Unit 1:Q bank

A corporate profit-sharing plan must be set up under

All corporate pension and profit-sharing plans must be set up under trust agreements. A plan's trustee assumes fiduciary responsibility for the plan.

Your customer opens a Coverdell ESA for his niece. 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

Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution.

Which of the following statements about a Coverdell Education Savings Account (ESA) is not true?

Contributions are tax deductible, subject to a modified adjusted gross income phase out.

Someone considering saving for retirement in a Roth IRA could correctly be told that

Contributions to Roth IRAs are made with after-tax dollars, and distributions are received tax free (both cost basis and earnings) if holding period requirements are met.

A registered representative is explaining the characteristics of a Coverdell Education Savings Account (ESA) to a customer. Which of the following statements regarding this type of savings account is correct?

Contributions to a Coverdell ESA are made with after-tax dollars. Distributions used for qualified educational expenses are tax free.

Two friends would like to open a joint account but have the tax filed under the name of the nonemployed individual. That could be done in

In a JTWROS account, the assets are considered jointly owned. Only one tax identification number (Social Security number) is placed on the account. If it is the number of the nonemployed individual, the Form 1099 will go to that person and that is whom the IRS will expect to pay the taxes. That might be the correct answer to a test question. In the real world, it might not satisfy the IRS that the one in the lower tax bracket is being credited with all the income and gains. If the IRS audits the account and sees that the funds came from the working individual, there could be tax issues. However, the exam does not always deal with the real world and we won't either on this one.

Which of the following plans requires an actuary's services?

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.

A pension plan might invest in each of the following except

It is inappropriate to place tax-free investments into a tax-deferred plan because there is no benefit to the deferral.

The concept of double taxation applies to shareholders of

It is the C corporation where the owners contend with double taxation. The first tax is on the corporation's earnings. After that, any dividends distributed to the shareholders are subject to tax. LO 1.c

Which of the following securities is the least suitable recommendation for a qualified retirement account plan account? A) Blue-chip common stock B) A-rated corporate bond C) Treasury bill D) Investment-grade municipal bond

Municipal bonds provide tax-exempt interest payments and, consequently, offer lower yields. Because earnings in a qualified retirement plan account grow tax deferred, the municipal bond is not a suitable investment. In addition, they will be fully taxed upon withdrawal.

Which of the following statements regarding nonqualified deferred compensation plans is not true?

Needing no IRS approval, nonqualified deferred compensation plans may be discriminatory and offered only to certain employees such as key executives. A typical deferred compensation plan is 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, are not eligible for these plans. Because these plans are rarely funded, business failure places the employee in the role of a general creditor.

If a customer wishes to open a cash account, who must sign the new account form?

Neither the customer's signature nor the registered representative's signature is required to open a cash account. A principal must review and accept the new account by signing the form.

Which of the following would be considered an inappropriate investment for your client's traditional IRA? A) A valuable collection of rare postage stamps B) A mutual fund whose portfolio consists solely of shares of over-the-counter stocks C) A unit investment trust whose portfolio consists solely of tax-free municipal bonds D) A taxable municipal bond

Tax-free bonds, whether purchased individually or through a mutual fund or UIT, are considered inappropriate investments because the tax-free benefit is lost. On the other hand, taxable municipal bonds benefit from the tax deferral offered in an IRA. What about the stamp collection? That is an ineligible investment, not merely inappropriate.

One of your clients maintains a traditional IRA with your firm. The individual was born July 20, 1949. This individual's initial required minimum distribution (RMD) from the IRA must be made no later than

The SECURE Act requires any individual born after June 30, 1949, to begin taking RMDs not later than April 1 of the year after turning 72. This client will turn 72 on July 20, 2021, and the next April 1 is in 2022.

Which of the following is not a benefit gained by using a TOD account?

The TOD (transfer on death) designation offers many benefits, but reducing estate taxes is not one of them. The assets in the account are included in the decedent's estate. However, the hassles of probate are avoided, and without any legal impediments, the owner of the account can make changes at will.

Responding to the student loan crisis, the SECURE Act now permits qualified withdrawals from Section 529 plans to include payments of

The lifetime limit is $10,000 of interest or principal per child. If the child who is the beneficiary of the plan does not use all the money by graduation, the remaining funds can be used to pay the interest or principal (subject to the standard limits) for other siblings.

Which of the following types of retirement plans would be most beneficial to a young employee of a corporation?

The most beneficial corporate pension plan for a younger employee would be the defined contribution plan. The employee has many years in the workforce, so the investments made with the defined contributions will have a maximum amount of time to grow.

A schoolteacher has a 403(b) tax-qualified deferred retirement plan into which she has deposited $100,000 over a 12-year period. At retirement, if the teacher withdraws the total value of the account (now $220,000), how much of the withdrawal will be subject to taxation as ordinary income?

The retirement plan is qualified, which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn.

A new customer is opening a cash account with your broker-dealer. The new account form must contain the signature(s) of

To open a cash account, only the signature of the principal accepting the account is required. For margin accounts, the signature of the customer would be required on the margin agreement.

You have a client who owns a small business. The business provides an ERISA-qualified plan for employees. Your client manages the investments and asks you about permitted strategies. ERISA rules would permit which of the following investments? A) Uncovered call options B) U.S. Treasury bonds purchased from a plan participant C) Stamp collections D) Covered call options

Uncovered call options carry a potentially unlimited risk of loss. As such, ERISA has declared them unsuitable for investments in a qualified plan. However, covered calls, as well as protective puts, are allowable investments. Selling a security to or buying a security from a plan participant is a prohibited transaction. Most collectibles are not permitted in ERISA plans.

Wolfe is still teaching full time for the school system. When does Wolfe have to begin taking required minimum distributions?

Wolfe is invested in a qualified annuity. Therefore, the minimum distribution requirements are the same as for any qualified account. RMDs must begin at age 72 but can be postponed as long as continuously employed by the same employer. Unless qualifying for an exception, any withdrawals from a qualified annuity before reaching age 59½ are taxed as ordinary income with the additional 10% penalty.