Test 2
Which one of the following statements is correct regarding a nondeductible IRA?
In many cases, a person who is eligible to make a nondeductible IRA contribution may choose to make a Roth IRA contribution instead.
Which one of the following is correct regarding Medicaid?
It is a government health insurance program designed for individuals with low income and minimal assets.
Which one of the following statements best describes a golden parachute plan?
It is an arrangement between an employer and an executive that will provide the executive with severance benefits if the employer is sold and the new owner fires the executive.
Which one of the following correctly describes the federal gift tax annual exclusion?
It is the maximum amount of present interest gifts allowed to be transferred free of gift taxes per donee per year or the actual amount given to the donee, whichever is less.
Nick wants to maintain the purchasing power of $75,000 (in today's dollars) in retirement. If inflation continues to average 3.5%, approximately what amount will Nick need in 20 years to equal the purchasing power of $75,000 today? (Round your answer to the nearest $5,000.)
Keystrokes: 20 N, 3.5 I/YR, 75,000, +/-, PV, FV = $149,234; rounded to the nearest $5,000 = $150,000
Wally and Kim, a married couple with an average life expectancy, have a retirement budget of $6,000/month. While they are both alive their Social Security and Kim's military retirement will pay $4,500/month. Wally's IRA is sufficient to generate $1,505/month as a lifetime annuity with the features they need. What Retirement Level have they achieved?
Level 1
Federal employees covered under the Civil Service Retirement System pay
Medicare tax Federal employees participating in the Civil Service Retirement System (CSRS) and do not contribute do Social Security (OASDI), but do need to pay the Medicare tax.
Over a period of 10 years, Mike contributed a total of $20,000 to a nondeductible IRA. The current value of his IRA is $32,000, and Mike, who is 50 years old, has decided to use his IRA assets toward the purchase of a second home in the mountains. Assuming Mike's marginal tax bracket is 24%, how much will he owe in taxes and penalties?
Mike must pay income taxes on $12,000 ($32,000 - $20,000 of after-tax contributions). Mike's effective tax rate is 34% (24% + 10% early withdrawal penalty = 34%). Remember, penalties in a nondeductible IRA apply only to earnings. Mike will have to pay $4,080 in taxes and penalties (34% of $12,000 = $4,080). Mike is not a "first-time home buyer" in this question because he is buying a vacation home
You have a client, age 56, who has decided to take early retirement. She would like to maximize distributions from her IRA without having to pay the 10% penalty tax on premature distributions. Which, if any, of the following words of advice should you give her? 1) At age 59½, she can stop taking substantially equal periodic payments until age 73, if she wishes. 2) Use of the fixed annuitization method or the required distribution method will maximize the amount of substantially equal periodic payments she receives.
NONE OF THE OPTIONS
Which one of the following statements regarding net short-term capital gains is correct?
Net short-term capital gains are treated as ordinary income.
Tom has been promised a stream of $40,000 annual payments at the end of each year for 25 years. The present value of these payments discounted at a rate of 5% equals which one of the following amounts?
Next, enter the following unknown values in any order: 40,000, PMT; 5, I/YR; 25, N; and request the known present value of an annuity (PVOA). This will show the correct answer, $563,758
Mike recently terminated employment with ENCO Inc. He has a $70,000 account balance in ENCO Inc.'s simplified employee pension (SEP) plan. Which one of these steps should Mike take to roll over his SEP account into an IRA?
Roll over all of the distribution he receives, within 60 days of receipt, into an IRA.
Annette, a single taxpayer, has lived in her principal residence for 18 months, and is relocating to another part of the country due to health reasons. She will have a gain of $400,000 on the sale. Which one of the following is correct with respect to the sale of her home?
She will qualify for an exclusion of $187,500 ($250,000 maximum exclusion times 18/24) on the sale of the home.
The process of re-balancing is a key factor in
Strategic asset allocation involves obtaining the best asset mix for a client over a long period.
Which one of the following is a correct statement about a Roth IRA for 2023?
Taxable withdrawals of up to $10,000 from a Roth IRA for the purchase of a first home can be penalty free
Which type of life insurance below is referred to as "pure" life insurance?
Term Life Insurance Term life is insurance in its purest form; it provides nothing more than a cash payment if death occurs while the policy is in force. Permanent insurance provides a cash value in addition to the basic insurance coverage and interest-only is a settlement option, not a type of insurance.
When performing bond calculations, which of the following general assumptions should be made unless stated otherwise?
The coupon rate is annualized but paid semiannually for U.S. bonds.
Susan, age 47, who is married and files jointly, contributes 5% of her salary to her employer's 401(k) plan. Susan and her husband have modified AGI of $124,242. If Susan makes a full $6,500 contribution to an IRA, how much of this contribution will be deductible in 2023?
The following formula can be used to calculate the deductible amount of Susan's IRA contribution (bumped up to the next $10) for 2023: Allowable IRA Contribution Limit x{(UL - AGI) divided by phaseout range x Max Contribution amount}= Deductible Amount UL = Upper dollar limit of the phaseout range for married individuals filing jointly = $136,000 (for 2023) Phaseout range for married filing jointly = $20,000 (always for married filing jointly) $6,500 x [($136,000 - $124,242)/$20,000] = $3,821.35, which is bumped up to the next $10, which would be $3,830. Notice that the $3,821 is not rounded to the nearest $10. It is bumped up to the next increment of $10. Also, any answer that does not end in "0" will always be wrong.
Which one of the following is a characteristic of Treasury inflation-protected securities (TIPS)?
The increase in principal is taxable each year.
Frank is 54. His daughter Meredith is attending college. Frank has been making salary reduction contributions to his 401(k) for the past four years, and is considered a highly compensated employee. His account is worth $25,000. His contributions and the earnings on his contributions total $19,000. His employer has contributed $5,000 and these contributions have earned $1,000. His vested balance is $21,500. The plan provides for both hardship withdrawals and plan loans, and loans are available to all plan participants on an equal basis. Frank needs to use some of his plan assets to pay college tuition. Which of the following is a correct statement about how Frank could meet Meredith's college expenses?
The maximum plan loan Frank could take is $10,750. Frank can borrow up to 50% of his vested balance. Half of $21,500 is $10,750. As long as loans are available to all plan participants on an equal basis, highly compensated employees may take loans.
Which of the following is correct regarding the additional payroll tax for high wage earners that was brought about by the Affordable Care Act?
The tax was designed to provide additional funding for Medicare.
When deciding how much to contribute to a Roth IRA, your clients must consider which of the following?
Their AGI
Roberto and Julia, a married couple with two young children and minimal assets, are considering creating an estate plan. Which one of the following statements is correct?
They should create an estate plan even though their assets do not exceed the applicable exclusion amount.
Richard wants to have an annual retirement income of $100,000 (payable at the beginning of each year) protected against 3% inflation. Assuming a 7% after-tax rate of return and a retirement period of 30 years, how much money (rounded) does Richard need in order to meet his goal?
To determine how much money Richard needs, calculate the inflation-adjusted rate of return: (1.07 1.03) - 1 100 = 3.8835. Next, clear your calculator and set it to begin mode. Enter the following known values in any order: 100,000, +/-, PMT; 3.8835 I/YR; 30, N; and request the unknown PV (PVAD). This will give you the correct answer, $1,822,043 (rounded).
Which of the following statements comparing the suitability standard and the fiduciary standard is correct?
Verbal disclosure may be adequate under the suitability standard but not the fiduciary standard.
Which one of the following cannot achieve the estate planning goal of providing for incapacity?
Will
Which one of the following statements regarding IRA distributions is correct?
Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty.
Assuming the five-year holding period has been satisfied, which one of the following is not a qualified distribution from a Roth IRA?
a distribution made to an individual who retires on or after age 55
Wills, beneficiary designations, and correct titling of property can all accomplish which one of the following estate planning goals?
assure that property is distributed according to the owner's wishes
Since 1982 the growth rate of state and local governments has
been increasing at a steady rate.
All of the following are correct statements regarding qualified longevity annuity contracts (QLACs) EXCEPT
contributions into a QLAC for owners with very large retirement accounts are limited to 25% of their overall account balance.
A "rising equity glide path" typically will lead to which equity exposure over one's total lifetime?
decreased
As a general rule, a Medigap insurance policy is designed to cover which one of the following Medicare-approved charges that are not paid by Medicare?
deductibles or coinsurance amounts
Which one of the following distributions from a 403(b) tax sheltered annuity would not be subject to the 10% premature withdrawal penalty?
distributions paid to an alternate payee pursuant to a qualified domestic relations order
Howard, age 69, has contributed $100,000 in after-tax dollars to his qualified retirement plan at work. The balance in his account is $400,000. Howard's benefit is payable as a joint and survivor annuity with his 70-year-old wife, Joan. Howard wants to know how much of each monthly annuity payment he receives from the plan will be tax free. Using the table below, how will you calculate the correct amount? Combined Ages of Annuitants at Annuity Start Date Number of Monthly Payments 110 or less 410 111-120 360 121-130 310 131-140 260 141 and over 210
divide $100,000 by 260
Which of the following are not used in technical analysis?
financial statement ratios Moving averages, graphs, and statistics regarding the supply and demand of stocks are used by technicians
Mark, a financial adviser, has a client who has worked in two positions during his lifetime. The client's first position was a state or local government position that was not covered by Social Security. The client is receiving a pension from that employment. His second position was covered by Social Security and he is eligible for Social Security retirement benefits. Mark should advise his client that
his eligibility for Social Security retirement benefits may be reduced due to the windfall elimination provision (WEP). If you have a client who has worked in a position that was not covered by Social Security, and the client is receiving a pension from that employment, his eligibility for Social Security benefits based on his own work history covered by Social Security may be reduced due to the windfall elimination provision
Which one of the following is covered under Medicare Part A and Part B?
home health care
Sequence of return risk is thought to have the most potential impact on an individual who has
just retired and begun distributions from his or her account.
Which one of the following is not a key element of an investment policy?
names of specific stocks to be in the portfolio One way to remember the essential elements of an investment policy is the acronym "GRASP" (Goals, Risk, Asset Allocation, Strategies/Suitable Investment-meaning the investment categories that may or may not be used-and, Periodic Review). Specific investments would be determined after the investment policy is created.
Suzy begins her Social Security retirement benefit at full retirement age (FRA). What is the amount that she will receive?
primary insurance amount (PIA) Workers who begin their Social Security retirement benefits at full retirement age will receive their primary insurance amount (PIA). This amount is based their lifetime average earnings, or AIME. If they delay their benefits until after attaining FRA they will begin to be credited with DRCs. Those who are only currently insured (not fully insured) are not eligible for Social Security retirement benefits.
In order to be considered a "qualified" policy, a long-term care policy must
provide for nonforfeiture options.
A non-springing durable power of attorney
remains effective after the principal becomes incapacitated.
Monte Carlo analysis is based upon a given set of assumptions regarding rates of return and
standard deviations.
Which one of the following is exempt from the 10% penalty on qualified plan distributions made before age 59½?
substantially equal periodic payments made to a participant following separation from service, based upon the participant's remaining life expectancy
Which one of the following is correct about forces changing the financial services industry?
technical specialists are harder to supervise
What does Jensen's alpha tell you?
the percentage a manager over- or underperformed based on the amount of risk taken
Owning property in joint tenancy with right of survivorship (JTWROS) is a will substitute because
the property passes outside of probate.
Reverse mortgages can be used for which one of the following purposes?
to generate a lump sum that can be used to fund long-term care A reverse mortgage can be used to generate a lump sum that can be used to fund long-term care. Payments can continue for as long as the homeowner resides in their home-not necessarily until their death. Depending on the ultimate sale price of the home and the amount of equity that has been paid out, there may not be funds remaining for the beneficiaries. Reverse mortgage balances do not need to be repaid while at least one owner lives in the home, maintains it, and pays the taxes, insurance, and any HOA dues that are payable. But, when the home is no longer the primary residence due to moving or death, the balance is payable
When thinking about a tax-diversified overall portfolio, when is the proper time to take distributions from an after-tax investment like a Roth IRA or a taxable brokerage account to fund living expenses in retirement?
when investments were down sharply
Lucy received a $1,200 profit sharing contribution this year. Lucy is married to George, an artist who had no earnings this year. Their combined AGI for this year is $240,000. How much of their $13,000 IRA contribution can they deduct for 2023?
$0
Pa started receiving his Social Security benefits one year after his full retirement age (FRA). His primary insurance amount (PIA) was $1,800, but his delayed retirement credits took his monthly benefit up to $1,944. Ma started her Social Security early based on her work history. Her PIA was $1,200, but she received $840/month because she started her benefits four years early. Ma was one year past her FRA for survivor benefits when Pa died and she started receiving her survivor benefits. How much would she get each month?
$1,944
Juan, age 44, contributed $4,000 per year to his Roth IRA since opening it three years ago. Last year he converted $10,000 into his Roth IRA from his traditional IRA. This year he withdrew $25,000 to help his sister. Juan is in the 22% federal tax bracket. How much will he owe the federal government for this distribution?
$1,960
Mary inherited 500 shares of stock from her uncle, Ted, three years ago. Ted had purchased half the stock 12 years ago for $14 per share, and the remainder 11 years ago for $13 per share. The stock price had declined to $10 per share when Ted died. What is Mary's per share basis in the stock, assuming that she sells it this year for $16 per share?
$10 The basis of an asset acquired by inheritance generally is the fair market value on the date of the decedent's death.
Assume your client has the following portfolio: Stock Weight Beta BCD 40% 1.15 EFG 25% .90 HIJ 35% 1.05 What is the overall weighted beta for this portfolio?
.4 × 1.15 = .4600; .25 × .90 = .2250; .35 × 1.05 = .37. Then, .4600 + .2250 + .3675 = 1.0525.
Which of the following are true statements about the level of trust in the financial services industry according to different major studies? 1) The trust level of elites has recovered from the lows of the Great Recession, but the mass population's trust level is still low and has not recovered as much as it has for the affluent. 2) Just over 50% of executives at financial firms feel the need for flexible ethics to get ahead at their firms. 3) Trust comes far below expertise in the eyes of prospects when they are looking for an adviser. 4) The financial services industry enjoys a high level of trust in comparison to most other industries when rated by the American public.
1 & 2
Which of the following are correct statements about the effect that income and asset ownership have on Social Security benefit payments? 1)The value of assets owned by a worker does not affect the amount of Social Security benefits that he or she will receive. 2)The reduction is $1 of benefits for each $1 of income earned above the allowable limit for an individual who begins receiving Social Security benefits prior to the year he or she attains full retirement age. 3)Investment income received by a worker does not affect the amount of Social Security benefits that he or she will receive. 4)The reduction is $1 of benefits for each $2 of income earned above the allowable limit for individuals who begin receiving Social Security benefits in the year they attain their Social Security full retirement age, but prior to the month in which they actually attain that age.
1 & 3
Your client, Jake, age 55, is considering taking immediate distributions from his IRA. It was funded exclusively with rollover assets from a qualified pension plan after he decided to take early retirement. Jake would like to avoid any penalties associated with taking early distributions from an IRA. Which of the following are important planning considerations for Jake? 1) Distributions can be part of a series of substantially equal periodic payments made over an individual's life expectancy 2) Distributions can be made to an individual age 55 or older who has terminated employment with his or her employer. 3) Under the required minimum distribution method (also known as the life expectancy method), the resulting annual payments are redetermined each year. 4) Under the fixed annuitization method, the higher the interest rate assumption and the shorter the life expectancy, the greater the payment amount that results from the calculation.
1, 3, & 4
Assume your client has a 5% bond, par value of $1,000, and 15 years to maturity. Comparable bonds are yielding 6%. What is the value of this bond?
1,000 [FV], 25 [PMT], 3 [I/YR], 30 [N], then solve for [PV] = -902
Which of the following are examples of the second step of the retirement planning process? 1)prioritize goals 2)disclose compensation arrangements 3)examine a person's tax situation 4)determine important time horizons
1,3, & 4 The second step in the retirement planning process is to gather client data, including goals and expectations. The first step is to establish and define the client-counselor relationship, which includes disclosing the counselor's compensation arrangement.
Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what is the expected change in price for this fund?
1.5% x -6.5 = -9.75%. Recall that duration needs to have a negative sign in order to represent the inverse relationship between bond prices and interest rates
Which of the following are usually covered by long-term care insurance? 1)treatment for preexisting health problems (within the first six months of the policy) 2)personal (custodial) care 3)skilled nursing home care 4)care for all mental disorders, in all situations
2 & 3
Your client, Susan, age 60, cannot afford to retire until age 62 when she becomes eligible for Social Security and company pension benefits. Susan no longer feels appreciated by her company and was recently passed over for a promotion. Her husband Brent, age 63, lost his company health care plan and dependent coverage when he retired, but Susan has been able to cover the two of them on her company's plan. If Susan takes early retirement at age 62, her company benefits plan stipulates that her health care coverage will end. Susan's health is excellent, but Brent's health is just fair. Susan should be concerned about which of the following issues regarding retirement? 1) Her wealthy sister, wants her to retire so they can have more time together. 2) Brent won't be eligible for Medicare for almost two more years. 3) Her retirement may impact her spouse and family.
2 & 3
The donee's basis in gifted property is determined by which of the following valuations? 1) The property's fair market value (FMV) at the time of the gift if the property has appreciated in value while owned by the donor 2) The donor's adjusted basis in the property at the time of the gift if the property has appreciated in value while owned by the donor 3) The property's FMV six months after the gift if not sold prior to that time 4) The property's FMV at the time of the gift if this value is less than the donor's adjusted basis, and the property is sold for a loss from the date of gift value
2 & 4
Which of the following are key obligations a broker-dealer must meet to satisfy Regulation Best Interest? 1) act in accordance with the fiduciary standard 2) exercise "reasonable diligence, care, and skill" when recommending transactions 3) make "fair and considerate" disclosure of material facts regarding the investment at or before the making of a recommendation to an institutional client 4) a broker-dealer must have and enforce written policies and procedures that identify conflicts of interest and either eliminate or disclose these conflicts
2 & 4
Henry, a fully insured worker for Social Security purposes, will retire next month at the age of 62. Henry is concerned that he may lose some of his Social Security benefits because of the earnings limitation test. Which of the following sources of Henry's income are counted for purposes of the earnings limitation test? 1)IRA withdrawals 2)self-employment earnings 3)pension annuity payments 4)part-time salary
2 & 4 "Excess" earned income by Social Security beneficiaries who are under Social Security's full retirement age results in a partial or full loss of benefits, depending on the age of the person, the amount of Social Security benefit, and the amount of earned income.
Which of the following personal expenses are likely to decrease following an individual's retirement? 1)travel 2)education 3)utilities 4)income taxes 5)home repairs
2 & 4 Travel and recreation costs escalate for many retirees. Even if retirees have their mortgage paid off, they will still be faced with the following expenses: real estate taxes, utilities, insurance, and repairs. Retirees tend to spend less on education than do nonretirees. Total income taxes are likely to diminish as earned income declines.
Under the Affordable Care Act, "Platinum" plans offered on the exchanges vary in 1)the services that they provide. 2)how the insured and insurer share the costs of care.
2 Only Plans in each category (i.e., Platinum, Gold, Silver, Bronze, Catastrophic) all cover the same services. It is how the insured and the insurer share the costs of care that varies.
Which of the following are true for employees of the federal government hired in the last three decades? I. CSRS replaced FERS II. The defined benefit plan under FERS is more generous to employees than CSRS. III. FERS offers reduced benefits for early retirement as long as the worker has at least 10 years of experience and they have reached their MRA. IV. FERS bases the worker's retirement benefit on the worker's highest three years of pay.
3 & 4
Which of these statements regarding the suitability standard and the fiduciary standard are CORRECT? 1) The suitability standard takes into account all relevant factors. The fiduciary standard accounts for only the client's risk profile, age, objectives, and time horizon. 2) Disputes under the suitability standard are addressed in public courts while disputes under the fiduciary standard are addressed using arbitration. 3) The main categories under the suitability standard are registered reps and agents. The main categories under the fiduciary standard are registered investment advisers and trustees. 4) The major regulators of under the fiduciary standard are the SEC, DOL, and the states. The major regulators for the suitability standard are FINRA and the states.
3 & 4
Although obligations may vary, what is the standard number of periods or units required for a reservist to participate in drill annually?
48
Assume that a worker's Social Security full retirement age is 66. What percentage of the worker's full retirement age benefits will be paid to her at age 62?
75%
What is the maximum percentage of Social Security benefits that may be taxed?
85%
When are living wills applicable?
A living will is applicable when the declarant is in a terminal or similar condition.
Which of the following are factors to consider when making the decision on when to receive Social Security benefits? Earnings of dependents Income benefit provided Additional sources of income Condition of health
ALL factors
Which of the following are correct statements about the capital utilization strategy? 1)It produces an annual retirement income over a finite number of years. 2)Assuming the yield remains the same, the larger the retirement income that is paid, the shorter the number of years over which it will be paid. 3)When the capital utilization approach is used, the planner must be careful in making assumptions about the life expectancy of the client. 4)The effect of taxes on retirement savings and distributions should be considered when the before-tax approach is used to calculate the future value of retirement assets.
All of the options are true. A capital utilization strategy would make it possible to produce a larger annual income for a client but over a finite number of years, after which the principal is exhausted.
Which of the following are correct statements about the legal requirements for a loan to a participant from a retirement plan? 1) The term of a loan for a medical emergency must not exceed five years. 2) Loans from SEP IRAs are not permitted. 3) The term of a loan used to acquire a principal residence may exceed five years. 4) Loans from a SIMPLE 401(k) plan are permitted.
All of the statements are true
Which one of the following is correct regarding taxation of mutual funds?
An exchange of shares in one fund to shares of another fund within the same family will create a taxable event
Jane has contributed $1,000 each year to a Roth IRA, beginning with an initial payment of $1,000 on December 31, 2019. She wants to know when she can begin making qualified distributions. Which one of the following statements would represent what you, as her financial adviser, would tell her?
Any distribution she takes after January 1, 2024, will meet the five-year holding period requirement.
Jan has been employed by Bryce Corporation for 40 years and is a 4% owner of the company. She received $90,000 in compensation during the preceding year and is a participant in the corporation's profit sharing plan. She will celebrate her 73rd birthday on July 3rd of this year and plans to retire in four more years. Which one of the following correctly describes the date by which Jan must start taking distributions from her profit sharing account?
April 1 of the year following the year she retires
Which one of the following is a correct statement about rollovers? A) Hardship distributions from a 401(k) plan are eligible for rollover treatment. B) A direct rollover may be accomplished by providing an ex-employee with a check payable to the custodian or trustee of the rollover plan or IRA, and appropriate instructions. C) A rollover within 60 days of receipt of a qualified plan distribution is not subject to income tax withholding. D) Corrective distributions of excess deferrals from 401(k) plans are eligible for rollover treatment.
B
Rebecca has been serving in the military for 10 years. Recently, she received notice that she was eligible for a cash bonus but it would mean she must continue serving for an additional six years. Rebecca opted into the BRS program but she does not remember previously hearing about any bonus. You are knowledgeable about the BRS program and you understand the nature of the bonus. What is the bonus program called?
Continuation pay Continuation pay is a cash payout bonus available between eight and 12 years of service with the requirement of agreeing to additional years of service. The additional service requirement and pay amount vary based on active duty or reserve status and work specialty needs
Which one of the following statements regarding long-term capital gains rates is not correct? A) Long-term gains and losses can be netted. B) Net long-term capital gains are generally subject to a maximum rate of 15% or 20%. C) A 28% maximum capital gains rate applies to the gain on collectibles held for more than one year. D) The long-term capital gain holding period is more than 18 months.
D
Which of the following are benefits for a person for staying employed, at least part-time?
Going to work means having something to do that gets you out of the house and can provide healthy stimulation.
Charlie contributed $2,000 to Roth IRA 1 last year, when he was age 24, and $2,000 to Roth IRA 2 this year. Two years from now, Roth IRA 1 will have a balance of $2,650, and Roth IRA 2 will have a balance of $2,590, and Charlie will close Roth IRA 1, receiving the balance of $2,650. Which one of the following statements best describes his tax and penalty status for that year?
He will pay neither taxes nor a penalty.
