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Which of the following assets will have the greatest effect on minimizing financial assistance when an individual is applying to college and using the FAFSA application?

Although the exact percentages will likely not be tested, 20% of the money in an UTMA (or UGMA) account is counted, while only 5.64% of a Section 529 plan (either option) is counted. Retirement accounts are not considered assets on the application for student aid, which means the value of a Roth IRA won't hurt the individual's chances for financial aid eligibility. An UTMA account

One of your clients is discussing various options for funding his IRA. Current tax law would permit investing in which of the following vehicles? permits these Gold or silver coins minted by the U.S. Treasury Department Fixed annuities REITs

In general, investments in collectibles are not permitted in IRAs. The one major exception is U.S. gold and silver coins minted by the Treasury Department. Although some might object to placing an annuity into a tax-deferred plan because it is already tax deferred, there could be a good reason for its inclusion and, more important for this question, it is permitted.

he contents of the IPS would not include

specific security selection

If a 41-year-old investor who earns $26,000 this year overcontributes to his IRA, how much will be subject to the 6% penalty?

Any contribution in excess of the indexed maximum (and the earnings associated with the excess) is subject to a penalty of 6%.

Terry Bolton employs his 2 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?

As the money paid is earned income, it is not subject to the kiddie tax rules, regardless of age.

Which of the following statements regarding a traditional IRA is true?

Coverdell ESAs currently permit up to $2,000 in annual contributions, whereas QTPs (Section 529 plans) allow large contributions reaching as high as $250,000 and above.

One reason why employers like using deferred compensation plans is that

Deferred compensation plans frequently provide that employees leaving before a certain period of time, going to the competition, or being terminated for cause forfeit plan benefits. There are no current tax deductions, the plans discriminate, and because they are nonqualified, there is no IRS approval.

Which of the following would you expect to see in the investment policy statement of a qualified plan? The information in the summary plan document specified by the Department of Labor The method to be used to measure the investment performance of the plan A listing of the portfolio assets as of the most recent quarter Investment limitations placed on the portfolio managers II and IV

The IPS would include information on how the investment performance of the plan is measured as well as the investment parameters to be followed by the portfolio managers. It would not include the summary plan description (document), generally referred to by the initials SPD. That is for the employees' to learn about eligibility, vesting, matching contributions, etc. It has nothing to do with how the money is invested. The purpose of the IPS is to set "policy" for the portfolio, not to list its composition.

Where would you be most likely to find an IPS?

The investment policy statement (IPS), although not required under Department of Labor (DOL) rules, is generally found in corporate qualified plans, such as the defined benefit or defined contribution plan. Because the investor manages the IRA, there is no need to prepare an IPS for participants to review.

Among the benefits of an HSA is

funds not used for health expenses may be invested in mutual funds and other securities. 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. Currently, the maximum contribution is $3,450 for an individual or $6,850 if family coverage, regardless of the number of dependents covered.

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? Investment objectives Investment philosophy Investment selection criteria Monitoring procedures

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.

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

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.

One of your clients has recently turned 72 and has questions about RMDs. The client has a traditional IRA, a rollover IRA, and 401(k) plans from two previous employers. When computing the RMDs, the RMD from each IRA is computed and may be made from one or both of them. the RMD from each IRA is computed and must be paid from that IRA. both 401(k)s are combined to compute the required distribution which may be made from one or both of them. the RMD from each 401(k) is computed and must be paid from that 401(k).

For RMD purposes, each IRA is figured separately and the distribution can be made from one or all of them. That is not the case with a 401(k) plan. Each account has a RMD that can only be paid from that account.

Each of these would be considered an advantage of using a 529 plan rather than a Coverdell ESA to fund a child's future education except not truethe 529 plan is counted at a lower percentage of assets when applying for financial aid.

Funds in both plans are counted as assets of parents at 5.64% if owner is a parent or dependent student, so there is no difference. The 529 plan allows for far greater contribution levels and there is no income limitation on the donor as exists with the Coverdell ESA. The funds in the ESA must be used by the time the beneficiary is 30; no such age restrictions apply to the 529 plan.

A QDRO is a judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant. The QDRO must contain certain specific information as stated in whose regulations?

It is the IRS who states the QDRO must contain certain specific information, such as: the participant and each alternate payee's name and last known mailing address, and the amount or percentage of the participant's benefits to be paid to each alternate payee. This is not part of ERISA or the Department of Labor and, least of all,

A grandparent wishes to contribute funds to an account for the benefit of the college education of a grandchild. In which of the following does the donor have the greatest amount of control over the assets in the account?

It is the Section 529 plan that offers the greatest amount of control to the donor. In the case of the ESA, on the IRS form used to open the account, it states: "The 'responsible individual"' named by the depositor shall be a parent or guardian of the designated beneficiary." Unless we are told that the grandparent has been appointed as legal guardian, there is a lack of control. And, even then, one thing the "responsible individual" cannot do that the donor to a 529 plan can is take the money back. Although the grandparent could be named the custodian of the UGMA or UTMA account, the only authority there is to make the investment decisions and disbursements until the termination age of the account.

Which of the following is not included in adjusted gross income on an individual's federal income tax return?

Municipal bond interest Although tax-exempt interest is reported on the Form 1040 (line 8b), it is not included in adjusted gross income.

Suzy Stanton's wealthy Uncle Ray is a client of yours and is asking for some advice on funding a program to save for Suzy's college education with the lowest possible tax impact. Ray tells you that he set up an UGMA account for Suzy's older brother, Sammy; but, when Sammy turned 18, he took the money, bought a motorcycle, and joined a commune. Ray wants to avoid seeing something like that happen again. What would probably be the best suggestion to help Ray meet his objectives?

The Section 529 plan will give the uncle both tax savings and, because in this plan the assets remain under the control of the donor, the ability to retain the funds if Suzy does not use them for higher education.

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

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.

Which of the following statements regarding Section 529 plans is CORRECT?

Qualified expenses could include tuition for attendance at a foreign university. As of the date of this question, there are approximately 330 institutions of higher learning located outside of the United States where Section 529 plans may be used to pay qualified expenses. The expense for room and board (residence cost) qualifies only to the extent that it isn't more than the greater of the following 2 amounts: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution It is the Coverdell ESA that has the age 30 requirement and some states offer deduction on the state income tax return, not the federal one.

The main disadvantage of a contributory defined contribution pension plan is that

The liability of the employer in the defined contribution pension plan is an agreed contribution to the plan. The actual performance of the plan's investments will determine the final amount to be paid to the individual at retirement. In a contributory plan, the employee is also eligible to make contributions.

fiduciary responsibilities

The requirement for a retirement plan trustee to follow fiduciary standards is found in Section 404 (c) of ERISA.

Which of the following may NOT be used to fund an individual retirement account (IRA)?

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.

Gail's minimum required distribution this year from her IRA is $5,000. If she takes $8,000, the penalty will be

There is no penalty if a participant withdraws more than the required minimum distribution.