Unit 18

A participant in an ERISA qualified retirement plan is studying the investment policy statement (IPS) prepared by the plan's fiduciary. The contents of the IPS would not include A) specific security selection B) methods for monitoring procedures and performance C) determination for meeting future cash flow needs D) investment philosophy including asset allocation style

A) specific security selection One thing that could never be in an IPS is a listing of the securities that will be purchased in the future. Types of securities, yes, but not the specific ones.

Gail's minimum required distribution this year from her IRA is $5,000. If she takes $8,000, the penalty will be A) $2,000 B) $0 C) $2,500 D) $1,500

B) $0 There is no penalty if a participant withdraws more than the required minimum distribution.

Which of the following statements about plan fiduciaries under ERISA are true? I. Plan fiduciaries sometimes have conflicting obligations to plan participants and other parties in interest. II. Plan fiduciaries must ordinarily diversify plan investments. III. Plan fiduciaries are personally liable for fines if they violate their fiduciary duties. A) I and III B) II and III C) I, II, and III D) I and II

B) II and III Under ERISA, plan fiduciaries must act solely in the interests of plan participants and beneficiaries, and they may not place the interests of other interested parties above those of the plan participants and beneficiaries. They must diversify plan investments to minimize the risk of large losses, unless it would not be wise to do so. If they violate any of their fiduciary duties, they may be personally liable for large fines.

Since its inception in 1986, virtually all the states have replaced the Uniform Gifts to Minors Act with the Uniform Transfers to Minors Act. It is generally agreed that one of the primary benefits offered by UTMA over UGMA is A) greater flexibility in naming beneficiaries B) greater flexibility in the type of property that may be transferred to the minor C) mandatory surrender of control at majority D) greater flexibility in naming custodians

B) greater flexibility in the type of property that may be transferred to the minor The property that may be transferred into an UGMA account is generally limited to cash and securities, while in an UTMA account, almost any kind of property—real or personal, tangible or intangible—can be transferred to the custodian.

Your client, Jane, died, and her 53-year-old son, Patrick, is the beneficiary of her IRA account. There is $750,000 in the account at the time of her death. All contributions were made with pre-tax dollars. Ten years later, the account has grown to $1.2 million, and Patrick begins to take distributions. The distributions will be A) taxable on the growth and earning since Jane's death B) taxed on the amount withdrawn in a given year C) tax free because the estate paid the taxes at the time of Jane's death D) 100% taxable on the amount over $1 million

B) taxed on the amount withdrawn in a given year The account beneficiary is responsible for the taxes due on the funds that are withdrawn. One hundred percent of the distribution is taxable in the tax year the withdrawal is made.

If a retiree is paid an annual amount equal to 30% of the average of his last 3 years' salary, which of the following retirement plans offers this type of payment? A) Money purchase pension B) Deferred compensation C) Defined benefit ​pension D) Profit-sharing

C) Defined benefit ​pension A retirement plan that establishes the retiree's payout in advance is a defined benefit plan. ​Profit sharing and money purchase pension plans are defined contribution plans.

Which of the following may not be used to fund an individual retirement account (IRA)? A) Stocks B) Mutual funds C) Life insurance D) Bank accounts

C) Life insurance There are many funding options available to investors who open an IRA. IRA contributions can be invested in stocks, mutual funds, bank accounts, and annuities. They cannot be invested in life insurance, however.

The term security would include which of the following? A) Indentures B) 403(b) plans C) Section 529 plans D) Coverdell ERAs

C) Section 529 plans Technically, Section 529 plans are known as municipal fund securities. As such, the rules of the MSRB require delivery of an official statement, sometimes called an offering circular but never referred to as a prospectus. Retirement plans are not included in the definition and an indenture is a document specifying the legal obligations of the bond issuer and rights of the bondholders. It is some¬times called the deed of trust, and although it details information about a security, it is not, in itself, a security.

Allowable investments in an IRA would include A) collectible art B) rare stamps C) U.S. government-issued silver eagles D) cash value life insurance

C) U.S. government-issued silver eagles There are certain coins minted by the U.S. Treasury that are eligible for inclusion in an IRA. No life insurance is allowed (though annuities, both fixed and variable, are allowed), and collectibles, such as art and stamps, are prohibited.

What is the tax penalty for the withdrawal of money from an IRA before age 59½? A) 6% B) 50% C) 5% D) 10%

D) 10% Explanation Early withdrawals from an IRA are subject to a tax penalty amounting to 10% of the taxable portion of the distribution.

The employer does not get a current tax deduction when offering which of the following retirement plans? A) SIMPLE plan B) Money purchase plan C) Defined benefit plan D) Deferred compensation plan

D) Deferred compensation plan Explanation Because there is no constructive receipt of income until the deferral period is over, the employing company does not get a current tax deduction. Of course, the employee doesn't report taxable income until then. In the other plans, all qualified, any contributions made by the employer represent a current business expense and are deductible from the company's income.

Under UTMA, the custodian must be A) a trustee. B) appointed by the court. C) a member of the minor's family. D) an adult.

D) an adult. Explanation The only requirement to be the custodian of an UTMA (or UGMA) account is being of legal age (an adult).

Nonqualified corporate retirement plans differ from qualified retirement plans because I. nonqualified plan contributions are not exempt from current income tax II. nonqualified plan earnings accumulate on a tax-deferred basis III. the corporation need not comply with nondiscrimination rules that apply to qualified plans IV. the corporation must comply with ERISA requirements dealing with communications to plan participants A) I and III B) I and II C) II and IV D) II and III

A) I and III Two of the primary ways in which nonqualified corporate retirement plans differ from qualified retirement plans is that contributions are not exempt from current income tax and they need not comply with nondiscrimination rules that apply to qualified plans. Under most circumstances, the accounts do not provide for tax deferral on earnings because these plans are rarely funded. The ERISA communication requirements apply to qualified plans only.

An investment policy statement would likely include I. expected returns of the recommended strategy and the expected range of these returns II. recommended allocations among differing asset classes III. strategies used for selecting specific stocks in the equity portion of the portfolio IV. disclosure of the fees that the adviser will earn for implementing the recommended strategy A) I, II, and III B) II, III, and IV C) I only D) I and II

A) I, II, and III An investment policy statement prepared for clients delineates the allocation percentages for each asset class and the expected returns from each class, and outlines strategies that may be used for timing the market and choosing specific investments within each class, but fees the adviser may earn are not included in the policy statement; they are disclosed separately.

Which of the following concerning a money purchase pension plan are true? I. All employees must contribute to the plan. II. Voluntary employee contributions are optional. III. Employer contributions are required. IV. Employer contributions are optional. A) II and IV B) I and IV C) II and III D) I and III

C) II and III A money purchase pension plan is a defined contribution plan established by the employer, thereby making the contributions mandatory. Employee participation by making voluntary contributions to the plan is optional. Employees who contribute to the plan usually contribute a percentage of their income.

Your customer opens a Coverdell ESA for his niece. In order 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 A) automatically reinvested back into the plan B) taxable to the uncle, the donor to the plan C) taxable to the niece, the beneficiary of the plan D) nontaxable to either party

C) taxable to the niece, the beneficiary of the plan Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution.

What is the latest date that an IRA participant may make a contribution based on the current year's income? A) April 15 of the current year or the first business day following if the 15th is a Saturday or Sunday B) December 31 of the current year C) July 15 of the following year, if extensions have been filed D) April 15 of the following year or the first business day following if the 15th is a Saturday or Sunday

D) April 15 of the following year or the first business day following if the 15th is a Saturday or Sunday Explanation Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made. If April 15 falls on a Saturday or Sunday, contributions can be made up to the 1st business day after the 15th. If the taxpayer has received an extension, that does not affect this deadline.

All of the following permit investments into various securities, such as stocks, bonds, and mutual funds except A) an HSA. B) a Roth IRA. C) a traditional IRA. D) an FSA.

D) an FSA. Explanation Flexible spending accounts (FSAs) allow deductions from an employee's paycheck. That money is held by the company and is used to pay allowable claims by the employee. A health savings account (HSA) permits the employee to invest in a wide variety of securities. IRAs, traditional and Roth, have always permitted investment flexibility.

At the end of Maria's tax year, the unused funds in her HSA A) revert to Maria's employer. B) are distributed to the designated beneficiary or beneficiaries. C) are distributed to Maria. D) are automatically carried over to the new year.

D) are automatically carried over to the new year. Explanation One of the major advantages of an HSA is that, unlike an FSA, unused funds belong to the employee and may be rolled over. Furthermore, as long as the funds are used for qualified medical expenses, they are nontaxable.

All of the following statements concerning IRA contributions are true except A) if you pay your tax on January 15, you can still deduct your IRA contribution, even if not made until April 15 B) contributions can be paid into this year's IRA from January 1 of this year until April 15 of next year C) between January 1 and April 15, contributions may be made for the current year, the past year, or both D) contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis

D) contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis Explanation Contributions can be made to an IRA only until the first tax filing deadline (April 15), regardless of having filed an extension.

Ways in which a Section 529 plan differs from a Coverdell ESA include I. tax-free distributions when the funds are used for qualifying educational expenses II. higher contribution limits III. no earnings limitations IV. contributions that may be made by someone other than a parent or legal guardian A) II and III B) I and II C) II and IV D) I and IV

A) II and III Contributions to an ESA are limited to $2,000 per beneficiary per year, whereas the 529 limit is set by the plan sponsor, sometimes as high as $500,000. Unlike the ESA, where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 plans and Coverdell ESAs enjoy tax-free distributions, and plans may be established by almost anyone.

A single individual earning $250,000 a year may I. open a Coverdell ESA II. not open a Coverdell ESA III. open a 529 college savings plan IV. not open a 529 college savings plan A) II and IV B) II and III C) I and IV D) I and III

B) II and III There are income limits that apply to Coverdell ESAs. Single individuals earning more than $110,000 per year are not permitted to open a Coverdell account, and married couples lose the ability to contribute when earnings exceed $220,000. However, there are no income limits restricting who is eligible to open and contribute to a Section 529 college savings plan.

Which of the following retirement plans is not legally required to establish vesting, funding, and eligibility requirements? A) Defined benefit pension plan B) Payroll deduction plan C) Profit-sharing plan D) Keogh plan

B) Payroll deduction plan A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.

If Maria turned 73 on August 16, 2023, when must she make the first required minimum distribution (RMD) from her IRA? A) December 31, 2024 B) April 1, 2025 C) December 31, 2023 D) April 1, 2024

D) April 1, 2024 Explanation The SECURE Act 2.0 requires that RMDs commence no later than April 1 of the year following the year that the owner of the IRA turned 73 years old. Maria turned 73 on August 16, 2023. Therefore, distributions must commence by April 1, 2024.

Which of the following securities is most suitable for an investment adviser representative to recommend to a 26-year-old customer opening an IRA? A) Municipal bond fund shares B) Put options C) Term insurance contract D) Growth stock mutual fund

D) Growth stock mutual fund Explanation Growth stocks provide potentially long-term returns suitable for a retirement account. An individual opening a new IRA won't have sufficient funds to properly diversify other than by purchasing shares of an investment company. IRA distributions are 100% taxable, which makes the investment in tax-exempt securities unsuitable. Insurance is not permitted in an IRA account, and speculative options are inappropriate.

Ways in which a Section 529 plan differs from a Coverdell ESA include I. tax-free distributions when the funds are used for qualifying educational expenses II. higher contribution limits III. no earnings limitations IV. contributions that may be made by someone other than a parent or legal guardian A) II and III B) I and IV C) I and II D) II and IV

A) II and III Contributions to an ESA are limited to $2,000 per beneficiary per year, whereas the 529 limit is set by the plan sponsor, sometimes as high as $500,000. Unlike the ESA, where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 plans and Coverdell ESAs enjoy tax-free distributions, and plans may be established by almost anyone.

To protect the benefits of plan participants and beneficiaries, ERISA prescribes standards for the execution of the plan fiduciary's duties and responsibilities. Which of the following CORRECTLY describes those standards? I. The standard of prudence applies to responsibilities relating to the investment of the plan assets but not to the responsibilities relating to the administration and management of the plan. II. Participants must be offered a broad range of investment options. III. The rules prohibit transactions between the plan and persons who have conflicts of interest with the plan even though a particular transaction may benefit the plan participants. IV. ERISA requires the plan fiduciaries to adopt and adhere to an investment policy that must be communicated in writing to all participants. A) II and III. B) I and IV. C) III and IV. D) I and II.

A) II and III. The fiduciary standards of ERISA require that plan participants be offered a broad range of investment options in order to obtain the benefit of broad diversification. Under no circumstance, even when benefiting plan participants, are fiduciaries permitted to engage in prohibited transactions such as lending money to the plan. The standards of prudence apply to the administration of the plan, as well as to the investment decisions, and the investment policy, although a good thing to have, is not required under ERISA.

A premature distribution from an IRA would be exempt from the premature distribution penalty under all of the following circumstances except A) as a result of hardship B) upon the death of the IRA owner C) to correct an excessive contribution to the IRA D) to pay for qualifying medical expenses

A) as a result of hardship Hardship withdrawals are not permitted from IRAs. They are a feature permitted in 401(k) plans.

Probably the most significant benefit of saving for retirement using a Roth IRA is A) tax-deductible contributions B) tax-free treatment at withdrawal C) larger contributions than a traditional IRA D) tax-deferred accumulation

B) tax-free treatment at withdrawal Although Roth IRA contributions grow without current taxation, that doesn't make them unique. What is truly special about the Roth is that, if certain conditions are met, withdrawals are totally free of income tax.

The contribution limit has to be aggregated when participating in both A) a 457 and a Roth IRA B) a 401(k) and a 457 C) a 401(k) and a 403(b) D) a 403(b) and a 457

C) a 401(k) and a 403(b) Contributions to a 457 plan do not have to be aggregated with other retirement plans. That is, if eligible, one could contribute the maximum to a 401(k), a 403(b), or an IRA (traditional or Roth) and could also contribute the maximum to a 457 plan.

Gaston is a police officer and wishes to contribute to a retirement plan sponsored by the city. Gaston wants the flexibility of being able to have unfettered penalty-free access to his funds before reaching age 59½. This can only be accomplished if Gaston contributes to A) a SEP-IRA. B) a 401(k) plan. C) a 457 plan. D) a 403(b).

C) a 457 plan. The 457 plan is unique in that it is the only tax-qualified retirement plan permitting withdrawals, for any reason, before reaching 59½ without penalty. All qualified plans have exceptions to the 10% penalty tax, but only the 457 allows the withdrawals for any reason.

Because of the changes made in the SECURE Act 2.0, minimum distributions from a traditional IRA must begin A) once the owner retires. B) as soon as the owner turns 72. C) by April 1, the year after the owner turns 73. D) a year after the owner turns 59½

C) by April 1, the year after the owner turns 73. Effective with the SECURE Act 2.0, distributions from a traditional IRA must begin by April 1 of the year after the owner turns 73.

Among the benefits of an HSA is A) the amount that may be contributed is based on the number of dependents. B) up to $10,000 per year may be accumulated. C) funds not used for health expenses may be invested in mutual funds and other securities. D) funds may be used for various medical expenses once the low deductible has been met.

C) funds not used for health expenses may be invested in mutual funds and other securities. Unlike an FSA (flexible spending account), employee contributions to a health savings account (HSA) not used for medical expenses may be invested in a wide variety of securities. Although mutual funds are the most common, many providers offer the opportunity to invest in stocks and bonds. Remember, one of the eligibility requirements for an HSA is a high, not low, deductible. In 2023, the maximum contribution is $3,850 for an individual or $7,750 if family coverage, regardless of the number of dependents covered. These numbers are never tested and are included so that students get an idea of what a "high-deductible" plan means.

Which of the following qualified retirement plans offer tax advantages to both the employer and the employee? I. Individual retirement arrangements (IRAs) II. 401(k) plans III. Deferred compensation plans IV. Defined benefit plans A) II and III B) I and IV C) I and III D) II and IV

D) II and IV Explanation In both 401(k) plans and defined benefit plans, tax advantages accrue to both the employer and the employees. Employer contributions are deductible, and earnings growth is tax deferred to the employee. IRAs offer no benefit to the employer (note that the answer choice did not say "SEP IRA"), and deferred compensation plans are nonqualified.

Which of the following regarding customer accounts is not true? A) Margin trading in a fiduciary account requires special documentation. B) In some cases, a TOD account is referred to as a POD account. C) Asset held under JTWROS goes to the survivor(s) in the event of the death of one of the tenants. D) Stock held in a custodial account may be registered in the name of the minor.

D) Stock held in a custodial account may be registered in the name of the minor. The reason behind UTMA (or UGMA) accounts is because securities may not be registered in the name of a minor. Trading on margin is generally not permitted in fiduciary accounts except under special circumstances and with the appropriate documentation. TOD and POD are essentially the same. TOD is the preferred term in the securities business while banks generally use POD.

Tammy Jones is retiring from her company next month on her 62nd birthday. Her 401(k) has $300,000 and offers her 4 different mutual funds. After calculating what she will receive from Social Security, she concludes that she will need an additional $500 a month to retain her current lifestyle. Which of the following would be the most appropriate recommendation? A) Roll the money into a traditional self-directed IRA B) Roll the money into a mutual fund withdrawal plan C) Leave the money in her current 401(k) account D) Take a lump-sum distribution of the entire $300,000

A) Roll the money into a traditional self-directed IRA It would benefit Ms. Jones most to roll the money into a traditional IRA. By doing this she would defer paying taxes on the $300,000—something she could not avoid if she took the lump-sum distribution or rolled the money into a mutual fund withdrawal plan. Although the decision to roll over into a self-directed IRA or leave the funds in the 401(k), if permitted, is one worthy of consideration, with only 4 mutual funds being offered in Ms. Jones's 401(k) account, most would agree that the increased options available in the IRA make that the better choice.

A person providing which of the following services to an ERISA plan would be performing in a fiduciary capacity? A) Selecting and monitoring third-party service providers B) Changing the level of employer contributions C) Determining the age at which benefits are to be provided D) Amending the plan

A) Selecting and monitoring third-party service providers The issue here is the distinction between fiduciary functions and something called settlor functions. ERISA defines fiduciary not in terms of formal title but rather in functional terms of control and authority over the plan. ERISA provides that a person is a fiduciary with respect to an employee benefit plan to the extent that such a person does any of the following: exercises any discretionary authority or control over the management of a plan or over the management or disposition of plan assets; renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of such plan; or has any discretionary authority or discretionary responsibility in the administration of such plan including appointing other plan fiduciaries or selecting and monitoring third-party service providers. The other choices given in the question are known as settlor functions. The most common settlor functions are design decisions involving: establishment of the plan, defining who are the covered employees and benefits to be provided, and amending or terminating the plan. Because the likelihood of an IAR ever performing settlor functions is quite remote (usually they are done by employees of the sponsoring employer), I cannot fathom why NASAA would ask something like this on the exam, but, just in case.

Which of these is an advantage of using a Coverdell ESA rather than a 529 plan to fund a child's future education? A) The Coverdell offers greater investment flexibility. B) Contributions to the Coverdell are eligible for the annual gift tax exclusion. C) The Coverdell has greater tax advantages. D) The Coverdell allows for transfer of beneficiary.

A) The Coverdell offers greater investment flexibility. A Coverdell ESA works similar to a self-directed IRA where stocks, bond, mutual funds, ETFs, and other investment vehicles are options. With a 529 plan, the donor is limited to whatever is available in the state plan chosen. Tax advantages might be better for the 529 plan because many states allow a portion of the contribution to be taken as a deduction or credit against state income taxes. Both allow for transfer to a new beneficiary as long as that individual is a member of the original beneficiary's family. In both cases, whatever is contributed to the program is treated as a completed gift and is eligible for the annual gift tax exclusion.

Which of the following statements regarding a traditional IRA is true? A) The income and capital gains earned in the account are tax deferred until the funds are withdrawn. B) Distributions before age of 59½ are subject to a 10% penalty in lieu of income taxes. C) Because contributions to a traditional IRA are not currently tax deductible, all qualifying withdrawals are tax free. D) Distributions without penalty may begin after the age of 59½ and must begin by April 1 of the year before an individual turns 73.

A) The income and capital gains earned in the account are tax deferred until the funds are withdrawn. The income and capital gains earned in the account are tax deferred until the funds are withdrawn. It is the Roth IRA that can have tax-free withdrawals. Based on the SECURE Act 2.0, distributions must begin by April 1 of the year after an individual turns 73, not before. If a distribution is taken before reaching age 59 1/2, it is subject to income tax plus a 10% penalty, not instead of (in lieu of) the taxes. If the question does not indicate an exception to the penalty, such as death or disability, there isn't one.

Thomas, age 49, owns his own business and pays himself a salary of $80,000 per year. He employs his wife, Grace, age 51 as receptionist and pays her $45,000 per year. What is the maximum deductible contribution that they could have made to their traditional IRAs? A) They can contribute $6,500 to his IRA and $7,500 to hers. B) They cannot make deductible contributions because their joint incomes are too high. C) They can contribute a total of $6,500 only because they both work at the same business. D) They can contribute $6,500 to each of their individual IRAs.

A) They can contribute $6,500 to his IRA and $7,500 to hers. They both could have made deductible contributions to their own respective IRAs for that year. Because Grace is 51, she can take advantage of the $1,000 catch-up provision and, therefore, contribute $7,500 rather than Thomas's $6,500 limit. A taxpayer's income does not restrict the deductibility of the contributions unless one or both of the spouses are also covered under some other qualified plan. Even though Thomas could establish a Keogh or a SEP, the question did not state that he had. Do not read more into the question than is there.

A nonqualified, single premium variable annuity differs from a Keogh plan in that A) all payouts are fully taxable in a Keogh plan B) earnings are tax deferred C) it is open to self-employed persons D) both are subject to early withdrawal penalties

A) all payouts are fully taxable in a Keogh plan Earnings on investments made in both a Keogh plan and nonqualified annuity grow on a tax-deferred basis; they are not taxed until withdrawn. The cost basis in a Keogh plan is zero because contributions are tax deductible, but distributions are fully taxable upon receipt. However, in a nonqualified annuity, the cost basis is equal to the amount invested because the contributions are nondeductible; only the earnings portion of the distributions is taxable.

A tax-advantaged medical savings account available to employees enrolled in a high-deductible health plan is A) an HSA. B) Medicare, Part C. C) an FSA. D) a Section 162 plan.

A) an HSA. One of the requirements for enrolling in an HSA is that the individual be covered under a health plan with a high deductible. No such requirement applies to a flexible spending account (FSA). Medicare Part C, sometimes known as Medicare Advantage, is government health coverage and does not generally apply to those who are covered by health insurance at a place of employment (and Medicare is not tested on the exam). A Section 162 plan is an executive bonus plan, generally involving life insurance and has never been covered on the exam.

When a nonspouse inherits an IRA, the beneficiary can choose from all of the following options except A) keeping the money in the deceased's IRA B) withdrawing the funds over a 10-year period following the death of the owner C) opening a separate inherited IRA in the name of the deceased FBO the beneficiary D) withdrawing all of the funds immediately

A) keeping the money in the deceased's IRA It is only a beneficiary who is the spouse of the deceased who may continue that IRA.

When a nonspouse inherits an IRA, the beneficiary can choose from all of the following options except A) keeping the money in the deceased's IRA B) withdrawing the funds over a 10-year period following the death of the owner C) withdrawing all of the funds immediately D) opening a separate inherited IRA in the name of the deceased FBO the beneficiary

A) keeping the money in the deceased's IRA It is only a beneficiary who is the spouse of the deceased who may continue that IRA.

Which one, if any, of these transactions will be treated as a prohibited transaction under the provisions of the ERISA legislation? A) None of these transactions constitute a prohibited transaction under the provisions of the legislation B) An investment adviser using the interest from plan assets to cover the adviser's office expenses C) A loan between a 401(k) plan and plan participant D) The furnishing of office space to a plan trustee for reasonable compensation and fair rental value

B) An investment adviser using the interest from plan assets to cover the adviser's office expenses An investment adviser, as a fiduciary and disqualified person under the plan, is prohibited from using plan assets in payment of personal obligations (such as outstanding office expenses). Loans from a 401(k) plan to a participant are not prohibited transactions. The plan trustee may rent space from the plan (one of the plan's assets is an office building).

A prospective client has been interviewing a number of investment advisers and wishes to see your firm's investment policy statement. Your IPS would probably include which of the following headings? I. Investment objectives II. Investment philosophy III. Investment selection criteria IV. Monitoring procedures A) I, III, and IV B) I, II, III, and IV C) II and IV D) I and II

B) I, II, III, and IV Although there are no rules requiring that an IA develop an investment policy statement, it is a recommended procedure. Each of these 4 items would be found in a typical IPS. Please note that the IPS would include the criteria for selecting investments, but not the listing of the actual investments themselves.

An agent taking which of the following actions would be committing a violation? A) Buying securities in a joint account at the request of one party only B) Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent C) Buying securities in a cash account with the consent of the customer D) Selling securities from a corporate account by using limited power of attorney trading authority for the account

B) Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent The custodian, not the beneficial owner (minor), is the person who has the authority to make investment decisions for an account. Any tenant in a joint account may give instructions for the account.

Which of the following statements regarding a traditional IRA for someone filing a 2023 tax return is true? A) Distributions without penalty may begin after age 59½ and must begin by April 1 of the year preceding the year an individual turns 73. B) The income and capital gains earned in the account are tax deferred until the funds are withdrawn. C) Distributions before age 59½ are subject to a 10% penalty in lieu of income taxes. D) With sufficient earned income, a taxpayer who contributes $6,500 to a Roth IRA can also contribute $6,500 to a traditional IRA.

B) The income and capital gains earned in the account are tax deferred until the funds are withdrawn. The income and capital gains earned in the account are tax deferred until the funds are withdrawn. A traditional IRA allows a maximum annual contribution of $6,500 per individual ($7,500 for those age 50 and older). One may contribute to both a Roth IRA and a traditional IRA, but the total contribution cannot exceed the limit for a single IRA ($6,500 or $7,500 for age 50 and over). Distributions without penalty may begin after age 59½ and must begin by April 1 of the year following the year an individual turns 73. Distributions before age 59½ are subject to a 10% penalty in addition to ordinary income tax.

An investor wishes to use funds in his IRA to purchase a condominium for personal use. Under current regulations, A) real estate, like life insurance, cannot be purchased in an IRA. B) this would be a prohibited transaction. C) this would not be a prohibited transaction unless the investor personally used the property more than 14 days per year. D) real estate, such as a personal condominium, would be a permitted investment.

B) this would be a prohibited transaction. An IRA may invest in real estate if it is for business purposes only. If done improperly, serious problems with the IRS can result. If it is done as a truly hands-off investment, it is unlikely that there will be an issue. However, the moment the participant derives any personal benefit from the property, it becomes a prohibited transaction. We have not heard of it being tested at this level, but here is how serious this is. Generally, if an IRA owner or his or her beneficiaries engage in a prohibited transaction in connection with an IRA account at any time during the year, the account stops being an IRA as of the first day of that year. The effect of this is the account is treated as distributing all its assets to the IRA owner at their fair market values on the first day of the year. If the total of those values is more than the basis in the IRA (usually zero if the contributions were tax deductible), the IRA owner will have a taxable gain that is includible in his or her ordinary income.

Terry Bolton employs his two sons in the family gardening business. Josh is 12 years old and was paid $2,000 for the year. Drake is 14 years old and was paid $3,000 for the year. Which of the following are correct statements regarding the taxation of the income? I. Josh's income is taxed at his tax rate. II. Drake's income is taxed at his tax rate. III. Josh's income is taxed at his parents' marginal rate. IV. Drake's income is taxed at his parents' marginal rate. A) III and IV B) I and IV C) I and II D) II and III

C) I and II Because the money paid is earned income, it is not subject to the child tax rules, regardless of age. If, however, there is unearned income, anything over $2,500 in 2023 (an amount that isn't tested) is taxed at the parents' marginal (top) tax rate.

To comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must I. offer plan participants at least three different investment alternatives II. ensure that plan participants are insulated from control over their portfolios III. allow plan participants to change their investment options no less frequently than quarterly IV. allow plan participants to purchase U.S. Treasury securities A) II and III B) I and IV C) I and III D) II and IV

C) I and III The safe harbor requirements relieve the trustee of a 401(k) plan of liability if the plan participants have the ability to select from at least 3 different investments and are allowed to make selection changes no less frequently than quarterly.

Which factor is least important when assessing a defined benefit pension? A) Lump sum available at retirement B) Expected amount payable C) Investment performance of the fund D) Age at which benefits can be taken

C) Investment performance of the fund Under a defined benefit plan, the pension payable is related to the length of service and usually expressed as a proportion of final earnings. The investment performance of the fund is therefore the least important factor to consider.

Which of the following is the most suitable investment for the IRAs of a young couple with a combined annual income of $80,000? A) Options on large-cap common stock B) Partnership interests in an oil and gas drilling program C) Shares of an exchange-traded fund tracking the S&P 500 index D) Initial public offerings of small companies

C) Shares of an exchange-traded fund tracking the S&P 500 index For this couple, the IRA should be established with an objective of long-term appreciation. DPPs, IPOs of small companies, and options on large-cap common stock are riskier investments and are generally considered imprudent for IRAs. DPPs are generally appropriate for those with higher incomes looking for tax benefits, and those tax benefits would not apply in an IRA. The exam finds writing covered call options, rather than buying calls, to be a suitable investment. Although the long time horizon allows for some risk, IPOs in small companies carry more risk than what would be considered suitable for this couple.

Which of the following statements regarding loans from 401(k) plans is not correct? A) They must bear a reasonable rate of interest. B) They must be adequately secured. C) They must be made available to highly compensated employees in amounts greater than that made available to other employees. D) They must be made in accordance with the loan provisions stipulated in the 401(k) plan.

C) They must be made available to highly compensated employees in amounts greater than that made available to other employees. Loans must be repaid with interest, generally within 5 years. They must be secured and made in accordance with plan provisions. Loans may not be made available to highly compensated employees in amounts greater than that made available to other employees.

You have a 62-year-old client who opened a Roth IRA with your firm one year ago. The account was funded with a $6,500 deposit and the account's value is now $7,500. The client has another Roth, opened eight years ago at another firm. The client would like to withdraw $7,000 from this account rather than the one at the other firm. The tax consequences of this withdrawal would be A) ordinary income tax on the $500 that exceeds the original cost. B) ordinary income tax on the $1,000 growth because the account has not been open for 5 years. C) no tax. D) ordinary income tax on the entire amount because the account has not been open for 5 years.

C) no tax. An individual can always withdraw the initial principal in a Roth without tax or penalty - it is only the earnings that will be subject to tax if not meeting the requirements of the Internal Revenue Code. In order for withdrawals of earnings from a Roth IRA to be free of any tax, there are two primary requirements: The first is that the owner be at least 59½ years of age. The second is that it is at least 5 years since the first deposit to a Roth IRA in the individual's name. Both of those conditions are met here. The client is 62 and the initial Roth IRA deposit was made 8 years ago. It is irrelevant which account the money is taken from as long as there is an account that has been open for at least 5 years.

Which factor is least important when assessing a defined benefit pension? A) Age at which benefits can be taken B) Expected amount payable C) Lump sum available at retirement D) Investment performance of the fund

D) Investment performance of the fund Explanation Under a defined benefit plan, the pension payable is related to the length of service and usually expressed as a proportion of final earnings. The investment performance of the fund is therefore the least important factor to consider.

Tammy Jones is retiring from her company next month on her 62nd birthday. Her 401(k) has $300,000 and offers her 4 different mutual funds. After calculating what she will receive from Social Security, she concludes that she will need an additional $500 a month to retain her current lifestyle. Which of the following would be the most appropriate recommendation? A) Take a lump-sum distribution of the entire $300,000 B) Roll the money into a mutual fund withdrawal plan C) Leave the money in her current 401(k) account D) Roll the money into a traditional self-directed IRA

D) Roll the money into a traditional self-directed IRA Explanation It would benefit Ms. Jones most to roll the money into a traditional IRA. By doing this she would defer paying taxes on the $300,000—something she could not avoid if she took the lump-sum distribution or rolled the money into a mutual fund withdrawal plan. Although the decision to roll over into a self-directed IRA or leave the funds in the 401(k), if permitted, is one worthy of consideration, with only 4 mutual funds being offered in Ms. Jones's 401(k) account, most would agree that the increased options available in the IRA make that the better choice.

You have a client who is not covered under an employer-sponsored retirement plan and has been contributing the maximum to her traditional IRA. She has just informed you that she won $1 million in the lottery, plans to continue working, and would like to continue to contribute to her IRA. Which of the following statements is correct? A) She may continue to contribute, but her contribution will not be tax deductible. B) Her income for the year exceeds the allowable limit for making a contribution. C) She may continue to contribute, but only a portion of her contribution will be tax deductible. D) She may continue to contribute and her contribution will be tax deductible.

D) She may continue to contribute and her contribution will be tax deductible. Explanation The only time that there is an earnings limit for tax deductibility is when the individual (or spouse) is covered under an employer-sponsored retirement plan. That is not the case here. It is important to note that the client intends to continue in her job because lottery winnings are not considered earned income for an IRA contribution.

A nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees is called A) a defined contribution plan. B) a defined benefit plan. C) a payroll deduction plan. D) a SERP.

D) a SERP. Explanation A supplemental executive retirement plan (SERP) is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees. It is probably not a testable point, but these are frequently funded with cash value life insurance policies. Defined benefit and defined contribution plans are qualified - the question states, nonqualified. A payroll deduction plan is usually nonqualified, but that is most often used by lower income employees; it is definitely not an executive's plan.

All of the following statements concerning qualified tuition programs for educational funding are correct except A) a college savings plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred B) prepaid tuition plans are plans where prepayment of college tuition is allowed at current prices for enrollment in the future C) unless there is a change in beneficiary, assets in the QTP may be moved from the plan of one state to the plan of another as frequently as once per 12 months D) control over the account passes to the student/beneficiary once withdrawals commence

D) control over the account passes to the student/beneficiary once withdrawals commence Explanation One of the advantages of QTPs (qualified tuition ​programs, better known as Section 529 plans) is that the owner-contributor ​is always in control of the program. Without a change in beneficiary, plan "rollovers" are limited to once per 12-month period.