Chapter 6 Questions

16. Which of the following refers to an investor's ability to avoid IRS penalties by taking substantially equal and periodic payments? A. Rule 59(a) B. Section 1035 C. Rule 72(t) D. Section 457

16. Answer: C. IRS Rule 72(t) allows an investor to withdraw substantially equal periodic payments over a minimum of five years and, in doing so, avoid the 10% early withdrawal tax penalty.

26. A couple has just had a baby and they want to start saving for college. What option does not offer the opportunity for their investment to grow free of federal taxes? A. Education Savings Account B. UGMA/UTMA account C. 529 college savings plan D. 529 prepaid tuition plan

26. Answer: B. Unlike the other options, UGMA/UTMA accounts are subject to federal income and capital gains taxes.

27. All of the following are characteristics of 529 plans except: A. Earnings in the account are tax-deferred. B. They are designed to fund higher education expenses. C. The beneficiary gains control at the age of majority. D. They can be useful as estate planning tools.

27. Answer: C. Section 529 plans are tax-advantaged savings plans for higher education, and primary and secondary education tuition. Earnings in 529 plans are not subject to federal tax. In general, the donor/owner of the 529 retains control of the funds, even after the beneficiary reaches the age of majority. For the sake of estate taxes, the 529 is not considered part of the donor's taxable estate, thereby making 529 plans a method of estate tax planning.

3. Which of the following has an effect on an investment's overall cost basis? I. Commissions paid to buy securities II. Commissions paid to sell securities III. A forward stock split IV. A reverse stock split A. I only B. I and II C. I and III D. II and IV

3. Answer: A. Commissions paid to purchase a security are added to an investment's cost to arrive at its cost basis. The commission for selling a security is deducted from the sale price when calculating sale proceeds, so it does not affect the investment's cost basis. Because the overall value of an investment is unchanged as a result of a stock split, neither a forward nor a reverse stock split has an impact on overall cost basis.

3. True or false. If a company is forced to liquidate, retirement fund monies are available for creditor access just like other company assets.

3. False. Pursuant to ERISA, the funds contributed to a retirement plan account must be held in a trust separate from other corporate assets for the sole benefit of the employees, and creditors are not be able to access these assets in a liquidation.

3. True or false. Traditional and Roth IRAs have similar limits on contributions and required minimum distributions

3. False. Traditional and Roth IRAs do have similar limits on contributions. Their biggest difference is that the owner of a traditional IRA must take required minimum distributions beginning the year she turns 72, whereas a Roth IRA does not require minimum distributions in the owner's lifetime.

4. True or false. If an individual sets up a Roth IRA account at the age of 60, and withdraws earnings at the age of 62, he will not be charged a tax penalty on the withdrawal.

4. False. For the Roth IRA, earnings can be withdrawn tax-free beginning five years after the year for which the first contribution was made to the Roth IRA and if the taxpayer is 59 1/2 years or older.

1. _____ This instrument allows earnings to grow tax-free and can be used to pay for all educational expenses for primary through graduate school education.

A. CESA

An investor paid $20 per share for 100 shares of XYZ and a $40 commission. What is the investor's cost-basis per share?

Answer: $20.40. The $40 commission on a per share basis is $.40 so $2,040 / 100 shares = $20.40 per share. If the investor now sold all 100 shares at $25 for $2,500 with a $40 commission, the proceeds would be $2,500 - $40 commission = $2,460 net. Divided by 100 shares, the net proceeds per share would be $24.60. Therefore, the capital gain per share would be $24.60 - $20.40 = $4.20 per share, or $420 total for the 100 shares.

Under ERISA rules, which of the following would not be prohibited within the retirement plan? A. A loan to a participant of the plan who is not a disqualified person B. A transfer of plan income to the investment adviser managing the plan C. Lending money to the CEO of the company that is offering the plan D. Investing in gold coins

Answer: A. Under ERISA rules, the following are prohibited transactions: investments in collectibles (antiques, art, etc.), alcoholic beverages, such as vintage wine, and precious metals that do not meet certain requirements. Certain transactions between the plan and a disqualified person are also prohibited. A disqualified person includes the investment adviser serving the plan, the management of the company offering the plan, and any company owning more than 50% of the company sponsoring the plan. Prohibited transactions include a transfer of plan income or assets to a disqualified person, lending money to a disqualified person, a fiduciary using plan assets or income for its own benefit, when a fiduciary is paid with plan assets or income for a service, furnishing goods and services from the plan to a disqualified person, and taking goods or services from a disqualified person.

2. Name the type of retirement plan for small business that is only available to a self-employed individual who does not employ anyone else. A. SEP B. SIMPLE C. Solo 401(k)

C

4. _____ At redemption, interest income is tax-free if used for educational expenses in the same calendar year for this instrument.

E. Education savings bond

1. How is a Roth 401(k) similar to a Roth IRA and/or a 401(k) plan? A. As with a Roth IRA, as long as participants in a Roth 401(k) are over 59 1/2 years old and have had the account for five years or more, they can make all withdrawals tax-free. B. Roth 401(k)s resemble traditional 401(k)s in that the employer can make matching contributions into the after-tax Roth 401(k). C. A Roth 401(k) is similar to a Roth IRA in that they both have no restrictions on income level. D. As with the Roth IRA, Roth 401(k) participants have to start taking distributions from the Roth 401(k) beginning the year the owner turns 72.

1. A. B is not true because the employer must make any contributions to a pre-tax 401(k) account associated with the Roth 401(k). C is not true because the Roth IRA has restrictions on income level. D is not true because the Roth IRA does not require that distributions start when the account owner turns 72.

1. What is the most important defining feature of qualified retirement plans? A. These plans typically allow participants to make contributions to the plan with pre-tax dollars. B. These plans comply with Employee Retirement Income Security Act requirements. C. Pension sponsors must fully fund the participants' benefits, and the contributed funds must be held separate from other corporate assets. D. Such plans often include employer matching of employee contributions, and employers can deduct employer contributions from their corporate taxes.

1. A. Tax-qualified plans are called such, because they meet the requirements of the IRS to receive tax advantages. Tax-qualified plans typically allow participants to make contributions to the plan with pre-tax dollars, reducing their income for calculating their taxes.

1. On the zombie planet Dexos431, in a galaxy not far away, the planetary government taxes all lifeforms at the same rate, no matter their income level. Economists call this a: A. Regressive tax system B. Progressive tax system C. Alternative minimum tax system D. Transfer tax system

1. Answer: A. Under a regressive tax system, all taxpayers are taxed at the same rate, no matter their income levels. The United States collects taxes under a progressive tax system, which increases the tax rate as taxpayers report higher income. All taxpayers are required to also calculate their taxes under the alternative minimum tax (AMT) system and pay whichever amount is larger. The transfer tax system refers to taxes levied on large amounts of wealth transferred between anyone other than spouses.

1. True or false. Both the traditional IRA and the Roth IRA allow contributions of after-tax dollars.

1. True. The traditional IRA provides tax benefits, so it is in the participant's best interest to maximize before-tax contributions to that account. Any after-tax contributions can be withdrawn from the traditional IRA tax-free, but the individual must show evidence that taxes were paid on these contributions.

10. The tax basis of securities gifted during a person's lifetime that have gone up in value since being purchased by the giver is: A. Stepped-up to the value on the date of transfer B. Passed on to the recipient C. Subject to the annual exclusion amount D. Deductible to the person gifting the securities

10. Answer: B. A stepped-up tax basis is only calculated when a deceased person transfers wealth to an heir. The new, stepped-up tax basis is the price of the security on the giftor's date of death.

11. Which of the following activities is permitted in an IRA? A. Purchase life insurance B. Purchase art C. Purchase a variable annuity D. Short 10 call options on XYZ corporation while having no long position in the stock

11. Answer: C. Only cash or cash equivalents can be deposited into an IRA. But once in the account, the funds can be used to buy most kinds of securities and some non-securities. Collectibles, such as works of art and stamps, and life insurance can never be purchased in an IRA. An investor is not allowed to short call options on securities he does not hold (known as a naked call option) in an IRA. Finally, although it is not recommended to purchase a variable annuity inside of an IRA, it is permissible.

12. ERISA regulations apply to all of the following except: A. Beneficiary designation and participation requirements B. Section 457 plans C. Vesting and disclosure requirements D. Section 403(b) plans

12. Answer: B. Government and church retirement plans are excluded from ERISA requirements by law. In other words, ERISA regulates retirement plans in the private sector only. A Section 457 plan is a retirement plan for state and local government workers. Section 403(b) plans are available to employees of tax-exempt and not-for-profit companies. ERISA contains rules pertaining to beneficiary designation, participation requirements, vesting requirements, and disclosure requirements.

13. The income tax burden is likely to be the lightest on retirement income coming out of a: A. SEP IRA B. Roth IRA C. Defined benefit plan D. Keogh plan

13. Answer: B. As long as the retiree is at least 59 1/2 years old and has had the money in a Roth for at least five years, withdrawals come out tax-free. Money received from any of the other choices is 100% taxable as ordinary income.

14. A 57-year old beginning substantially equal periodic payment (SEPP) plan payments under Rule 72(t) would have to continue receiving those payments: A. For five years B. For ten years C. Until age 59 1/2 D. At least until age 59 1/2, with mandatory recalculation prior to age 62

14. Answer: A. The regulation requires recipients to continue the SEPP for five years or until the age of 59 1/2, whichever comes last. This means that payments starting at age 57 would have to continue for the next five years.

15. The owner of a traditional IRA is required to begin taking distributions by what date? A. December 31 of the year she turns 72 B. December 31 of the year she turns 59 1/2 C. April 1 of the year she turns 72 D. April 1 of the year after she turns 72

15. Answer: D. The required minimum distribution (RMD) rules for the IRS require an individual to begin taking funds from her traditional IRAs by April 1 after the year she turns 72.

17. All of the following are exceptions that would allow an investor to avoid the 10% tax penalty on IRA early withdrawals except: A. Withdrawals for certain educational expenses B. Death C. Living expenses if unemployed D. First-time home purchase up to $10,000

17. Answer: C. General living expenses while unemployed (except health insurance premiums) are not considered an exception to the 10% early withdrawal tax penalty.

18. All money coming out of a tax-qualified retirement plan (excluding a Roth IRA) is: A. Taxable as ordinary income B. Received tax-free C. Taxable as a short-term capital gain D. Taxable as a long-term capital gain

18. Answer: A. There are no capital gains with retirement plans; all income received from them is subject to ordinary income tax. Money received under the proper conditions from a Roth retirement plan can be received tax-free, but that's not addressed by the question.

19. Spock is an adviser who takes great pride in his use of logic when making investment recommendations. Which of the following investment vehicles would he be least likely to recommend for a client's IRA? A. Corporate bonds B. Growth stocks C. Municipal bonds D. REITs

19. Answer: C. Having municipals in an IRA is allowed, but it would not be the most logical investment choice. That is because the tax advantage associated with municipal bonds is wasted in a tax-deferred account like an IRA.

2. All of the following would be considered ordinary income except: A. Wages earned at a job B. Income earned from one's business C. Bonus received from an employer D. Profits distributed to shareholders of a C corporation

2. Answer: D. Dividends, which are the profits distributed to the shareholders of a qualified company, are considered dividend income and taxed at a preferential rate. Wages, income earned from one's business, and bonuses paid by an employer are all considered ordinary income.

2. True or false. A Roth 401(k) may be rolled over into a traditional 401(k).

2. False. It may be rolled over into another Roth 401(k) or a Roth IRA, but not a traditional 401(k).

2. List the two primary goals of most retirement plans.

2. The two primary goals of most retirement plans are to provide enough money to live on after retirement and to defer taxes on contributions and earnings.

2. True or false. An employee is limited in the amount he may contribute to a traditional IRA if he has another retirement plan account.

2. True. An employee is limited in the amount he can contribute to an IRA whether or not he has another retirement account. If an individual is participating in another qualified retirement plan, such as a 401(k), he will be able to contribute to the IRA up to the limit, but he will not be able to deduct the full amount from his taxes. The deduction amount will depend on the individual's income level.

20. How much money does Mrs. Meyer owe to the IRS if she takes a one-time distribution payment of $20,000 from her 401(k) to pay for a vacation to Antarctica? Mrs. Meyer is 55 years old and is in the 15% tax bracket. A. $2,000 B. $3,000 C. $5,000 D. $7,000

20. Answer: C. According to IRS regulations, anyone under the age of 59 1/2 who takes a distribution from her retirement account will be subject to a 10% penalty on the distribution, in addition to the ordinary income taxes owed. That means Mrs. Meyers must pay the 10% penalty plus her 15% income tax. To calculate the amount of money owed, multiply $20,000 × 25% = $5,000.

21. Each of the following is a type of qualified retirement plan except: A. Deferred compensation plan B. 401(k) C. Profit sharing plan D. 403(b)

21. Answer: A. Qualified retirement plans are employee benefit plans that, in return for complying with Internal Revenue Code requirements, qualify for certain income tax advantages. One type of qualified plan is the defined contribution plan. In essence, the IRS defines the maximum amount that can be contributed to the plan. Examples of these types of plans include 401(k) plans, profit sharing plans, and 403(b) plans. A deferred compensation plan is a non-qualified plan that allows employers to put away compensation for an employee to receive at a later date.

22. Which of the following statements regarding qualified retirement plans are true? I. Qualified retirement plans are required to fully match employee contributions. II. Employee contributions to a qualified retirement plan can be made on a pre-tax basis. III. Employee contributions to a qualified retirement plan can be made on an after-tax basis, if allowed by the plan. IV. Qualified retirement plans must adhere to rules outlined by ERISA. A. I and II B. II and III C. I, II, and III D. II, III, and IV

22. Answer: D. Employee contributions to a qualified plan are contributed on a pre-tax basis in traditional plans and continue to grow tax-deferred until distribution, when taxes are paid upon withdrawal. In addition, qualified plans may accept after-tax contributions (called Roth contributions.) These after-tax contributions will grow tax-deferred and they will not be taxed upon withdrawal (if all criteria are met). All qualified plans must adhere to ERISA. Qualified plans can opt to give matching contributions to part or all of the employee's contributions, but the employer is not required to match those contributions.

23. What is the current annual maximum contribution to a Coverdell ESA? A. $500 B. $2,000 C. $5,000 D. Determined by each state

23. Answer: B. The current maximum contribution to a Coverdell ESA (formerly known as an Education IRA) is $2,000. No contributions may be made for a beneficiary once she reaches age 18.

24. All of the following can be funded with pre-tax dollars except: A. Section 457 plan B. Traditional 401(k) plan C. SIMPLE IRA D. Section 529 plan

24. Answer: D. A 529 plan is funded with after-tax dollars. However, if the money is withdrawn for qualified higher educational experiences, there will be no taxation on earnings within the fund.

25. Differences between Coverdell ESA accounts and 529 plans include all of the following except: A. Control of the assets changes at the age of majority of the beneficiary of a CESA, but it does not for a 529 plan. B. CESA has income limits, while 529 plans do not. C. CESA funds can be used for qualified elementary and secondary education expenses; when applied to elementary and second education expenses, 529 plans can only cover tuition costs. D. Section 529 plans offer tax-free withdrawals for qualified educational expenses, but the earnings are taxed for CESAs.

25. Answer: D. Both programs offer tax-free withdrawals for qualified educational expenses

28. What is the name of the document that outlines a retirement plan's investment goals and strategies, and serves as a guide for what to invest in, as well as a means of assessing how well the fiduciary has met the policy's investment goals? A. Retirement plan contract B. Investment policy statement C. Employee benefit brochure D. ERISA statement of benefits

28. Answer: B. An investment policy statement (IPS) is a document that outlines a retirement plan's investment goals and strategies, and serves as a guide for what to invest in, as well as a means of assessing how well the fiduciary has met the policy's investment goals. While having an IPS is not required by ERISA or the IRS, following the topics addressed in an IPS helps the plan's fiduciary to meet many of the requirements of the U.S. Department of Labor (DOL). For example, the DOL requires that fiduciaries make investment decisions and document these decisions. They must also invest prudently and monitor the investments they make. An IPS provides an excellent way to accomplish these requirements. IPSs also limit an employer's liability as a fiduciary. Companies that have operated within the parameters set by their investment policy statements are generally spared punitive action by regulators if losses due to investment performance occur within the plan.

29. Which of following is not true regarding ERISA and retirement plans? A. Employers offering their employees a retirement plan are required to act as fiduciaries. B. Investment advisers managing a retirement plan are required to act as fiduciaries. C. A fiduciary of a retirement plan must attempt to educate employees regarding their investment options and the investing process. D. The retirement plan must have an investment policy statement.

29. Answer: D. Under ERISA, employers offering their employees a retirement plan are required to act as fiduciaries, or a trusted party who acts in the best interests of another party. This definition also extends to include most of the outside providers and advisers who work with the plan. Ultimately, this means that employers and professionals working with the plan have both a legal and an ethical obligation to ensure that the retirement plan they offer is in place to serve the employees (not the employer) and that the decisions made regarding that plan are clearly in the best interest of the employees. A fiduciary of a retirement plan must attempt to educate employees regarding their investment options and the investing process. ERISA does not require that retirement plans have an investment policy statement, but ERISA strongly encourages that they do.

3. If Winston wants to roll over or transfer his qualified retirement plan when he leaves his job next month, what effects does he need to consider? A. Whether he can set up another suitable plan before he leaves his job or within 60 days B. Whether he did a rollover of the same account in the last year C. Whether he can replace the 20% the IRS will take if he chooses a rollover D. All of the above

3. D. See Rollovers vs. Transfers section just before the Exercise.

30. Under ERISA rules, which of the following would not be prohibited within a retirement plan? A. An investment in a famous piece of art B. The plan hires and pays the CEO's wife as a web designer from plan assets to maintain the plan website C. The CEO borrows money from the plan to meet payroll with an agreement from the employees D. All options transactions

30. Answer: D. Under ERISA rules, the following are prohibited transactions: investments in collectibles (antiques, art, collectibles, etc.), alcoholic beverages, such as vintage wine, and precious metals that kdo not meet certain requirements. Certain transactions between the plan and a disqualified person are also prohibited. A disqualified person includes the investment adviser serving the plan, the management of the company offering the plan, and any company owning more than 50% of the company sponsoring the plan. Prohibited transactions include a transfer of plan income or assets to a disqualified person, lending money to a disqualified person, a fiduciary using plan assets or income for its own benefit, when a fiduciary is paid with plan assets or income for a service, furnishing goods and services from the plan to a disqualified person, and taking goods or services from a disqualified person for the plan. Options transactions are not prohibited within retirement accounts.

31. To qualify for an HSA, the individual or family must be enrolled in a: A. High interest health plan B. Qualifying group plan C. High deductible health plan D. High distribution health plan

31. Answer: C. HSAs are only available for those enrolled in a high deductible health plan (HDHP). The IRS sets the minimum required deductible to qualify as an HDHP. For 2022, a deductible of $1,400 is required for individuals and a deductible of $2,800 is required for families.

32. Karen, a resident of Oregon, has purchased an Oregon municipal bond with a rate of 6%. If her federal tax bracket is 28% and state tax is 10%, what would she need to earn on a corporate bond to have a comparable rate? A. 8.33% B. 9.68% C. 6.67% D. 7.68%

32. Answer: B. This municipal bond will not be taxed at either the federal or state level because Karen is a resident of Oregon. To get the comparable corporate rate, we need to divide by one minus the federal plus the state tax rate. 6% / (1 - 0.38) = 6% / 0.62 = 9.68%

33. John, who is single, opens a health savings account on his 66th birthday. Under current rules, which of the following is true? A. John may contribute an unlimited amount to his HSA each year. B. John may withdraw his contributions, but not his earnings, at anytime without penalties. C. John's contributions to the HSA are tax-deductible, and contributions and earnings can be withdrawn tax-free if used for qualified medical expenses. D. John can supplement his Medicare or Medicaid benefits with HSA funds.

33. Answer: C. Contributions to an HSA are tax-deductible, and contributions and earnings can be withdrawn tax-free if used for qualified medical expenses, and the policyholder is over the age of 65. An individual or family must not be eligible for Medicaid or Medicare to qualify for an HSA.

4. A taxpayer with a total excess capital loss of $10,000 may: A. Deduct $3,000 against their ordinary income B. Deduct $10,000 against their ordinary income C. Deduct against ordinary income if their holding period was more than 12 months D. Not deduct anything

4. Answer: A. Taxpayers who have offset both their short-term and long-term capital gains with capital losses and still have a loss left over may apply up to $3,000 of the loss against their ordinary income. The unused portion can then be carried forward into future years.

4. True or false. Rollovers of all qualified retirement plans require that 20% of the balance be held by the IRS for the rest of that tax year.

4. False. The 20% rule does not hold for IRAs, although an individual who manages his own IRA rollover must still complete it within 60 days. Additionally, the 20% rule does not apply to direct transfers.

4. True or false. Even though both IRS regulations and ERISA requirements state that employers must make retirement plan accounts available to employees over 21 years old, companies may set different eligibility requirements.

4. True. For example, a company may set an eligibility age of 18 rather than 21.

5. All of the following are true of a wash sale except: A. It adds the loss to the new basis. B. It is applied to sales and repurchases that happen within 30 days of the trade date. C. The IRS does not allow wash sales. D. Wash sales do not apply to sales where a gain was made.

5. Answer: C. The IRS does allow wash sales, but just places rules on how a wash sale affects the basis of the newly purchased security. Instead of allowing the investor to report the loss on the previously supported security, that loss must be added to the cost basis of the new security.

5. True or false. Roth IRA participants must begin taking required minimum distributions no later than the year in which they turn 72.

5. False. Roth IRAs do not require participants to take minimum required distributions.

5. True or false. A working person can contribute to her non-working spouse's IRA, as long as the couple files a joint return and the working spouse has enough earned income to cover both IRA contributions.

5. True. A working spouse can contribute to her spouse's IRA as long as she has enough earned income and files a joint return.

6. Which of the following are true of the alternative minimum tax (AMT)? I. Taxpayers may choose which system to file under. II. All taxpayers must calculate their AMT. III. The AMT is designed to minimize a taxpayer's liability. IV. Certain deductions are excluded from the AMT calculation. A. I and III B. II and IV C. I and IV D. II and III

6. Answer: B. All taxpayers are required by law to calculate the taxes owed under both the traditional tax system and the AMT and pay the greater of the two amounts. Additionally, certain deductions allowed under the traditional system are not allowed under the AMT, which raises the potential amount on which the AMT is calculated. The goal of the AMT is to generate tax revenue from taxpayers who would otherwise avoid taxation.

7. Income earned by an estate after the person's death is: A. Not taxed B. Taxed at the beneficiary's rate C. Taxed at the executor's rate D. Taxed at the estate's tax rate

7. Answer: D. Income earned by an estate after the person's death, but before being passed on to their heirs, is taxed to the estate using a progressive tax rate system with much smaller brackets than an individual tax return. Income earned prior to a person's death but not received until after is taxed at the rate of the person or entity that receives the income.

8. All of the following would avoid gift and estate transfer taxes except: A. Paying a school $50,000 for college tuition on behalf of someone else. B. Giving someone $50,000 to help with his medical bills. C. Giving $25,000,000 to a person's spouse. D. A couple giving twice the annual exclusion amount to each of their children.

8. Answer: B. To avoid being subject to gift tax, the giftor would have had to make payments directly to the medical provider. Giving it to the individual made it subject to gift tax. Likewise, money paid directly to an educational institution is exempt from gift taxes. A person is allowed to give an unlimited amount to their spouse. Couples are allowed to make joint gifts and then split that amount in determining how much applies to each of their individual annual exclusions.

9. Which of the following are true about estate and gift transfer taxes? I. They are only paid when given to someone more than one generation removed from the giftor. II. The amount of the tax is based on the deceased person's tax basis. III. Gift taxes are ultimately the responsibility of the giver. IV. A certain amount can be passed without paying any transfer taxes using the unified credit. A. I and III B. II and III C. III and IV D. I and IV

9. Answer: C. Gift taxes are ultimately the responsibility of the person giving the gift. Large amounts of money can be passed to heirs using the unified credit, before any gift and estate taxes are applied. Generation-skipping taxes (GSTT) are applied when money is given to someone more than one generation removed from the giftor. Transfer taxes are calculated on the net worth given, not the underlying tax basis of the amount transferred.

1. Name the type of retirement plan for small businesses that allows a business owner to skip contributions in years when business is bad. A. SEP B. SIMPLE C. Solo 401(k)

A

3. Name the type of retirement plan for small business that allows contributions for individuals over 72 years old. A. SEP B. SIMPLE C. Solo 401(k)

A

An investor wanting to reduce possible exposure to the AMT tax might consider all of the following strategies except: A. Contributing the maximum to a 401(k) plan B. Investing in private activity municipal bonds C. Offsetting capital gains with capital losses D. Living in a low-tax state and never having children or any other dependents

Answer: B. Anything that reduces your adjusted gross income (AGI) reduces potential exposure to the alternative minimum tax. Thus maximizing contributions to an employer-sponsored retirement plan, such as a 401(k) plan, is a smart move. Likewise, offsetting capital gains with capital losses will keep your AGI down and, thus, reduce AMT exposure. Since the AMT hits taxpayers in high-tax locales the hardest (under the AMT, state and local income and property taxes are not deductible), living in a low-tax state could minimize your AMT exposure, as would not having children, since without them, you would not lose the dependent deductions under the AMT calculation. However, investing in private activity municipal bonds would increase potential AMT tax, since unlike most municipal bonds, interest from private activity bonds is not tax-free under the AMT.

Which of the following wouldn't be a reason to have an investment policy statement for a retirement plan? A. It limits an employer's liability as a fiduciary. B. It serves as a guide for what to invest in, as well as a means of assessing how well the fiduciary has met the policy's investment goals. C. It is a requirement to be a qualified retirement plan. D. It serves as a guiding document outlining how many of the ERISA Section 404(c) requirements are met.

Answer: C. IPSs limit an employer's liability as a fiduciary. Companies that have operated within the parameters set by their IPSs are generally spared punitive action by regulators if losses due to investment performance occur within the plan. An IPS is a guiding document outlining how many of the ERISA Section 404(c) requirements are met. An IPS also serves as a guide for what to invest in, as well as a means of assessing how well the fiduciary has met the policy's investment goals. The IRS does not require that qualified plans have an investment policy statement. Although the provisions set by ERISA do not require a company to have an IPS, they do recommend it.

4. Name the type of retirement plan for small business for which the employer is required to either match employee contributions up to 1% to 3% of the employee's compensation or to contribute 2% whether the employee makes a contribution or not. A. SEP B. SIMPLE C. Solo 401(k)

B

5. _____ This instrument, offered by states, may have state tax advantages along with its exemption from federal taxes on earnings and withdrawals if used for qualified education expenses.

B. 529 college savings plan

2. _____ Setting up this type of instrument allows the investor to avoid inflation risk by purchasing credits to pay for education expenses in today's dollars.

C. Prepaid tuition plan

3. _____ These instruments allow an adult to set up an account for the benefit of a minor, and although the account is not managed by the minor, it is considered an asset of the minor for need-based financial aid purposes.

D. UGMA/UTMA