, defining who are the covered employees and benefits to be provided, and amending or terminating the plan. Because the likelihood of an IAR ever performing settlor functions is quite remote (usually they are done by employees of the sponsoring employer), I cannot fathom why NASAA would ask something like this on the exam, but, just in case.

Which of the following does not benefit both the employee and the employer? A) SERP B) Defined benefit plan C) Traditional IRA D) SEP-IRA

C There is no employee/employer relationship in a traditional (or Roth) IRA. A SEP-IRA is different in that the employer makes the contribution, gets the tax deduction, and the employee's account is enriched by that contribution. The same is true for the defined benefit plan and the SERP. A supplemental executive retirement plan is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees.

All of the following are eligible to open an IRA EXCEPT A) a corporate officer not covered by his company's pension plan B) a corporate officer covered by his company's pension plan C) a self-employed person covered by a Keogh plan D) a divorced individual whose sole source of income is $10,000 per month in child support

D

Because of the changes made in the SECURE Act, minimum distributions from a traditional IRA must begin A) as soon as the owner turns 72 B) once the owner retires C) a year after the owner turns 59½ D) by April 1, the year after the owner turns 72

D

If a 41-year-old investor who earns $26,000 this year overcontributes to his IRA, how much will be subject to the 6% penalty? A) There will be no penalty B) His original cost base C) His original cost base plus the contribution D) The amount by which he over contributed

D

If an individual makes a withdrawal from her IRA at age 52, she pays no penalty tax if she A) used the funds for her nephew's college tuition B) had no earned income that year C) has retired D) is disabled

D

The requirement to take a minimum distribution once the age of 72 has been reached is found in A) an index annuity B) a Section 529 plan C) a qualified employer-sponsored plan even when still working for that employer D) a traditional IRA

D

Thomas, age 49, owns his own business and pays himself a salary of $80,000 per year. He employs his wife, Grace, age 51 as receptionist and pays her $45,000 per year. What is the maximum deductible contribution that they could have made to their traditional IRAs? A) They cannot make deductible contributions because their joint incomes are too high. B) They can contribute $6,000 to each of their individual IRAs. C) They can contribute a total of $6,000 only because they both work at the same business. D) They can contribute $6,000 to his IRA and $7,000 to hers.

D

Lena died at the age of 50 with $100,000 in her traditional IRA account. In addition to income taxes due on the distribution, her beneficiary, who is 52, will have to pay a premature distribution penalty tax of how much? A) $10,000 B) $6,000 C) $15,000 D) $0

D The premature distribution penalty does not apply if the distribution is made after the death of the account owner, regardless of the age of the owner or the beneficiary.

Which of the following employer-sponsored plans is NOT covered by ERISA? A) Defined benefit pension B) Deferred compensation C) 403(b) D) 401(k)

B

Which of the following concerning a money purchase pension plan are TRUE? All employees must contribute to the plan. Voluntary employee contributions are optional. Employer contributions are required. Employer contributions are optional.

2, 3

Which of the following statements regarding Coverdell Education Savings Accounts are TRUE? After-tax contributions of up to an indexed maximum per student per year are allowed. Contributions may not be made for students past their 18th birthday. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. Distributions are always taxable.

1, 2

Terry Bolton employs his 2 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 trust tax rates. Drake's income is taxed at trust tax rates.

1, 2 As the money paid is earned income, it is not subject to the kiddie tax rules, regardless of age.

As a client's only child is about to complete her college education, it is obvious that the 529 Plan used to accumulate funds has been overfunded. Which of the following might be suggested to minimize tax consequences? Encourage the daughter to go to graduate school and use the money for qualified expenses there. Roll over the funds to a member of the beneficiary's family. Roll over the funds to a Coverdell ESA. Roll over the funds to the donor's IRA.

1, 2 When there is money remaining in a Section 529 plan after a student has completed college, withdrawal of that excess will result in the portion representing earnings being taxed at ordinary income tax rates plus a 10% penalty. Those taxes and penalties can be avoided if the funds are properly used, such as graduate school for the original beneficiary or designating a new beneficiary who is an immediate family member (as defined in the law) and rolling over the funds. There is no such thing as a rollover to a Coverdell ESA and money in a 529 plan is not part of a qualified plan, so rolling over to an IRA is out of the question.

An investment policy statement would likely include expected returns of the recommended strategy and the expected range of these returns recommended allocations among differing asset classes strategies used for selecting specific stocks in the equity portion of the portfolio disclosure of the fees that the adviser will earn for implementing the recommended strategy

1, 2, 3 An investment policy statement prepared for clients delineates the allocation percentages for each asset class and the expected returns from each class, and outlines strategies that may be used for timing the market and choosing specific investments within each class, but fees the adviser may earn are not included in the policy statement; they are disclosed separately.

Among the differences between a Coverdell Education Savings Account and Section 529 plans are one has adjusted gross income limits, the other does not one has contribution limits set by federal law, the other by the individual state if the money is not used, money reverts back to the donor in one and to the beneficiary in the other

1, 2, 3 The Coverdell may only be used by persons who fall within certain income limits—no such limits apply to the 529 plan. The Coverdell has contribution limits set by federal law; each state sets its own 529 limit. If the money is not used for education, it reverts back to the donor in a 529 plan but to the beneficiary in a Coverdell.

A prospective client has been interviewing a number of investment advisers and wishes to see your firm's investment policy statement. Your IPS would probably include which of the following headings? Investment objectives Investment philosophy Investment selection criteria Monitoring procedures

1, 2, 3, 4

Which of the following investment activities are acceptable for a fiduciary acting under the prudent expert rule? Purchasing AAA-rated debentures Purchasing a growth mutual fund Purchasing new issues of a AAA-rated issuer Writing covered calls on dividend-paying stocks

1, 2, 3, 4

Which of the following statements regarding participant loans in a 401(k) plan are CORRECT? The maximum allowable loan amount is the lesser of $50,000 or 50% of the participant's vested account balance. Unless the loan is taken out for the purpose of a mortgage on the participant's principal residence, repayment must be completed within 60 months of obtaining the loan. Payback of the loan will be through payroll deduction. Default on the loan will result in the IRS treating the loan as a distribution.

1, 2, 3, 4

Which of the following circumstances may cause a person to be identified as a fiduciary? Investment adviser representative who becomes a trustee Investment adviser representative who becomes a member of the board of directors of a foundation Investment adviser representative who holds himself out as a fiduciary for ERISA plans and pensions Investment adviser representative who manages a discretionary account

1, 2, 3, 4 All of these statements are correct. Trustees, board members of a foundation, IARs who exercise and those who hold themselves out as a fiduciary for an ERISA plan will generally find themselves being defined as a fiduciary.

Many parents prefer to use a Section 529 plan over a Coverdell ESA to finance their child's education plans because contribution limits are higher funds may be withdrawn tax-free if used for qualified education expenses there are no earnings limits 529 contributions are tax deductible on the federal level

1, 3

Nonqualified corporate retirement plans differ from qualified retirement plans because nonqualified plan contributions are not exempt from current income tax nonqualified plan earnings accumulate on a tax-deferred basis the corporation need not comply with nondiscrimination rules that apply to qualified plans the corporation must comply with ERISA requirements dealing with communications to plan participants

1, 3

Ways in which a Section 529 plan differs from a Coverdell ESA include tax-free distributions when the funds are used for qualifying educational expenses higher contribution limits no earnings limitations contributions that may be made by someone other than a parent or legal guardian

2, 3

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 three different investment alternatives ensure that plan participants are insulated from control over their portfolios allow plan participants to change their investment options no less frequently than quarterly allow plan participants to purchase U.S. Treasury securities

1, 3 The safe harbor requirements relieve the trustee of a 401(k) plan of liability if the plan participants have the ability to select from at least 3 different investments and are allowed to make selection changes no less frequently than quarterly.

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

1, 4

One of your clients has recently turned 72 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from two previous employers. When computing the RMDs, the RMD from each IRA is computed and may be made from one or both of them. the RMD from each IRA is computed and must be paid from that IRA. both 401(k)s are combined to compute the required distribution which may be made from one or both of them. the RMD from each 401(k) is computed and must be paid from that 401(k).

1, 4 For RMD purposes, each IRA is figured separately and the distribution can be made from one or all of them. That is not the case with a 401(k) plan. Each account has a RMD that can only be paid from that account.

A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be specific security selection methods of performance measurement determination for meeting future cash flow needs the Summary Plan Description

2, 3

Which of the following would you expect to see in the investment policy statement of a qualified plan? The information in the summary plan document specified by the Department of Labor The method to be used to measure the investment performance of the plan A listing of the portfolio assets as of the most recent quarter Investment limitations placed on the portfolio managers

2, 4 The IPS would include information on how the investment performance of the plan is measured as well as the investment parameters to be followed by the portfolio managers. It would not include the summary plan description (document), generally referred to by the initials SPD. That is for the employees' to learn about eligibility, vesting, matching contributions, etc. It has nothing to do with how the money is invested. The purpose of the IPS is to set "policy" for the portfolio, not to list its composition.

A young customer who is a novice investor wishes to begin an investment program. He is eligible for his employer's 401(k) plan, to which the employer makes matching contributions, but he does not participate in the plan. Your advice to the customer should be to begin A) contributions through elective deferral of his salary to the employer's 401(k) plan, at least to the employer's matching level B) by making regular contributions to an income mutual fund C) by making regular contributions to a growth mutual fund D) by taking positions in individual stocks

A

All of the following would be reasons for an employer to choose a nonqualified plan over a qualified plan EXCEPT A) the nonqualified plan provides an immediate income tax deduction for the employer. B) the nonqualified plan provides greater flexibility. C) the nonqualified plan can discriminate in favor of highly compensated employees. D) the nonqualified plan is not subject to ERISA reporting and disclosure requirements.

A

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 A) the information in the summary plan document specified by the Department of Labor B) investment parameters to be followed by the portfolio managers C) the schedule for future needs of the plan D) how the plan measures investment performance

A

An employer wishing to offer a retirement plan with a goal of retaining key employees would probably start with A) a deferred compensation plan B) a SEP IRA C) a payroll deduction plan D) a defined benefit plan

A

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

A

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

A

One of the advantages of using a 529 plan rather than a Coverdell ESA to fund higher education is A) there is no age limit by which time the funds must be used. B) the 529 allows you to change the beneficiary to another member of the beneficiary's family. C) contributions to a 529 plan are tax deductible. D) the 529 plan is a security while the ESA is not.

A

Qualified annuity plans offered under Section 403(b) of the Internal Revenue Code, referred to as tax-sheltered annuities (TSAs), are not available to A) long-term patients in a private, not-for-profit hospital. B) janitorial staff employed by a private, not-for-profit hospital. C) administrative assistants employed by a private, not-for-profit hospital. D) physicians employed by a private, not-for-profit hospital.

A

Saving for higher education using which of the following tools will generally result in the worst outcome when filing the FAFSA form? A) UTMA B) Cash value in the parent's insurance policy C) Coverdell ESA D) Section 529 plan

A

The Employment Retirement Income Security Act of 1974 (ERISA) is A) a federal law regulating many aspects of private retirement plans B) a state law regulating many aspects of private retirement plans C) a state law establishing a pension system for state employees D) a federal law establishing the Social Security system

A

The employer does not get a current tax deduction when offering which of the following retirement plans? A) Deferred compensation plan B) Defined benefit plan C) Money purchase plan D) SIMPLE plan

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 A) ordinary income on the $25,000 cost basis, long-term capital gain on the appreciation when sold B) long-term capital gain on the entire $125,000 C) ordinary income on the entire $125,000 D) ordinary income on the $25,000 cost basis, short-term capital gain on the appreciation when sold

A Under IRS rules, if part of your retirement plan assets includes company stock, taking that as a distribution (not rolling it over into an IRA) subjects the cost basis to ordinary income tax and any unrealized appreciation is taxed as long-term capital gain when sold.

Which factor is least important when assessing a defined benefit pension? A) Investment performance of the fund B) Age at which benefits can be taken C) Lump sum available at retirement D) Expected amount payable

A Under a defined benefit plan, the pension payable is related to the length of service and usually expressed as a proportion of final earnings. The investment performance of the fund is therefore the least important factor to consider.

A customer who is changing jobs has how many days to roll over a lump-sum distribution from a qualified pension plan into an IRA? A) 90 days B) 60 days C) 15 days D) 30 days

B

One benefit of a 457 plan that is not found in any other employer-sponsored tax-qualified plan is A) earnings on the contributions are not taxed until the funds are withdrawn. B) penalty-free withdrawals at any age for any reason. C) the plan may allow for employer matching of contributions. D) contributions are made on a pre-tax basis.

B

Under UTMA, which of the following are allowable distributions for the benefit of the minor? A) A percentage of food expense B) The cost to attend a summer camp C) A percentage of housing expenses, such as the utilities for his bedroom D) Clothing expense for child who has gone thru a growth spurt

B

Under the Uniform Gifts to Minors Act, Ralph wants to give some stock to his brother's son, Jose. His nephew's father, Bob, is the legal guardian. If Ralph wants to name himself as custodian, which of the following needs to be done? A) Ralph must have the permission of the guardian. B) Ralph must open the account and name himself as the custodian. C) Ralph must receive legal permission to act as custodian. D) Ralph must file the proper legal documents.

B

Under the minimum distribution rules, Jason is required to take a minimum distribution of $10,000 this year from his IRA. However, a distribution of only $8,000 has been made. What is the dollar amount of penalty that may be assessed in this situation? A) $200 B) $1,000 C) $2,000 D) $4,000

B

What is the total amount that may be invested in a Coverdell Education Savings Account in 1 year? A) The current maximum per parent B) The current maximum per child C) The current maximum per couple D) The current maximum per family member

B

Which of the following is the beneficial owner of securities in an UTMA account? A) The donor B) The minor C) The guardian D) The custodian

B

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

B

Which of the following securities is the least suitable recommendation for a qualified money purchase plan account? A) Large-cap common stock B) Investment-grade municipal bond C) Treasury bond D) A-rated corporate bond

B

One of your clients has made plans to get an advanced degree by enrolling in the local community college in three years. At the same time, her child expects to be entering veterinary school. What would you recommend as the most appropriate tool to accumulate funds for both of them? A) Coverdell ESAs B) Section 529 plans C) UTMA accounts D) Variable annuities

B A Section 529 plan for each as beneficiary would be most appropriate, largely because the others wouldn't work. The parent certainly isn't a minor so UTMA is out and that makes the Coverdell ESA a non-option because contributions can't be made after the 18th birthday. Variable annuities are retirement vehicles and, with their generally high surrender charges, would not be a suitable recommendation with a three-year time horizon.

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

B All qualified retirement plans must be established under a trust agreement. Contributions with this type of plan are not required annually, nor can the plan make direct cash payouts to participants before retirement.

To comply with Section 404(c) of ERISA, A) the plan must cover all full-time employees with at least 1 year of service who are 21 or older B) the plan must offer at least 3 different investment choices, such as a stable value option, an income option, and a conservative growth option C) the plan fiduciary must act in accordance with the provisions of the retirement plan's objectives and goals D) plan participant loans must be limited to 50% of vested assets or $50,000, whichever is less

B Although each of these statements is true, the only one that applies to Section 404(c) is the fact that the plan must offer a selection of at least three investment choices with materially different risk and return characteristics.

Which of the following is NOT required under ERISA Section 404(c)? A) Plan participants must have access to a broad range of investment alternatives. B) All plan participants must have been employed by the plan sponsor for a minimum of 3 years. C) Individual accounts must be provided for each plan participant. D) Each plan participant must have the ability to exercise independent control over assets in her account.

B ERISA Section 404(c) relieves the employer of fiduciary responsibility for investment decisions made by employees. To qualify for this protection, employees must enjoy the benefits and risks of their decisions (individual accounts), have the right to exercise independent control over the account, and have a sufficiently broad range of choices to make the right of control meaningful. Section 404(c) has nothing to do with the employee's length of employment.

Under ERISA, a fund manager wishing to write uncovered calls may do so A) if explicitly allowed in the plan document B) under no circumstances C) if approved by the IRS in writing D) without restrictions

B ERISA prohibits retirement plans from making investments that are excessively speculative, such as uncovered call writing, which possesses unlimited risk.

Which of the following transactions for ERISA plans is not specifically prohibited? A) Lending money or extending credit between a plan and a disqualified person B) A transfer of plan income or assets for the benefit of a plan beneficiary or plan participant which they are entitled according to the provisions within the plan C) A transfer of plan income or assets to, or use of them by or for the benefit of a disqualified person D) Any act of a fiduciary by which plan income or assets are used for the fiduciary's own interest

B ERISA serves as a basis of rules which protect the beneficiaries and plan participants. It is permitted for a fiduciary to transfer plan income or assets for the benefit of a plan beneficiary or a plan participant which they are entitled according to the provisions within the plan. It is not allowable for the fiduciary to transfer or loan plan assets for the benefit of a disqualified person such as the fiduciary of the plan or a person providing services to the plan.

Mary teaches physics at the local high school and makes about $70,000 per year. She could maximize her annual retirement savings by participating in A) an employer-funded 401(k) plan. B) a 403(b) and a 457 plan. C) a 403(b) plan and an IRA. D) a 403(b) plan.

B Employees of public schools can legally maintain both a 403(b) plan and a 457 plan. In 2018, if both plan limits are contributed, that can be $37,000 ($49,000 if Mary is 50 or older and uses the $6,000 catch-up provision available with both plans). A 401(k) plan is not available for public sector employees.

What is the proper course of action for the fiduciary of a trust that has a portfolio made up of 10% cash and 90% stock of one company that has recently experienced a 40% market gain? A) Increase the cash position to 25% by taking some of the profits off the table B) Maintain the current allocation if, while acting in the capacity of trustee, he believes it aligns with the goal of the trust C) Begin diversifying the equity portfolio D) Use the cash to acquire more shares of the stock

B In almost every trust question, the correct answer will be that the trustee (fiduciary) has to follow the terms of the trust and meet the trust's goals and objectives.

Which of the following could NOT participate in a Keogh plan? A) Self-employed individual who owns an IRA B) Limited partner who does not contribute any personal services to the partnership but has invested money C) Spouse of a self-employed individual who works for the business D) Employee of a self-employed individual

B Keogh plan participants must work for the business. This may include a sole proprietor, a partner who works in the business, or an employee, but not a limited partner who contributes no personal services (meaning there is no compensation paid).

Which of the following statements regarding loans from 401(k) plans is NOT correct? A) They must bear a reasonable rate of interest. B) They must be made available to highly compensated employees in amounts greater than that made available to other employees. C) They must be adequately secured. D) They must be made in accordance with the loan provisions stipulated in the 401(k) plan.

B Loans must be repaid with interest, generally within 5 years. They must be secured and made in accordance with plan provisions. Loans may not be made available to highly compensated employees in amounts greater than that made available to other employees.

A 45-year-old employment counselor has a Keogh plan for himself and 3 full-time employees who have been working for him for the past 4 years. If he earns $150,000 this year and contributes the maximum amount allowed to his Keogh plan, how much may he invest in an IRA? A) He may invest any amount up to 100% of his earned income. B) He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. C) He may not have an IRA. D) He may have an IRA but may not make a contribution for this year.

B Regardless of how much is invested in a Keogh plan, an investor may still invest in an IRA if he has earned income. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible.

The child of one of your clients is headed off for a year of graduate study at the University of Oxford in England. The Section 529 plan used to fund the child's undergraduate study still has about $20,000 in the account. Because Oxford is on the U.S. Department of Education's list of approved institutions, qualified expenses would include which of the following? A) Textbooks used to supplement the required reading assignments B) The full cost of tuition and required fees C) Dues to sports clubs or societies D) The full cost of an off-campus luxury apartment

B The list of qualified expenses is rather small and includes mandatory tuition and fees, as well as room and board on campus. If off-campus, the qualified portion is limited to basically the amount that would be charge for on-campus accommodations. Although required textbooks are qualified, any texts purchased to supplement one's study are not.

Your client's wife retired as a 3rd grade teacher in 2009, where she was covered under the school system's 403(b) plan. If she resumes employment with a corporate employer, and that new employer has a 401(k) plan, is she entitled to defer RMDs from the 403(b) plan past the regular age 72 date? A) RMDs may never be deferred for those who were participants in a 403(b) plan. B) RMDs may be deferred only from the plan sponsored by the current employer. C) RMDs may be deferred only if the current employer offered a 403(b) plan. D) RMDs may be deferred as long as the individual is employed on a full-time basis.

B The rule is that you can only defer RMDs in the plan of the employer where you are currently employed. For example, assume you retire from Company A and get a job with Company B, and both companies have a 401(k) plan. You can only defer RMDs from the Company B plan, because that is your current employer; you will have to take RMDs from the Company A plan. The same would be true if it were 2 different school systems with 403(b) plans.

A self-employed attorney has income of $110,000 per year. If he contributes $4,000 to his traditional IRA and has no other retirement plans, which of the following statements is true? A) The contribution is not tax deductible. B) The contribution is fully tax deductible. C) The contribution is not permitted. D) The contribution is partially tax deductible.

B Traditional IRA contributions are fully deductible no matter how much income is earned if the taxpayer is not covered by any other qualified plan. Anyone with earned income can contribute to a traditional IRA.

Among the benefits of an HSA is A) the amount that may be contributed is based on the number of dependents. B) funds not used for health expenses may be invested in mutual funds and other securities. C) up to $10,000 per year may be accumulated. D) funds may be used for various medical expenses once the low deductible has been met.

B Unlike an FSA (flexible spending account), employee contributions to a health savings account (HSA) not used for medical expenses may be invested in a wide variety of securities. Although mutual funds are the most common, many providers offer the opportunity to invest in stocks and bonds. Remember, one of the eligibility requirements for an HSA is a high, not low, deductible. Currently, the maximum contribution is $3,450 for an individual or $6,850 if family coverage, regardless of the number of dependents covered.

A participant in an ERISA qualified retirement plan is studying the investment policy statement (IPS) prepared by the plan's fiduciary. The contents of the IPS would not include A) determination for meeting future cash flow needs B) investment philosophy including asset allocation style C) specific security selection D) methods for monitoring procedures and performance

C

All of the following are general principles of the prudent investor standard EXCEPT A) diversification B) reasonable expected returns C) profit guarantees D) liquidity of investment

C

All of the following investments are eligible for a traditional IRA EXCEPT A) limited partnerships B) growth-oriented securities C) works of art D) covered call writing

C

All of the following permit investments into various securities, such as stocks, bonds, and mutual funds EXCEPT A) an HSA. B) a traditional IRA. C) an FSA. D) a Roth IRA.

C

If a retiree is paid an annual amount equal to 30% of the average of his last 3 years' salary, which of the following retirement plans offers this type of payment? A) Money purchase pension B) Deferred compensation C) Defined benefit ​pension D) Profit-sharing

C

MWhen saving money for a child's college education, one consideration is the impact that those savings will have on the child's eligibility for financial aid. Funds saved in which of the following vehicles has the most detrimental effect on financial aid? A) Section 529 B) Coverdell ESA C) UTMA D) Prepaid tuition plan

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 A) 32. B) 24. C) 30. D) 25.

C

Tammy Jones is retiring from her company next month on her 62nd birthday. Her 401(k) has $300,000 and offers her 4 different mutual funds. After calculating what she will receive from Social Security, she concludes that she will need an additional $500 a month to retain her current lifestyle. Which of the following would be the most appropriate recommendation? A) Roll the money into a mutual fund withdrawal plan B) Leave the money in her current 401(k) account C) Roll the money into a traditional IRA D) Take a lump-sum distribution of the entire $300,000

C

The main disadvantage of a contributory defined contribution pension plan is that A) the employer contributed toward the retirement planning of the employee. B) at retirement, the client might want to use the retirement fund to generate income in retirement, possibly by purchasing an annuity. C) the actual sum an employee will receive at retirement is unknown. D) the employees can choose the amount they wish to invest.

C

The nondiscrimination rules imposed on qualified retirement plans by the Internal Revenue Code are intended primarily to ensure that retirement plans do not discriminate A) against female employees B) against employees over age 40 C) in favor of a company's owners, top executives, and key employees D) against a company's owners, top executives, and key employees

C

Which of the following statements describes an advantage of a Roth IRA over a traditional IRA? A) There are no annual contribution limits once an individual attains age 59½. B) The AGI limits for contributions are the same as those for traditional deductible IRA contributions. C) Qualifying distributions are received free of income tax if a holding period and age requirement is met. D) The required minimum distribution date rules do not apply if the distribution is made in the form of an annuity.

C

A premature distribution from an IRA would be exempt from the premature distribution penalty under all of the following circumstances EXCEPT A) upon the death of the IRA owner B) to correct an excessive contribution to the IRA C) as a result of hardship D) to pay for qualifying medical expenses

C Hardship withdrawals are not permitted from IRAs. They are a feature permitted in 401(k) plans.

Which of the following is considered to be a security? A) Section 403(b) plan B) Coverdell ESA C) Section 529 plan D) Section 457 plan

C The definition of security specifically excludes retirement plans (the Coverdell was originally known as the Education IRA). Section 529 plans are technically considered municipal fund securities.

A 401(k) offering which of the following choices would be most likely to be in compliance with Section 404(c) of ERISA? A) Money market fund, intermediate-term municipal bond fund, large-cap stock index fund B) Small-cap fund, large-cap stock ETF, money market fund C) Money market fund, intermediate-term government bond fund, large-cap stock index fund D) Long-term bond fund, large-cap stock index fund, foreign equity fund

C The trustee of a 401(k) would be able to reduce her ERISA fiduciary exposure and meet the safe harbor provisions of 404(c) if the plan offered a broad index fund, a medium term government bond fund, and a cash equivalent fund. It isn't the number of funds that counts; it is the different asset classes available. In general, a municipal bond fund (or municipal bonds themselves) would be an inappropriate investment for a tax-qualified plan.

During your annual review with your clients, Matt and Sally Eberhart, they indicate that they think it is time to start putting away some money for college for their 3-year-old son. They ask you to describe the advantage of using an UTMA account over a Coverdell ESA. You would likely point out all of the following as advantages EXCEPT A) withdrawals for other than qualified education expenses are not subject to any penalties B) there is no limit to the amount that can be contributed to an UTMA C) contributions to the UTMA are made with after-tax dollars D) there are no earnings limits for making UTMA contributions

C We're looking for a feature possessed by the UTMA that is not found in an ESA, but in both cases, contributions are made with after-tax dollars. Therefore, you would not describe that as an advantage. Unlike the ESA where couples earning in excess of $220,000 per year are not eligible to contribute, no such ceiling is imposed on those donating or transferring property to an UTMA. Unlike the ESA, where there is a 10% tax penalty on the earnings withdrawn for nonqualified educational expenses, no such penalty applies to an UTMA. Unlike the ESA, which has a $2,000 per year per child limit, there is no limit to the amount that one can give to an UTMA. However, unlike the ESA, where all earnings are tax free if used for qualified educational expenses, earnings in an UTMA are taxable and, if over a certain amount, might be taxed at the parent's top marginal rate.

Each of the following individuals is eligible to participate in a Keogh plan EXCEPT A) a securities analyst employed by a major research organization who makes $2,000 giving lectures in his spare time B) an engineer employed by a corporation who earns $5,000 making public speeches in her spare time C) a self-employed doctor in private practice D) an executive of a corporation who receives $5,000 in stock options from his company

D Individuals with income from self-employment may participate in Keogh plans. Stock options, capital gains, dividends, and interest are not considered income earned from self-employment.

A pension plan administrator would probably be able to qualify for the exemption offered under the safe harbor provisions of 404(c) of ERISA if the plan offered which of the following choices? A) DEF Long-term Investment Grade Bond Fund; PQR U.S. Government Bond Fund; STU High Yield Bond Fund B) ABC Large-Cap Growth Fund; JKL Small-Cap Technology Fund; MNO International Equities Fund C) PQR U.S. Government Bond Fund; GHI Money Market Fund; VWX Global Bond Fund D) ABC Large-Cap Growth Fund; DEF Long-term Investment Grade Bond Fund; GHI Money Market Fund

D

An employer has a qualified retirement plan that promises to pay employees a specific percentage of their average salary if they complete 20 years of service. This type of pension plan is A) a 401(k) plan B) a defined contribution pension plan C) a profit-sharing plan D) a defined benefit pension plan

D

An investment adviser representative recommending investments for an IRA should give primary consideration to A) maximum current income B) the beneficiary's tax status C) liquidity D) risk

D

When operating a Keogh plan, a self-employed individual must make contributions for A) part-time employees who have worked for the company for 3 or more years B) all employees C) all employees scheduled to work for 1,000 hours per year or more D) full-time employees who are at least 21 years old and have worked for the company for 1 or more years

D

Which of the following is the most suitable investment for the IRAs of a young couple with a combined annual income of $80,000? A) Partnership interests in an oil and gas drilling program B) Initial public offerings of small companies C) Options on large-cap common stock D) Shares of a growth fund

D

Which of the following securities is most suitable for an investment adviser representative to recommend to a 26-year-old customer opening an IRA? A) Municipal bond fund shares B) Put options C) Term insurance contract D) Growth stock mutual fund

D

Which of the following statements describing traditional IRAs is NOT true of 403(b) qualified plans? A) Contributions are tax deductible. B) Distributions after age 59½ are taxed as ordinary income. C) Distributions must begin by age 72. D) A self-employed person may participate.

D

A nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees is called A) a defined contribution plan. B) a payroll deduction plan. C) a defined benefit plan. D) a SERP.

D A supplemental executive retirement plan (SERP) is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees. It is probably not a testable point, but these are frequently funded with cash value life insurance policies. Defined benefit and defined contribution plans are qualified - the question states, nonqualified. A payroll deduction plan is usually nonqualified, but that is most often used by lower income employees; it is definitely not an executive's plan.

Money in an UTMA may be used to pay for certain expenses relating to the minor. Which of the following would be permitted usage of funds in an UTMA? A) Milk, bread, and eggs B) A new suit C) Paying for the minor's share of the heating and lighting expenses D) A vacation trip to Orlando

D Although the custodian has wide latitude in how money in this account may be spent, in general, it is not permitted to use it for the basic necessities, such as food, clothing, and shelter.

Under the UTMA, which of the following statements is NOT true? A) An UTMA account may have only one custodian for only one minor. B) Once a gift is given to a minor, it cannot be reclaimed. C) Only an adult can make a gift to a minor. D) The maximum amount of money an adult can give to a minor in any one year is $15,000

D Any adult can give a gift to a minor in a custodial account. There is no limitation on the size of the gift. However, any gift in excess of $15,000 (or such higher number as indexing provides for) will possibly subject the donor to a gift tax liability.

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

D No matter how much income individuals or couples receive, they may contribute to their IRAs if they have earned income. Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.

All of the following statements concerning qualified tuition programs for educational funding are correct EXCEPT A) a college savings plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred B) unless there is a change in beneficiary, assets in the QTP may be moved from the plan of one state to the plan of another as frequently as once per 12 months C) prepaid tuition plans are plans where prepayment of college tuition is allowed at current prices for enrollment in the future D) control over the account passes to the student/beneficiary once withdrawals commence

D One of the advantages of QTPs (qualified tuition ​programs, better known as Section 529 plans) is that the owner-contributor ​is always in control of the program. Without a change in beneficiary, plan "rollovers" are limited to once per 12-month period.

One of your clients is planning to participate in a pension plan. Which of the following statements is least accurate? A) In defined benefit pension plan, the client can have some reasonable certainty about the amount of income she will receive in retirement. B) In a defined benefit pension plan, the client would have the advantage of a guaranteed retirement payment from the employer. C) In a defined contribution pension plan, the eventual amount of the client's retirement benefits will depend upon the fund's investment performance. D) A defined contribution pension plan makes retirement planning significantly easier than a defined benefit pension plan.

D The disadvantage of a defined contribution pension plan is that the actual income the employee will receive in retirement will not be known in advance of retirement. Therefore, this makes effective planning significantly more difficult.

You have a client who is not covered under an employer-sponsored retirement plan and has been contributing the maximum to her traditional IRA. She has just informed you that she won $1 million in the lottery, plans to continue working, and would like to continue to contribute to her IRA. Which of the following statements is correct? A) She may continue to contribute, but only a portion of her contribution will be tax deductible. B) Her income for the year exceeds the allowable limit for making a contribution. C) She may continue to contribute, but her contribution will not be tax deductible. D) She may continue to contribute and her contribution will be tax deductible.

D The only time that there is an earnings limit is when the individual (or spouse) is covered under an employer-sponsored retirement plan. That is not the case here. It is important to note that the client intends to continue in her job because lottery winnings are not considered earned income for an IRA contribution.

Since its inception in 1986, virtually all the states have replaced the Uniform Gifts to Minors Act with the Uniform Transfers to Minors Act. It is generally agreed that one of the primary benefits offered by UTMA over UGMA is A) mandatory surrender of control at majority B) greater flexibility in naming custodians C) greater flexibility in naming beneficiaries D) greater flexibility in the type of property that may be transferred

D The property that may be transferred into an UGMA account is generally limited to cash and securities, while in an UTMA account, almost any kind of property—real or personal, tangible or intangible—can be transferred to the custodian.

Which of the following statements regarding both traditional and Roth IRAs is true? A) Withdrawals at retirement are tax free. B) Distributions must begin in the year after the owner reaches age 72. C) Contribution limits are the same. D) Contributions are tax deductible.

C

All of these would be characteristics of a traditional 401(k) plan EXCEPT A) the employer can contribute more than 25% of total payroll B) employees may have a portion of their contribution matched by the employer C) in-service employees may be eligible for hardship withdrawals D) employees can choose from a variety of investment options

A 401(k) plans provide for hardship withdrawals, a choice of investment options, and employer matching. Although there are exceptions to this, in general (and on the exam), you will have to know that the employer share of the contributions to a traditional 401(k) plan (or any other DC plan) may not exceed 25% of total payroll.

Which of the following individuals is clearly eligible to make a catch-up contribution? A) Emily, who is fully vested B) Hannah, who is 55 years old C) Sam, who has completed 15 years of service D) Roger, who has completed 1 year of service

B

Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) Unemployment compensation B) Municipal bond interest C) Salary and commissions D) Dividends paid on preferred stock

B

All of the following investments are eligible for a traditional IRA EXCEPT A) covered call writing B) works of art C) growth-oriented securities D) bank CDs

B

In a qualified plan, if the employer makes all the contributions, the employee's cost basis is A) the value of the contributions B) zero C) one-half of the contributions made D) the increase in value only

B

Marv teaches literature at the local high school and makes about $60,000 per year. He could maximize his annual retirement savings by participating in A) a 401(k) plan B) a 403(b) plan. C) a Roth IRA. D) a SEP-IRA

B

One reason why employers like using deferred compensation plans is that A) IRS approval is easily obtained B) they can be structured so that the employee's benefits are forfeited upon termination with cause C) with all employees receiving the same benefit, plan administration is simplified D) they provide larger tax deductions than any other plan

B

Qualified annuity plans offered under Section 403(b) of the Internal Revenue Code, referred to as tax-sheltered annuities (TSAs), are not available to A) a church minister B) a student at a nonprofit college C) a public school custodian D) a nurse at a nonprofit hospital

B

Which of the following is an allowable early withdrawal from a traditional IRA without a tax penalty? A) A single parent withdraws funds from her IRA to pay for the education of a nephew. B) A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence. C) A single parent supplements a home equity loan with funds from her IRA to pay for a second home. D) A person withdraws funds from his IRA to pay for elective cosmetic surgery.

B An individual withdrawing up to $10,000 from his IRA to purchase his first principal residence would have the 10% tax penalty waived; the wealth of the individual is not relevant. Although there are certain circumstances where funds may be withdrawn for medical expenses, elective cosmetic surgery does not qualify.

Which of the following employer-sponsored plans allows coverage to discriminate in favor of key employees? A) Defined benefit pension plan B) 457 plan C) 401(k) plan D) 403(b) plan

B Because the 457 plan is technically non-qualified, it does not come under the non-discrimination rules of ERISA.

A disadvantage of a defined benefit pension plan to the employee is that A) the funds are an integral part of the retirement planning process. B) at retirement, the employee may not be earning as much as when she was at her peak earning power. C) the risk of fund performance is borne by the employer. D) the individual is guaranteed a payout at the time of her retirement by her employer.

B In defined benefit pension plans, the retirement benefit is based on two factors: the final salary and the number of years of service. In some cases, earnings are reduced in those final years before retirement as the employee moves to a less stressful position. Because the benefit is defined, the employer bears the investment risk.

A self-employed CPA has earned $38,000 from his practice; he also earned $2,300 interest on his savings. What is the basis for his deposit into his defined contribution Keogh (HR-10) account this year? A) $2,300 B) $38,000 C) $40,300 D) $35,700

B Only earned income may be included in determining the income eligible for Keogh contributions. Dividends and interest are classed as portfolio income and are not included.

Tim earns $30,000 at his employment and is not offered a pension plan. His spouse is not currently employed. What is the best way to set up an IRA to give maximum retirement benefits? A) Set up separate accounts totaling $12,000. B) Set up one joint account for $12,000. C) Set up separate accounts for $6,000 each. D) Set up one IRA for $6,000 or 100% of earned income, whichever is less.

C A one-worker couple can open a spousal IRA. This type of arrangement allows the contribution of a total of $12,000 to the two accounts and no more than $6,000 in either account. Selecting separate accounts totaling $12,000 could imply that one account could exceed $6,000 while the other would be less. IRAs are always individual accounts. The spousal IRA allows contributions on behalf of a nonworking spouse.

All of the following statements concerning IRA contributions are true EXCEPT A) contributions can be paid into this year's IRA from January 1 of this year until April 15 of next year B) between January 1 and April 15, contributions may be made for the current year, the past year, or both C) contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis D) if you pay your tax on January 15, you can still deduct your IRA contribution, even if not made until April 15

C Contributions can be made to an IRA only until the first tax filing deadline (April 15), regardless of having filed an extension.

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 this year. What amount, if any, can Harry also contribute to the Roth IRA? A) $0 B) $2,500 C) $3,000 D) $4,000

D

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

D

It would be incorrect to state that a lump-sum distribution from a 401(k) before retirement may be A) subject to ordinary income tax and penalty B) eligible to be rolled over into a traditional IRA C) eligible to be transferred to a Roth IRA D) tax free if the recipient is disabled

D A distribution to someone who is disabled is free of the 10% penalty tax but is still subject to taxation as ordinary income. Distributions from a qualified retirement plan (e.g., a 401(k) plan) prior to retirement are subject to tax and possible penalty unless the funds are rolled over or transferred into a traditional IRA. If, instead, the move is made into a Roth IRA, there is no penalty, but tax would be due just the same as if one converted from a traditional to a Roth IRA.

Which of the following retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements? A) Keogh plan B) Defined benefit pension plan C) Profit-sharing plan D) Payroll deduction plan

D A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.

Jill is an investment adviser representative with FairPlay Advisers, an SEC-registered investment advisory firm. At the recommendation of a close friend who is a client of Jill's, Tom comes in for an interview and portfolio analysis. When examining Tom's IRA, which of the following holdings would Jill feel the need to immediately review? A) JKL Money Market Fund B) GHI Large-Cap Equity Index Fund C) DEF U.S. Government Bond Fund D) ABC Municipal Bond Fund

D Although not illegal, it is generally considered inappropriate to include tax-exempt securities, such as municipal bonds (whether individual bonds or in a fund), in a tax-deferred retirement plan.