Chapter 13 study set
Your broker-dealer acts as a prime broker for ABC Fund. In this arrangement, your broker-dealer is likely providing which of the following services? Execution of all transactions for the fund portfolio Clearing services Lending for trades done on margin Ensuring that all exchange trading rules are complied with
II & III. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker-dealers.
A customer of MNO, Inc., a registered broker-dealer, has a traditional IRA funded by a mutual fund. The customer, who is 70 years old as of June 30, 2023, must take a minimum distribution no later than what age to avoid a penalty? A) 59 1/2 B) 71 C) 70 1/2 D) 73
D) 73
ERISA protects employees by having requirements for all of these except A) minimum funding. B) vesting. C) IRA rollover provisions. D) nondiscrimination.
C) IRA rollover provisions. The rules regarding IRA rollovers is not part of ERISA; all of the others are.
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? A) $220,000 B) $120,000 C) $0 D) $100,000
A) $220,000 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 The teacher must pay taxes on the total value of the account when withdrawn
Your client, who has not yet attained the age of 59½, wants to take a withdrawal from his traditional IRA. Not being disabled or meeting any other qualifying reason allowing for an early withdrawal, you explain that the amount taken will be subject to a penalty of A) 10%. B) 5%. C) 25%. D) 15%.
A) 10%. Except in the case of death, disability, or certain other qualifying reasons, withdrawals made before the account owner reaches age 59½ are subject to one-time penalties of 10% of the gross amounts withdrawn, in addition to ordinary income taxes.
Which of the following regarding a Roth IRA are true? The contributions are nondeductible. Contributions must cease at age 72. Withdrawals must begin at age 72. Withdrawals after age 59½ can be tax free. A) I and IV B) I and III C) II and IV D) II and III
A) I and IV With a Roth IRA, the contributions are not deductible from current income. Withdrawals after age 59½ are tax free, provided the account has been open for at least 5 years. There is no age at which withdrawals must begin or contributions must cease.
An investor, age 40, earns $65,000 annually and contributes 3.5% to his employer's 401(k) plan. With the 401(k), his only retirement savings, he wants to do more for retirement and hopes to invest in such a way as to have some tax-free income when he takes distributions later in life. Which of the following is the most suitable given the investor's goals and objectives? A) Roth IRA B) Municipal bonds C) Traditional IRA D) A nonqualified variable annuity
A) Roth IRA Roth IRAs allow for tax-free distributions when owned for 5 years and the recipient is age 59 1/2 or older, traditional IRAs do not. Municipal bonds offer tax-free interest but do not grow tax-deferred and VAs should be used only after contributions to employer-sponsored plans and IRAs are maxed out.
If one of your clients dies, upon notification of death, you should immediately: mark the account Deceased until proper documents are received. cancel all good-til-canceled orders for the account. obtain a letter from the attorney representing the estate with instructions for transfer. obtain the names and addresses of the beneficiaries of the estate. A) I and III B) I and II C) II and III D) III and IV
B) I and II The firm must 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.
All of the following are eligible investments in a traditional IRA except A) shares of a municipal bond fund. B) collectibles. C) platinum bullion. D) limited partnerships.
B) collectibles. Collectibles are ineligible investments. Municipal bond funds are inappropriate, but not ineligible. Eligible investments in an IRA include platinum bullion and limited partnerships
A registered representative is reviewing plans for retirement with one of his clients. The client expressed interest in starting a Roth IRA, since the money in the plan will never be taxed. Asked to explain, the client says he had heard the Roth described as a tax-free retirement plan. Regarding the client's knowledge of Roth IRAs as spotty, the registered representative describes Roth IRAs. In his explanation, we might find any of the following statements except A) withdrawals of growth and earnings from a Roth are tax free if you meet certain conditions. B) required minimum distributions are higher with a Roth than with a traditional IRA. C) the cost base in a working Roth IRA is all after-tax money. D) withdrawals from a Roth are tax-free partly because the cost-base has already been taxed.
B) required minimum distributions are higher with a Roth than with a traditional IRA. Contributions to a Roth IRA are always after tax, but withdrawals, including growth and earnings that have never been taxed
All of the following are benefits of a traditional IRA except A) that funds may be withdrawn without penalty for certain exemptions. B) that no penalty is charged for failing to withdraw funds after age 72. C) that contributions may be tax deductible. D) that earnings accumulate on a tax-deferred basis.
B) that no penalty is charged for failing to withdraw funds after age 72. Required minimum distributions must begin the year after the account owner reaches age 72.
A new customer is opening a cash account with your broker-dealer. The new account form must contain the signature(s) of A) the customer and the registered representative working with the customer. B) the principal only. C) the principal and the registered representative working with the customer. D) the customer only.
B) the principal only. 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.
The amount paid into a defined contribution plan is set by A) the employee's age. B) the trust agreement. C) the ERISA-defined contribution requirements. D) the employer's profits.
B) the trust agreement. A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.
The requirements of ERISA apply to pension plans established by A) municipal governments. B) private sector organizations only. C) public entities only. D) both public and private sector organizations.
B) private sector organizations only. ERISA was established to protect the retirement funds of employees working in the private sector only. It does not apply to employees of public sector entities such as city and state governments.
Who of the following is not permitted to contribute to an IRA? A) A corporate officer covered by a 401(k) plan B) A self-employed attorney who has a Keogh plan C) An individual whose sole income consists of dividends and capital gains D) A person divorced in 2017 whose sole income is alimony and child support
C) An individual whose sole income consists of dividends and capital gains An IRA contribution can be made only from earned income. Dividends and interest are investment income, but alimony received as part of a divorce settlement entered into before January 1, 2019 is considered compensation for purposes of an IRA by the IRS.
Broker-dealers who reserve the right to disclose nonpublic private information about their customers to unaffiliated third parties must: provide notice to customers at the time of the account opening. provide notice to customers each time a transaction occurs within the account. provide reasonable means for customers to opt out of such disclosures. require that customers wishing to opt out send a written request with signature witnessed by a notary. A) I and II B) II and III C) I and III D) II and IV
C) I and III Regulation S-P requires that if a broker-dealer reserves the right to disclose nonpublic personal information to third nonaffiliated parties, it must notify the customer at the time of the account opening and annually thereafter
Under a Keogh plan, which of the following is not an acceptable investment? A) Unit investment trust B) U.S. government bond C) Rare oil painting D) International bond fund
C) Rare oil painting Investments not permitted in Keogh plans are commodities, collectibles and antiques, precious metals (other than U.S. government-issued gold and silver coins), and uncovered options.
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) $10,000 will be taxable as ordinary income, and $10,000 will be taxed as a capital gain. 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 withdrawal. C) The $20,000 is taxable as ordinary income in the year of the conversion. D) The $20,000 is taxable as ordinary income, but there is a $2,000 tax penalty for early withdrawal.
C) The $20,000 is taxable as ordinary income in the year of the conversion. 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 59½
Which of the following occurs in a partnership account if one partner dies? A) The surviving partners receive the deceased partner's share. B) The surviving partners are considered joint tenants and receive the deceased partner's share. C) The account is frozen until a new or amended partnership agreement is received. D) The surviving partners are considered joint tenants.
C) The account is frozen until a new or amended partnership agreement is received. The deceased partner's share usually goes to an estate; the other partners do not receive it.
All of the following statements regarding a Coverdell Education Savings Account (ESA) are true except A) the maximum annual contribution is $2,000 per beneficiary. B) the beneficiary may be the contributor's child or grandchild, or child of a friend of the contributor. C) unused balances may be used for any purpose the beneficiary chooses. D) a beneficiary's unused balance may be rolled over to an ESA account for another child.
C) unused balances may be used for any purpose the beneficiary chooses. ccount balances may be used for education only
A 40-year-old individual who is covered by an employer-sponsored retirement plan wants to save more for retirement. Which of the following is the most suitable recommendation? A) An investment account utilizing only tax-free municipal bond mutual funds B) A hedge fund utilizing high-risk, high-potential yield strategies C) A traditional IRA, as there will be no limit to the amount of the contribution that can be deducted D) A Roth IRA, as long as the individual's income level does not exceed the maximum allowed to make a contribution (phase-out schedule)
D) A Roth IRA, as long as the individual's income level does not exceed the maximum allowed to make a contribution (phase-out schedule) Dollars invested will grow, and distributions will be tax free as long as the dollars have been in the account for five years once the IRA owner has reached age 59½. Because the individual is covered by an employer-sponsored plan, we know that the contribution to a traditional IRA may not be fully tax deductible, if at all, and the earnings would be taxable when distributed.
