Series 7 Review - Unit#2
Minimum distributions from a traditional IRA must begin: A) by April 1, the year after the owner turns 72. B) once the owner retires. C) as soon as the owner turns 72 D) a year after the owner turns 59½.
A Minimum distributions from a traditional IRA must begin by April 1 of the year after the owner turns 72.Please Note: This question has been updated for the SECURE Act that became effective on January 1, 2020. Please check the Content Updates for more information Reference: 2.5.1 in the License Exam Manual
Which of the following are qualified plans? I. Payroll deduction. II. Deferred compensation. III. Defined benefit. IV. Defined contribution. A) II and IV. B) III and IV. C) I and II. D) I and III.
B Defined benefit and defined contribution plans are funded with pretax contributions and are thus qualified plans. Payroll deduction and deferred compensation plans are funded with after-tax contributions and are thus nonqualified plans. Reference: 2.6.1 in the License Exam Manual
All of the following statements regarding a transfer on death (TOD) account are correct EXCEPT: A) estate taxes are reduced. B) only those assets held at the broker/dealer are transferred. C) probate is avoided. D) the owner of the account may change beneficiaries at will.
A A TOD account avoids probate, but not estate taxes. The owner of the account may change beneficiaries and their percentages as he wishes. The TOD account is an account at a specific broker/dealer and only relates to the assets in that account. Reference: 2.1.1 in the License Exam Manual
To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes I. name II. verbal assurance that the customer is of legal age III.a street address, unless the primary mailing address is a post office box located in the state of residence IV. a taxpayer identification number A) III and IV B) I and II C) II and III D) I and IV
D Mere verbal assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A post office box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired drivers license or passport. Reference: 2.3.2 in the License Exam Manual
An agent is permitted to open all of the following customer accounts EXCEPT: A) an account in the name of Mrs. Jones opened by Mr. Jones. B) a partnership account opened by the designated partner. C) a minor's account opened by a custodian. D) a corporate account opened by the designated officer.
A An agent is not permitted to open an individual account in the name of a third person. Reference: 2.3.1 in the License Exam Manual
An employee not covered under his company's pension plan has been contributing to a traditional IRA for 5 years. If he leaves his current job, starts a new job, and is covered under the new corporation's pension plan, which of the following statements is TRUE? A) Contributions to his traditional IRA may continue. B) Contributions to his IRA must stop; the money in the account will be frozen, but interest and dividends can accrue tax-free until he retires. C) The money in his IRA must be combined with any money he will receive from the pension plan. D) His traditional IRA must be closed.
A An employee covered under a qualified retirement plan may continue to own and contribute to an IRA. The contributions to a traditional IRA may not be fully tax-deductible, depending on the amount of compensation earned, but the employee benefits from the tax deferral of IRA earnings. Reference: 2.5.1 in the License Exam Manual
The owner of an IRA, age 45, has contributed $10,000 into the account and the IRA is now worth $20,000. The owner is going to convert the entire $20,000 into a Roth IRA. What are the tax consequences of this conversion? A) The $20,000 is taxable as ordinary income in the year of the conversion. B) $10,000 will be taxable as ordinary income, and $10,000 will be taxed as a capital gain, in addition, there will be a $2,000 tax penalty for early withdraw. C) The $20,000 is taxable as ordinary income but there is a $2,000 tax penalty for early withdraw. D) $10,000 will be taxable as ordinary income and $10,000 will be taxed as a capital gain.
A Answer A. When converting from a (traditional) IRA to a Roth IRA, the distribution is all taxed as ordinary income in the year of the conversion. There is no 10% tax penalty if the conversion is done prior to age 59 1/2. Reference: 2.5.3 in the License Exam Manual
Under SEC rules, which of the following events require a broker/dealer to furnish a copy of the account record to a customer? I. Change of broker/dealers address II. Change of customer's name or address III.Change of customer's investment objectives IV.Change in registered representative assigned to the account A) II and III B) I and IV C) I and III D) II and IV
A Any change in a customer's status, particularly those that may impact the suitability of recommendations, requires a broker/dealer to update the customer account record and furnish it to the customer within 30 days of receipt of the change notice. Reference: 2.3.1 in the License Exam Manual
Which of the following is NOT true in jurisdictions that recognize the marital property designation known as community property? A) Community property applies to property owned individually before a marriage once the marriage has occurred. B) There may be tax implications regarding the dissolution of community property at the time of a divorce, marriage annulment, or death. C) Community property laws do not apply to gifts. D) Community property laws do not apply to inheritances.
A Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. In addition, it does not apply to inheritances or gifts. There can be federal tax implications for property designated as community property and laws in states that recognize community property ownership differs from jurisdiction to jurisdiction. Reference: 2.2.2 in the License Exam Manual
Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding EXCEPT A) deferred compensation plans B) Keogh plans C) profit-sharing plans D) corporate pension plans
A Deferred compensation plans are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA. Reference: 2.4.4 in the License Exam Manual
Which of the following plans is NOT required to meet the nondiscrimination provisions of ERISA? A) Deferred compensation plans. B) 403(b) plans. C) 401(k) plans. D) Keogh plans.
A Deferred compensation plans, by design, are nonqualified and not subject to ERISA. Therefore, they may discriminate as to which persons may participate. Reference: 2.4.1 in the License Exam Manual
Your customer has contributed $1,000 annually into her Roth IRA for 7 years. Which of the following statements concerning her Roth IRA distributions is TRUE? A) Your customer will not be taxed on the distributions if she is over the age of 59½ and the money has been held in the account for 5 years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. B) Your customer will pay ordinary income taxes on the part of the distribution that represents earnings. C) The distributions are taxed as ordinary income. D) The distributions are taxed as capital gains.
A Distributions from Roth IRAs made after age 59½ are tax-free if the money was in the account for 5 years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. Contributions to Roth IRAs are made with after-tax dollars. Reference: 2.4.2 in the License Exam Manual
Qualified distributions from Roth IRAs are: A) tax free. B) 100% taxable. C) taxable only to the extent of earnings. D) tax deferred.
A If a withdrawal from a Roth IRA is a qualified distribution, the withdrawal is tax free. A qualified distribution is made after a 5-year holding period and after the taxpayer has reached age 59½. Reference: 2.5.2 in the License Exam Manual
A customer asks your advice regarding a deferred compensation plan at work. You state that A) deferred compensation plans may be somewhat risky because the employee covered by the plan has no right to plan benefits if the business fails B) deferred compensation plans usually benefit younger employees because the money in the plan has more time to grow prior to retirement C) if the business fails, the employee is considered a secured bondholder in terms of liquidation priority and getting paid back D) if he sits on the board of directors and is also an employee of the company, he is not eligible for the plan
A If the business fails, the employee can lose everything they put in the plan. The participant will become a general creditor of the company and will be on the same level as unsecured bondholders in the liquidation priority. Reference: 2.4.1 in the License Exam Manual
Which of the following statements are TRUE regarding tax-deferred, noncontributory, defined benefit plans? I. Contribution amounts are fixed. II. Contribution amounts vary. III. Benefit payments are fixed. IV. Benefit payments vary. A) II and III. B) I and IV. C) I and III. D) II and IV.
A In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, etc. Reference: 2.6.1 in the License Exam Manual in the License Exam Manual
All of the following activities in a customer's mutual fund account may be considered a violation of the Conduct Rules EXCEPT: A) granting of discretionary authority to a new registered representative. B) excessive activity in the customer's account. C) switching of Class A shares between fund families. D) short-term trading in mutual fund shares.
A Mutual funds are considered a long-term investment. Thus, switching Class A shares of funds, short-term trading of funds, and excessive activity in a customer's account very likely indicate that the registered representative is churning. There is nothing unlawful about granting discretionary authority to a new registered representative. Reference: 2.3.4 in the License Exam Manual
All of the following statements regarding nonqualified deferred compensation plans are true EXCEPT: A) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities. B) Employees have no right to plan benefits if the business fails. C) Benefits payable to employees at retirement are taxable. D) Board members are not eligible for these plans as they are not considered employees.
A Needing no IRS approval, nonqualified deferred compensation plans may be discriminatory and offered only to certain employees such as key executives. An agreement between a company and an employee in which the employee agrees to defer some income until retirement, the benefits payable at retirement would be taxable at that time. Board members are not considered to be employees and therefore not eligible for these plans. Reference: 2.4.1 in the License Exam Manual
BAKE-ALL, a U.S. manufacturing corporation, has purchased shares of stock in RE-FORM, a U.S. corporation that refines raw materials. RE-FORM pays a dividend to its shareholders. For BAKE-ALL corporation, taxes will be due on what percentage of the dividends received from RE-FORM? A) 50% B) 0% (all dividends received are tax free) C) 100% D) 70%
A When a U.S. corporation receives dividends from another U.S. corporation it has invested in, 50% of the dividends received are excluded from taxation (tax free). Therefore, it is the remaining 50% of the dividends received that are taxable. Reference: 2.2.2 in the License Exam Manual
If a customer who has granted a durable power of attorney to her son dies, which of the following statements regarding the power of attorney is TRUE? A) It is canceled on the death of either principal. B) It remains in effect until the executor of the estate cancels it. C) It remains in effect only if the son is the sole heir to the estate. D) It remains in effect until the son cancels it.
A When the customer or her son dies, the power of attorney also expires. However, a durable power of attorney will survive a declaration of mental incompetence and is useful in those cases where a parent suffers from dementia. Reference: 2.3.4 in the License Exam Manual
If your 50-year-old client wants to withdraw funds from his traditional IRA, the early withdrawal will be taxed as: A) capital gains plus a 10% penalty. B) ordinary income plus a 10% penalty. C) ordinary income. D) capital gains.
B An early withdrawal from an IRA is taxed as ordinary income plus a 10% penalty. Reference: 2.5.1 in the License Exam Manual
The primary purpose for creating ERISA was to: A) promote a retirement fund for government employees. B) protect employees from the mishandling of retirement funds by corporations and unions. C) establish a means for self-employed persons to provide for their own retirement. D) provide all employees, both government and nongovernment, with an additional source of retirement income in the event that the Social Security system defaults.
B ERISA was created to protect the retirement funds of union members and employees of large corporations. ERISA guidelines state that all qualified retirement plans must be in writing, segregate funds from corporate or union assets, make prudent investments, report to participants annually, and not be discriminatory. All of these activities are audited under ERISA. Reference: 2.7 in the License Exam Manual
Under FINRA's rules governing the activities of member broker-dealers, prior notification to the employing firm and prior written consent from the employing firm would be required in order to open a brokerage account for all of the following EXCEPT A) an officer of another member firm opening a cash account B) a registered representative of another member opening a 529 plan C) a clerical employee of another member opening a margin account D) a registered representative of another member opening an options account
B FINRA requires prior written notification be made, and prior written consent be received before any employee can open a brokerage account with other members or financial institutions. Exceptions include accounts where the only activity will be in 529 plans, mutual funds, or variable annuities. Reference: 2.3.3 in the License Exam Manual
An employee of another broker/dealer would like to open an account with your firm. Under FINRA rules, all of the following statements regarding the employee and the account are true EXCEPT A) the employer must grant prior written approval to open the account B) the employer must approve each transaction before entry of the order C) if the employer requests them, they must receive duplicate copies of all account transactions D) the employer must be notified in writing of the opening of the account
B FINRA rules do not require prior approval of individual transactions by either the broker/dealer at which the account has been opened or the employing broker/dealer. The rules do require that the employing broker/dealer be notified in writing and that they give prior written consent before the account can be opened. Duplicate copies of account statements and confirmations must be supplied only if the employing BD has requested them. Reference: 2.3.3 in the License Exam Manual
Income from all of the following is partially exempt to a corporate investor EXCEPT A) income from common stock B) income from convertible bonds C) income from preferred stock mutual funds D) income from preferred stock
B Fifty percent of dividend income received from investments in common stock and preferred stock is excluded from taxation for a corporate investor. This exclusion applies to dividends from mutual funds where all of the portfolio securities are preferred or common stock. Reference: 2.2.2 in the License Exam Manual
All of the following regarding savings incentive match plans for employees (SIMPLEs) are true EXCEPT A) catch-up contributions for those age 50 and older are permitted B) employers cannot make matching contributions for employees C) SIMPLEs are retirement plans for small businesses with fewer than 100 employees D) employee contributions are pretax
B SIMPLEs are retirement plans for businesses with fewer than 100 employees that have no other retirement plan in place. The employee makes pretax contributions into a SIMPLE up to an annual contribution limit which can include catch-up contributions for those age 50 and older. The employer is permitted to make matching contributions for employees. Reference: 2.6.1 in the License Exam Manual
One of your clients dies. Upon notification of the death, you should immediately do all of the following EXCEPT A) cancel all day orders for the account B) obtain the names of the beneficiaries of the estate for the purpose of notification C) mark the account Deceased until proper documents are received D) cancel all GTC orders for the account
B The account registered representative should cancel all open orders and mark the account Deceased. The firm should not permit any trades until proper documents are received from the estate representative. It is not the responsibility of the firm to contact the decedent's attorney or the beneficiaries. Reference: 2.2.2 in the License Exam Manual
Which of the following types of retirement plans would be most beneficial to a young employee of a corporation? A) Defined benefit pension plan. B) Defined contribution pension plan. C) Profit-sharing plan. D) Keogh plan.
B The most beneficial corporate pension plan for a younger employee would be the defined contribution plan. The employee has many years to go in the workforce, so the investments made with the defined contributions will have a maximum time period to grow. Reference: 2.6.1 in the License Exam Manual
A new customer has given you written authorization to transfer the holdings in his account at another broker/dealer to his new account at your broker/dealer. Under the Uniform Practice Code, using the automated customer account transfer system form (ACATS) the carrying broker/dealer would have how many days to validate the positions and how many days to complete the transfer after validation? I. 1 business day to validate. II. 2 business days to validate. III. 2 business days to transfer after validation. IV. 3 business days to transfer after validation. A) II and IV. B) I and IV. C) II and III. D) I and III
B Under the Uniform Practice Code the carrying broker/dealer has 1 business day to validate positions and 3 business days to transfer to the receiving broker/dealer after validation. Reference: 2.3.6 in the License Exam Manual
The amount paid into a defined contribution plan is set by the: A) ERISA-defined contribution requirements. B) employer's profits. C) trust agreement. D) employee's age.
C A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan. Reference: 2.6.1 in the License Exam Manual
Obtaining all of the following complies with the regulations regarding customer identification programs (CIPs) EXCEPT A) name B) taxpayer identification number C) post office box, instead of a physical address, if it is the primary mailing address D) date of birth
C A post office box is never acceptable without a physical address. Reference: 2.3.2 in the License Exam Manual
Buying municipal bonds would normally NOT be considered suitable for A) a mutual fund portfolio B) a corporation's investment account C) a defined benefit plan portfolio D) an individual investor
C A defined benefit plan is a form of qualified tax-deferred corporate pension plan. Tax-free municipal bonds would never be considered suitable for a tax-deferred account. An individual investor, a mutual fund portfolio and a corporate investment account could call benefit from receiving tax-free municipal bond interest. Reference: 2.6.1 in the License Exam Manual
Broker/dealers are required to maintain customer identification programs (CIPs) and to check the names of new clients against A) a list maintained by the Securities Exchange Commission (SEC). B) a list of sanctioned people and organizations maintained by the Department of Enforcement. C) a list compiled by the OFAC. D) the FBI's most wanted list.
C All financial institutions are required by federal law to maintain a customer identification program and to check the identifying information against a list maintained by the Office of Foreign Assets Control (OFAC) for suspected terrorists or terrorist organizations. Reference: 2.3.2 in the License Exam Manual
When a customer, who is at least 59½, withdraws money from a traditional IRA that has been funded totally with deductible contributions A) the basis is taxed as ordinary income, the gains are taxed at the capital gains rate B) the withdrawal causes the entire IRA balance to be subject to taxation at ordinary income tax rates C) the entire amount withdrawn is subject to taxation at ordinary income tax rates D) unless qualifying for an exception, the entire amount withdrawn is subject to taxation at ordinary income tax rates with an additional 10% penalty
C All withdrawals from a traditional IRA that has been funded with pre-tax contributions are subject to taxation at ordinary income tax rates. There is no penalty once the account holder has reached age 59½. Reference: 2.4.2 in the License Exam Manual
Which of the following plans requires an actuary's services? A) 401(k). B) Defined contribution. C) Defined benefit. D) Profit-sharing.
C In a defined benefit plan the payout is established, and employers must contribute annually to assure payment of the benefit amount. An actuary must calculate the annual contribution amount necessary to meet the benefit requirement. Reference: 2.6.1 in the License Exam Manual
KLP Corporation has extensive investments in the stocks and bonds of other corporations. Its portfolio income this year amounts to $700,000 in interest income from bonds and $400,000 in dividend income from common and preferred stock. On how much of its portfolio income must it pay taxes this year? A) $120,000 B) $1.1 million C) $900,000 D) $300,000
C The corporate exclusion is 50% of dividend income; therefore, KLP must pay taxes on all $700,000 of its interest income, but only 50% (or $200,000) of its dividend income, for a total of $900,000. Reference: 2.2.2 in the License Exam Manual
If a customer wishes to open a cash account, who must sign the new account form? A) Only the registered representative B) The customer, the registered representative, and the principal C) Only the principal D) Only the customer
C The customer's signature nor the registered representative's signature is required to open a cash account. A principal must review and then accept the new account by signing the form. Reference: 2.3.1 in the License Exam Manual
Which of the following permits the highest annual contributions? A) A Coverdell Education Savings Account. B) A traditional spousal IRA for which the contribution has been deducted. C) A SEP IRA. D) A traditional nondeductible IRA.
C Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs. Reference: 2.6.1 in the License Exam Manual
A client of your member firm dies. In correct order, you should I. freeze the account. II.accept orders from the executor. III.obtain the death certificate and other legal documents. IV.cancel all open orders. A) I, IV, III, II. B) III, IV, I, II. C) IV, I, III, II. D) II, III, IV, I.
C Upon death of a client, all open orders must be canceled. The account is then frozen until proper legal documentation is received. Once that has occurred, the executor may begin conducting activity in the account. Reference: 2.2.2 in the License Exam Manual
Under FINRA rules, the carrying member, after receiving account transfer instructions from the receiving member must validate the positions in the account within how many business days of receipt? A) 5 days B) 4 days C) 1 day D) 7 days
C Within 1 business day following receipt of the transfer initiation form (TIF), the carrying firm must validate the positions in the account and within 3 business days following validation, the carrying firm must complete the transfer of the account. Reference: 2.3.6 in the License Exam Manual
A corporate profit-sharing plan must be set up under a(n): A) administrator. B) beneficial ownership. C) conservatorship. D) trust.
D All corporate pension and profit-sharing plans must be set up under trust agreements. A plan's trustee assumes fiduciary responsibility for the plan. Reference: 2.6.1 in the License Exam Manual
Your customer, age 60, is retired and living at home with a fully-paid-off mortgage. Her portfolio contains growth stocks and high-quality bonds, and she is a long-time investor and comfortable with moderate risk. Her objective is a moderate level of current income to supplement her corporate pension plan distributions and the earnings from her IRA. How are the distributions taxed from her IRA? A) If a security is sold for more than it was purchased for, the distribution of the profit is taxed as a capital gain. B) The distribution is taxed as either ordinary income or capital gains, depending on the source of the distribution. C) If the IRA has been owned for more than one year, the distributions are long term capital gains. D) All taxable distributions from a (traditional) IRA are taxed as ordinary income.
D All taxable distributions from a retirement account, including IRAs are taxed as ordinary income, not capital gains. Reference: 2.4 in the License Exam Manual
In an IRA, a 6% penalty will be levied if the account owner: A) makes a premature withdrawal. B) fails to make a contribution by April 15. C) changes the beneficiary designation more than once during any calendar year. D) makes an excess contribution.
D Excess contributions to an IRA are subject to a 6% penalty tax. Reference: 2.5.1 in the License Exam Manual
All of the following statements regarding a qualified pension plan are true EXCEPT A) it must comply with nondiscrimination rules B) it must cover all of its eligible employees C) it requires advance approval from the IRS D) growth in the account is tax-free
D Growth in qualified pension plans, as well as other qualified plans, is tax deferred, not tax-free. All growth is taxable at the time of distribution. Reference: 2.7 in the License Exam Manual
