Chapter 2 Missed Questions

Each of the following is a defined contribution plan EXCEPT A) a money-purchase plan B) a 401(k) plan C) a stock option plan D) a profit-sharing plan (qualified)

C Money-purchase plans, 401(k) plans, and qualified profit-sharing plans are all examples of defined contribution plans.

When pension plan proceeds (employer contributions only) are rolled into a Roth IRA, what portion is taxable? A) Employer contributions. B) Anything in excess of $5,000. C) Employee contributions. D) 20% of the total.

A - In a Roth IRA, contributions are made with after-tax dollars, but distributions are tax free. -Employer contributions into pension plans are made with pretax dollars. -To allow a future tax-free distribution from the Roth IRA, employer contributions from a rollover are taxed at the time the rollover takes place.

The contribution in a defined benefit plan will: A) vary with the profitability of the firm. B) vary with the actual requirements to fund a certain benefit. C) not vary because of ERISA requirements. D) not vary because of the side funding of past service requirements.

B -The contribution in a defined benefit plan will vary with the actual requirements to fund the specified benefit. -These requirements are determined actuarially based upon a number of factors. -Older, highly compensated employees benefit most from this type of plan.

Which of the following retirement plans would have to conform to the requirements of the Employee Retirement Income Security Act? A) A payroll deduction plan. B) A corporate deferred compensation plan. C) A retirement plan for county employees. D) A corporate defined benefit plan.

D ERISA) is aimed at private sector qualified plans. Deferred compensation and payroll deduction plans are not qualified a county employee plan is not private sector. A defined benefit plan, on the other hand is a corporate qualified plan.

Which of the following permits the highest annual contributions? A) A traditional nondeductible IRA. B) A SEP IRA. C) A traditional spousal IRA for which the contribution has been deducted. D) A Coverdell Education Savings Account.

B the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs.

Your customer, who has been making pretax contributions to her IRA, decides to take a well-earned vacation to celebrate her 30th birthday. If she withdraws $4,000 from her IRA to pay for a cruise, in addition to income tax, what penalty must be paid on the amount withdrawn? A) $400.00. B) $0.00. C) $240.00. D) $2,500.00.

A Withdrawals from an IRA before age 59½ are subject to income tax plus a 10% penalty (10% of $4,000 is $400).

Excess IRA contributions are subject to a penalty of: A) 12%. B) 6%. C) 10%. D) 15%.

B Excess IRA contributions are subject to a yearly penalty of 6% until they are either withdrawn together with associated growth or applied to the following year's contribution limit.

The primary purpose for creating ERISA was to: A) establish a means for self-employed persons to provide for their own retirement. B) provide all employees, both government and nongovernment, with an additional source of retirement income in the event that the Social Security system defaults. C) protect employees from the mishandling of retirement funds by corporations and unions. D) promote a retirement fund for government employees.

C ERISA was created to protect the retirement funds of union members and employees of corporations and other private sector employers. ERISA guidelines state that all qualified retirement plans must be in writing, segregate funds from corporate or union assets, make prudent investments, report to participants annually, and not be discriminatory. All of these activities are audited under ERISA.

If the owner of a $1 million IRA leaves it to his daughter, which of the following best describes the income tax treatment to the daughter? A) She will pay income taxes on the full amount she withdraws each year. B) She will pay income taxes on the full $1 million immediately. C) She will pay no income taxes because the estate taxes have already been paid. D) She will pay income taxes only on a portion of the withdrawals that exceed $1 million.

A An inherited IRA will be subject to income taxes to the beneficiary at time of withdrawal, on the same terms as if it had been distributed to the original owner.

Which of the following individuals are eligible to participate in a tax-sheltered annuity? II. Maintenance engineer at a state university. II. Student in a public school system. III. Minister. IV. Office clerk at a small corporation. A) I and III. B) II and IV. C) I and II. D) III and IV.

A Employees of 501(c)(3) and 403(b) organizations (which include charities, religious groups, and school systems) qualify for tax-sheltered annuities (TSAs).

Which of the following statements regarding joint accounts is TRUE? A) Two customers have a TIC account. Customer 1 deposits $10,000 and customer 2 deposits $10,000 into the account. If customer 1 dies, assets will automatically transfer to customer 2. B) If an account has a joint registration, distributions must be made payable to all parties. C) Customers 1 and 2 have a JTWROS account. If customer 1 wanted to trade in the account, he could not do so without notifying customer 2 first. D) Three customers open a TIC account. Each deposits funds into the account, but only one tenant is allowed to place trades in the account on behalf of the other tenants.

B In a joint account all distributions must be made payable to all parties and all parties can trade in joint accounts; in a TIC account, a deceased party's assets pass to his estate.

If your customer invests in a tax-sheltered variable annuity, what is the tax treatment of the distributions he receives? A) All capital gains. B) Partially tax-free, partially ordinary income. C) All ordinary income. D) Partially tax-free, partially capital gains.

C tax-sheltered variable annuity: contributions are made with pre-tax dollars distributions taxed as ordinary income.

Which of the following statements regarding a qualified profit-sharing plan is TRUE? A) Contributions are required annually. B) It must be established under a trust agreement. C) It can permit regular direct cash payouts to participants before retirement. D) It must define a specific contribution amount.

B All qualified retirement plans must be established under a trust agreement. -Contributions with this type of plan are not required annually, nor may the plan make direct cash payouts to participants before retirement.

A registered representative would likely be accused of a prohibited practice if he encouraged a customer to switch her mutual fund when: A) her tax status changes significantly. B) the fund's ranking changes in her favorite financial periodical. C) her retirement plans change dramatically. D) her investment objective changes.

B Significant changes in an investor's investment objective, tax status, or retirement planning may be justification for switching from one fund to another. Constantly switching to a higher rated fund ("chasing the leader") can result in continual tax exposures and possibly new sales loads. When a switch between funds occurs, the shareholder must recognize any capital gain or loss.

Recommendations to a customer: A)must include assurances or guarantees regarding investment performance. B)must reflect the facts disclosed by the customer regarding other holdings and financial situations. C)must never involve recommending a speculative security. D)must be approved in advance by a principal.

B Recommendations must be suitable for that particular customer. They don't need to be approved by a principle ahead of time, and they may include speculative securities if those are in line w customer's objectives.

Under a qualified defined contribution plan, which of the following statements are TRUE? I. The participant is guaranteed a contribution based on an agreed-upon percentage or rate. II. The participant's retirement benefits are based on the balance in his individual account. III. The employer may discriminate among employees as to participation. IV. Employer contributions remain the property of the company until retirement. A) III and IV. B) I and III. C) I and II. D) II and IV

C -Under a defined contribution plan, contributions may depend on years of service or, salary. -Benefits are based on what the accumulated contributions will provide at retirement. -Since the plan is qualified, it may not discriminate and has vesting requirements.

Your customer, who owns a small business, would like to make provision for his retirement. You might suggest to him any of the following EXCEPT: A) a self-employed 401(k) plan. B) a Roth IRA. C) a Section 457 plan. D) a variable annuity.

C 457 retirement plan is open only to state and local governments and tax-exempt employers.

All of the following statements about SEP IRAs are true EXCEPT: A) SEP IRAs allow employers to make contributions. B) SEP IRAs are established for small-business owners and their employees. C) the retirement account is usually set up at a bank or other financial institution. D) contributions to SEPs are made with after-tax dollars.

D Employers make PRE TAX contributions to SEP IRAs on behalf of their employees. The account is usually set up at a bank or other financial institution.

Which of the following statements is NOT true of Regulation S-P? A) Customers must be given annual privacy disclosures on a separate piece of paper. B) Consumers must be given an initial privacy notice. C) Firms must establish procedures to protect customers' nonpublic personal information D) Customers may be provided privacy information on internet web pages.

A -A customer with an ongoing relationship with a member must receive both an initial and an annual privacy notice. -It may be included in other documents but must be clear and conspicuous.

A 457 plan could cover which of the following: I. employees of a corporation. II. independent contractors providing services to the county. III. employees of a nonincorporated business. IV. city employees. A) II and III. B) II and IV. C) I and IV. D) I and III.

B The 457 plan is a nonqualified deferred compensation plan for municipal employees as well as for independent contractors performing services for those entities.

Which of the following regarding a Roth IRA are TRUE? I. The contributions are nondeductible. II. Contributions must cease at age 70½. III. Withdrawals must begin at age 70½. IV. Withdrawals after age 59½ can be tax-free. A) I and III. B) I and IV. C) II and IV. D) II and III.

B With a Roth IRA, - the contributions are not deductible from current income. - Withdrawals after age 59½ are tax fre if the money has been in the account for 5 years. - There is no age at which withdrawals must begin or contributions must cease

All of the following statements concerning IRA contributions are true EXCEPT: A) if you file your tax on January 15, you may deduct your IRA contribution even if it is not made until April 15. B) you may make contributions for the past year after April 15, provided you have filed an extension on a timely basis. C) you may contribute to this year's IRA from January 1 of this year until April 15 of next year. D) between January 1 and April 15, you may make contributions for the current year, the past year, or both .

B You may contribute to an IRA only until the first tax filing deadline (April 15) even if you filed an extension.

Customers of financial institutions must be given the opportunity to opt out of information sharing with nonaffiliated third parties. Which of the following opt-out procedures would be unacceptable under Regulation SP? A) Providing a toll-free number to call to opt out. B) Including an opt-out form with a pre-addressed envelope to mail back. C) Requiring a written letter to opt out. D) Providing an email address to opt out if the customer elected electronic delivery.

C Regulation SP requires you to make it as easy as possible for their customers to opt-out.

If a corporation begins a nonqualified retirement plan, which of the following statements is TRUE? A) The employer must abide by all ERISA requirements. B) Employer contributions are tax deductible. C) Employee contributions grow tax-deferred if they are invested in an annuity. D) Employee contributions are tax deductible.

C - Earnings accumulate tax deferred if the plan is funded by an investment vehicle that offers tax deferral (such as an annuity contract). - Tax has been paid on all amounts the employees and the employer contribute to the plan. Nonqualified plans need not comply with all ERISA requirements.

The rules concerning a person from a FINRA member firm opening an account with another member are applicable to which of the following? I. Registered representative of a member. II. Uncle of one of the officers of a member firm. III. Employee of a member selling only government securities. IV. Close friend of an officer of a member firm. A) II and IV. B) III and IV. C) I and III. D) I and II.

C - Everyone associated with a member firm in any capacity is governed by the rules on opening accounts with other member firms. - Every associated person must inform the transacting company of his affiliation and must expect that firm to inform the employer. -Uncles and friends of associated persons do not come under the rule.

Which of the following investors are eligible to establish an IRA? I. Independently wealthy individual whose sole source of income is $125,000 per year in dividends and interest. II. Law student who earned $1,200 in a part-time job. III. An individual who earned $3,500 last year selling encyclopedias but whose spouse is covered by a company profit-sharing plan. IV. Property owner whose income is solely from rent charged on family dwellings he owns. A) I and III. B) I and IV. C) II and III. D) II and IV.

C -An individual may contribute 100% of earned income up to a maximum allowable dollar limit, whichever is less. -Interest and dividend income is portfolio income and rent is passive income, not earned income.

Your customer has contributed $1,000 annually into her Roth IRA for seven years. Which of the following statements concerning her Roth IRA distributions is TRUE? A) The distributions are taxed as capital gains. B) The distributions are taxed as ordinary income. C) Your customer will not be taxed on the distributions if she is over the age of 59½ and the money has been held in the account for five years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. D) Your customer will pay ordinary income taxes on the part of the distribution that represents earnings.

C -Distributions from Roth IRAs made after age 59½ are tax-free if the money was in the account for five years -Contributions to Roth IRAs are made with after-tax dollars.

A 45 year-old investor is in the highest tax-bracket and wants to save over the next 20 years for a retirement income. Which of the following recommendations is least appropriate? A) Purchase a variable annuity. B) Maximize contributions to your 401(k). C) Open an IRA and fund it with municipal bonds. D) Buy blue-chip stocks.

C -IRAs are tax favored accounts. Funding tax favored accounts with municipal securities that already offer tax free interest negates the advantage of the tax free IRA account and therefore would not be considered an appropriate recommendation. - Each of the remaining answer choices offer advantages to a high income individual with a long term retirement objective and are therefore more appropriate / suitable recommendations.

All of the following securities would be suitable investments for a traditional IRA EXCEPT: A) Blue chip common stocks. B) A corporate bonds. C) AAA municipal bonds. D) AAA U.S. government agency bonds.

C -Municipal bonds, which generate tax-free interest income, are unsuitable for retirement plans. -One loses the federally tax-free income at distribution.

Regarding money in a 401(k) plan: I. there is no vesting period for the employee's contributions. II. there is no vesting period for the employer's contributions. III. there may be a vesting period for the employee's contributions. IV. there may be a vesting period for the employer's contributions. A) I and II. B) II and III. C) I and IV. D) III and IV.

C Because the employee contributes to a 401(k) with his own money, there is no vesting period for the employee's contributions. Any contributions made by the employer are optional and may carry a vesting requirement.

All of the following statements about SEP IRAs are true EXCEPT: A) SEP IRAs allow employers to make contributions. B) SEP IRAs are established for small-businessowners and their employees. C) the retirement account is usually set up at a bank or other financial institution. D) contributions to SEPs are made with after-tax dollars.

D Employers make pretax contributions to SEP IRAs on behalf of their employees. The account is usually set up at a bank or other financial institution.

Which of the following retirement plans are always funded with after-tax contributions? A) Keogh Plans. B) Traditional IRAs. C) SEP IRAs. D) Roth IRAs.

D Roth IRAs are funded entirely with after-tax contributions. Traditional IRAs may be funded partially or wholly with after-tax contributions depending on whether or not the individual is covered by an employer plan and exceeding certain earnings limits.

A qualified profit-sharing plan offered by a corporation to its employees has all of the following features EXCEPT: A) the employee may elect to rollover a lump-sum distribution into a traditional IRA. B) the earnings on the contribution are tax deferred until payout. C) the corporation may elect to omit or reduce contributions in years when profits from business operations fall. D) the amount of the contribution is tax deductible to the employee.

D The amount of the contribution to the plan is deductible to the employer, not the employee. A major difference between a profit-sharing plan and a pension plan is that contributions to the former are not mandatory.

When a client's cash account is frozen, the client: A) must deposit the full purchase price no later than the settlement date for a purchase. B) may make sales only with the firm's permission. C) may not trade under any circumstances. D) must deposit the full purchase price before a purchase order may be executed.

D When an account is frozen, the client may still purchase, but must deposit the full purchase price before any order may be entered.

If a 40-year-old customer earns $65,000 a year and his 38-year-old spouse earns $40,000 a year, how much may they contribute to IRAs? A) They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA. B) Only the higher wage earner may contribute to an IRA. C) They may not contribute because their combined income is too high. D) They may contribute up to the maximum annual allowable dollar limit split evenly between both accounts.

A No matter how much income individuals or couples receive, they may contribute to their IRAs if they have earned income. Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.

An employee of a FINRA member firm wishes to open an account at another member firm. The member firm opening the account: A) must give notice to the employing firm and must inform the employee that his employer will be notified of the account. B) must obtain the employing firm's permission to open the account. C) must obtain permission from FINRA to open the account. D) must notify FINRA of the account.

B - Persons associated with one FINRA member firm may open securities accounts at other member firms. - The firm opening the account must notify the employing firm in writing and receive the employing member's prior written consent in order to open the account.

Your client, working for a local municipality, tells you that he has the opportunity to participate in a Section 457 plan. Explaining some of the characteristics and features of this type of plan, you could tell him all of the following EXCEPT: A) these are non-qualified plans. B) they can be established by state and local governments and other tax-exempt employers. C) earnings on plan assets are taxable on an annual basis. D) contributions to the plan for eligible employees are made through salary deferral.

C Even though technically 457 plans are nonqualified, all earnings within the plan are tax-deferred like any other retirement plan.

All of the following are true regarding nonqualified deferred compensation plans EXCEPT: A) IRS approval is not needed for deferred compensation plans. B) income taxes on compensation are not due until constructive receipt. C) the plans need not be offered to all employees. D) employees may use accumulated funds as collateral for a bank loan.

D - Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary (that he or she will receive) upon retirement. - The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral.

A teacher has a 403 (b) tax-qualified deferred retirement plan. The school system she works for has deposited $20,000 for her into the plan during the past ten years. At retirement, the total value of the plan has grown to $29,000. If she withdraws the entire amount at retirement, what will be the tax consequences? A) She will have no tax liability. B) She will owe tax on $9,000. C) She will owe tax on the entire $29,000. D) She will owe tax on $20,000.

C A 403 (b) plan is a qualified plan; -contributions were made with pretax dollars. -At retirement, she will need to pay tax on the entire amount she withdraws.

Which of the following statements regarding 403(b) plans is NOT true? A) Employee contributions have both a dollar limit and a percentage of salary limit. B) If all contributions are qualified, the employee's cost basis in the account is zero. C) Distributions from a 403(b) plan follow the same distribution rules as those for other qualified plans. D) An employer can also make contributions to the 403(b) plan on behalf of the nonworking spouse of an employee.

D Only employees of 403(b) or 501(c)(3) organizations may be covered under 403(b) plans.

A 54-year-old client is in the highest tax bracket and seeks a conservative investment for retirement. If his investment adviser representative recommends a general obligation municipal bond for the client's IRA, the IAR has: A) recommended a suitable investment because GOs are good long-term investments. B) made an unsuitable recommendation, since a municipal revenue bond would have been more appropriate. C) committed no violation because municipal bonds are well suited for the market's volatility. D) made an unsuitable recommendation based on the client's needs and objectives.

D Recommending a municipal bond for an IRA is unsuitable as the distributions from IRAs are taxed as ordinary income. Therefore, there is no benefit to the tax-exempt income municipal bonds generate.

Which of the following statements regarding both traditional and Roth IRAs is TRUE? A)Distributions must begin in the year after the owner reaches age 70½. B)Contributions are tax deductible. C)Withdrawals at retirement are tax free. D)Contribution limits are the same.

D contribution limits are identical in both

All of the following statements regarding traditional IRAs and TSA plans are true EXCEPT: A) only teachers may participate. B) distributions after age 59½ will be taxed as ordinary income. C) growth in the account is tax deferred. D) early withdrawals for a vacation will incur a 10% penalty.

A Only employees of schools, church organizations, and nonprofit organizations are eligible to participate in a 403(b) TSA plan; anyone with earned income may have a traditional IRA.

Liquefying home equity to generate funds for investment purposes A)requires communication of the unique risks associated with this investment strategy by the broker-dealer B)can never be a recommended investment strategy C)is suitable for all investors D)is suitable during times of increasing home prices only

A This investment strategy requires the broker-dealer to communicate the unique risks associated with it, which could include losing one's home.

Which of the following statements regarding the withdrawals from a qualified retirement plan are TRUE? I. The employee will be taxed at the ordinary income tax rate on his cost basis. II. Funds may be withdrawn after retirement (as defined) with no tax on the withdrawn amount. III. Funds may be withdrawn early by the beneficiary if the covered person dies. IV. All qualified plan provisions must be in written form. A) I and IV. B) III and IV. C) I and II. D) II and III.

B -A qualified planholder has no cost basis at retirement. -Beneficiaries of planholders may withdraw funds without penalty if the planholder dies. -Qualified plans must always be in written form and must be communicated to employees.

Which of the following are discretionary orders? I. A customer sends a check for $25,000 to an agent and instructs the agent to purchase bank and insurance company stocks when the price appears favorable. II. A customer instructs an agent to buy 1,000 shares of ABC Corporation at a time and price determined by the agent. III. A customer instructs an agent to purchase as many shares of XYZ as the agent considers appropriate. IV. A customer instructs an agent to sell 300 shares of LMN, Inc., when the agent deems the time and price appropriate. A) II and III. B) I and III. C) I and IV. D) II and IV.

B Discretion authorizes a representative to choose the security, the amount of shares, or whether to buy or sell. Time and/or price alone are not discretionary decisions.

All of the following statements about joint tenants with rights of survivorship are true EXCEPT: A) mail can be sent to either of the parties to the account. B) trades may be made by either party. C) checks can be made out to either party. D) in the event of death, the remaining tenant has full ownership of the account.

C -In a joint account, checks must be made out to all parties to the account; - either party may make trades or receive mail regarding the account.

If a 41-year-old investor who earns $26,000 this year over contributes to his IRA, how much will be subject to the 6% penalty? A) There will be no penalty. B) His original cost base plus the contribution. C) His original cost base. D) The amount by which he over contributed.

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

Which of the following are types of corporate retirement plans? I. 403(b) plans. II. Defined benefit plans. III. Profit-sharing plans. IV. Solo 401(k) plans A) I and II. B) III and IV. C) I and IV. D) II and III.

D Corporate retirement plans can be divided into defined contribution plans, defined benefit plans, and profit-sharing plans. 403(b) plans are for nonprofit organizations, and solo 401(k) plans are for sole proprietorships that have no full-time employees except self and spouse.