CRPC ALL

Ex. Allen Baker, a single taxpayer with AGI of $79,000, is covered by his employer's profit sharing/401(k) plan. During the current plan year, no employer contribution was made, and Allen did not make any salary reduction contributions to the 401(k) portion of the plan. Allen's account balance increased by $120 this year, which was attributable to investment earnings of $80 and forfeitures of $40. If he contributes $6,000 to his IRA for this year, what is the amount of his allowable IRA deduction?

$0 Above the AGI range of $76,000 (2021), but they can still contribute to a Roth IRA.

Ex. Michael, a 62-year-old single man, is considering beginning his Social Security benefits to supplement his income of $14,000 per year. How much will he lose in Social Security benefits due to the earned income restrictions?

$0 Because his income is below the $18,960 (2021) earnings cap for singles, he's not impacted.

Ex. Over a period of 10 years, Mark contributed a total of $20,000 to a nondeductible IRA. The current value of Mark's IRA is $40,000, and Mark, who is now age 45, has decided to use all of his IRA assets for the down payment on a second home. Assuming Mark's marginal tax bracket is 35%, how much does he owe in taxes and penalties?

$9,000 Mark's effective tax rate is 45%; i.e., 35% plus the 10% early withdrawal penalty. 45% * $20,000 tax-deferred earnings = $9,000. The $20,000 basis in the IRA is not subject to income tax or the early withdrawal penalty.

Planning for Retirement 10 Years Out

-Consider any big-ticket financial commitments you anticipate in the next 10 years and how these items might affect your retirement timeline. -Review your estate documents to ensure the language is up to date. Your estate documents should include items such as a will, a power of attorney, a living will, a health care proxy, and possibly a revocable trust. -Reallocate your investment portfolio based on your earnings timeline, focusing on performance, risk, and expenses.

Qualifying for Social Security

-You must be age 62 or older and have earned at least 40 Social Security credits over your working lifetime. -If you become disabled before reaching age 62 you can qualify for Social Security benefits with fewer than 40 credits. -You can earn up to four credits per year to qualify for Social Security benefits. For 2021, you must earn at least $1,470 to earn one credit, or $5,880 to earn four credits.

Active Participants

-a qualified pension, profit-sharing, stock bonus, money purchase, SIMPLE 401(k) plan, or Roth 401(k) plan -a qualified plan established for employees by a federal, state, or local government or their subdivisions, other than a Section 457 plan -a tax-sheltered annuity plan (TSA) (also known as Section 403(b) plan) for employees of public schools and certain tax-exempt organizations -a simplified employee pension (SEP) -a savings incentive match plan for employees (SIMPLE) IRA Note: An individual who participates and receives annual additions in a nonqualified plan, such as a Section 457 plan, would not be considered an active participant.

How to Have a Qualified Roth IRA

-the account must have been opened for at least five "Roth years" (five years from the day you contributed) AND -the distribution is made after attaining age 59½, death, or disability, or if it is made to a first-time homebuyer in an amount up to $10,000.

Ex. What is the estimated annual cost of conflicted advice according to the 2015 White House report?

1%

The Six-Step Retirement Planning Process

1. Establishing and defining the client-planner relationship 2. Gathering client data including goals 3. Analyzing and evaluating the client's financial status 4. Developing and presenting recommendations 5. Implementing recommendations 6. Monitoring the implemented recommendations for necessary changes HINT: If you're having trouble remembering the six steps of the retirement planning process, try memorizing the following mnemonic: EGADIM (EGAD I Made it) E - Establish client relationship G - Gather data A - Analyze data D - Develop plan I - Implement plan M - Monitor plan

General Guidelines of P/E Investing

1. Select stocks with low P/Es, but only if the companies have solid performances. Many stocks deserve low P/Es because the companies they represent are truly inferior. 2. Diversify. A diversified portfolio of low P/E stocks should have an equal weighting in 15-20 different stocks representing 10-12 industries. 3. Only buy shares of medium to larger companies that are listed on the NYSE or AMEX or that are actively traded over the counter.

Determining the Retirement Savings Need

1. calculate net annual retirement income need. This is done by seeing the sources of inflation-adjusted income from a total need; these may include SS income or pension income. 2. adjust income deficit for inflation over preretirement period. Determine income needed in the first year as adjusted for inflation 3. determine total retirement fund needed. The calculated lump=sum retirement fund is the total fund needed on day one of retirement. This amount, invested at the IRR, will generate annual income payments equal to the deficit which will grow with inflation each year. 4. determine savings amount needed - level payment and serial payments. Once the lump amount is determined, then annual savings or serial payments can be calculated.

Early Mandatory Retirement

1986 U.S. Age Discrimination in Employment Act (ADEA) makes mandatory retirement at retirement age illegal; no discrimination based on age. The exceptions to protection from early mandatory retirement include police officers and airline pilots. This is due to the danger and physical demands of keeping us safe. Also exempt from protection are high-level executives, and "high policy-making" employees—positions that require significant mental skill.

Ex. Assume that a worker's Social Security full retirement age is 66. What percentage of the worker's full retirement age benefits will be paid to her at age 62?

75% A worker can begin receiving Social Security retirement benefits at age 62, but at a 25% reduction from the full amount that would be received at full retirement age 66. The percentage of this worker's full retirement age benefits that will be paid to her at age 62 is 75% [(5/9 of 1% per month for each of the first 36 months prior to full retirement age = 20%) + (5/12 of 1% * 12 months = 5%); 20% + 5% = 25%].

Bucket Strategy

A "bucket strategy" can mitigate the sequence of returns risk by creating a bucket of cash or money market instruments for immediate cash flow needs, while also maintaining a diversified portfolio of more volatile assets with higher potential returns for future needs. Having a "bucket" of low-risk products to rely on is essential, should equities experience negative returns during the first several years of retirement when sequence of return risk is at its greatest.

Ex. Small differences in rate of return create big differences in outcomes over time. For example, a 1% difference in annual return (12% versus 11%) on $20,000 compounded over 30 years is more than

A 1% difference in annual return on $20,000 compounded over 30 years is (measuring 12% against 11%) $141,352 ($599,198 - $457,846 = $141,352).

Ex. Which is not correct regarding the a conservatorship?

A conservatorship is granted by the beneficiary. A conservator is named, or granted authority, by the court. A conservator is responsible for managing the financial affairs of an individual who can no longer make his or her own decisions.

Deductibles

A deductible is the amount that the insured must pay before the plan pays anything. Deductibles do not apply to every service; for example, preventive care and wellness benefits, such as mammograms and well-baby care, are paid 100% by the insurance company. Health insurance deductibles are annual deductibles, not a per incident deductible.

Qualified Distribution from Roth IRA

A distribution is qualified if: the distribution is made after the attainment of age 59½, death, or disability, or if it is made to a first-time homebuyer for the purchase of a home (limited to a maximum distribution of $10,000) and a five-year holding period has been met

Duty of Loyalty

A fiduciary must be loyal to his or her clients and must always look out first and foremost for what is in their best interests. The duty of loyalty requires that the clients' interests be put ahead of one's own and that all actions be made solely for the benefit of the clients.

Golden Parachute

A golden parachute is an agreement between an executive and his or her company requiring the company to pay certain benefits in the event of a change in control of the company. These agreements are intended to guarantee financial security to key executives in the event of a takeover.

Coefficient of Variation

A measure of relative variability computed by dividing the standard deviation by the mean and multiplying by 100. CV = (SD / X) * 100

Ex. Which one of the following statements is true regarding nonperiodic distributions from an annuity contract prior to the annuity start date?

A nonperiodic distribution is taxed first as a taxable interest payment until the interest/earnings are completely exhausted and then as a tax-free return of principal (LIFO).

Gift Tax for Property to Spouse

A person can transfer an unlimited amount of property to a spouse via gift without gift tax consequences if the transfer is eligible for the marital deduction. However, that property then becomes part of the spouse's estate and may have estate tax consequences when they die.

Inflation Adjusted Return

A rate of return that is measured in terms of real goods and services; that is, after the effects of inflation have been factored out. Inflation adjusted yield formula: ([(1 + ROR)/(1+inflation rate)] - 1) x 100

Monte Carlo Analysis

A risk quantification technique that simulates a model's outcome many times to provide a statistical distribution of the calculated results. Bell curve. It's only as good as the assumptions and data that is used, however.

Glide Path

A target retirement fund aims for a specific target date at which the investor will retire, such as 2030, and gradually adjusts its mix of stocks, bonds, and cash equivalents to become more conservative over time. This is done by decreasing the percentage of stocks and increasing the percentage in bonds and cash equivalents as the investor's retirement date approaches, called its glide path.

Advantages and Disadvantages of Medicare Advantage

Advantages include the following: benefits not covered by traditional fee-for-service Medicare—e.g., drugs and eyeglasses predictable out-of-pocket costs (with managed care plans) there is no need for the Medicare beneficiary to have a Medigap policy greater emphasis on preventive care Disadvantages include the following: benefits may be limited, or denied, if network providers are not used when outside the service area, benefits may be limited to medically necessary and emergency care HMOs can terminate programs

Ex. Which one of the following is NOT a characteristic of a rollover?

Amounts rolled over from a qualified plan to an IRA and subsequently distributed to the participant will be taxed according to the rules that apply to the original qualified plan.

IRA

An IRA is a trust or custodial account set up for the exclusive benefit of its owner and/or any named beneficiaries. It functions as a personal retirement plan that permits certain individuals to set aside, within specified limits, monies for retirement. These monies are allowed to accumulate and grow on a tax-deferred basis, and, in some cases, part or all of the contributions to an IRA are deductible from the owner's current taxable income. An IRA is not a qualified plan.

Annual Exclusion

An individual can gift a maximum amount of present interest gifts (up to $15,000 per year or $30,000 for a married couple through gift splitting in 2021) to as many individuals as they wish without incurring a gift tax. To qualify for the annual exclusion, a gift must be a gift of a present interest (i.e., the donee must be able to immediately use, possess, or enjoy the gifted asset). The annual exclusion is indexed annually for inflation, but increases only when cumulative inflation has increased the base amount ($10,000) by a multiple of $1,000. A gift of any amount may be excluded from gift tax if it meets both of the following conditions: it was a gift to pay for educational tuition or medical treatment; and the payment was made directly and exclusively to the educational or medical services provider, and not to the person benefited by the payment.

Inter Vivos & Testamentary Trust

An inter vivos trust operates during the life of the grantor. A revocable living trust is an example. A testamentary trust is one created in the grantor's will and becomes operative only upon the grantor's death.

Ex. Which one of the following is a potential problem with a golden parachute?

Any excess payment would be nondeductible by the payor and subject to an excise tax by the employee. If compensation falls into the golden parachute category, the employer will lose the deduction on any excess parachute payments and the employee will be charged a nondeductible 20% excise tax on any excess parachute payments.

Ex. The "required beginning date" (RBD) for IRA distributions (RMD) is which one of the following?

April 1 of the year following the year in which age 72 was attained.

Ex. Jan has been employed by Bryce Corporation for 40 years and is a 4% owner of the company. She received $60,000 in compensation during the preceding year and is a participant in the corporation's profit sharing plan. She will celebrate her 72nd birthday on July 3rd of this year and plans to retire in four more years. Which one of the following correctly describes the date by which Jan must start taking distributions from her profit sharing account?

April 1 of the year following the year she retires. Distributions from qualified plans, IRAs, SEPs, SIMPLE IRAs, TSAs, and other retirement accounts must begin by a certain date. This rule does not apply to Roth IRAs. For IRAs, SEPs, SIMPLE IRAs, and 5% owners of a business with a qualified plan, that date is April 1 of the year following the year in which the participant attains age 72. Distributions from qualified plans, 403(b) plans, and 457 plans to individuals who are not 5% owners (such as Jan) must begin by April 1 of the year following the later of the year the participant attains age 72, or the year in which the participant retires.

Power of Attorney

Authorization for another to act as one's agent or attorney in either specified circumstances (special) or in all situations (general). There's limited power of the attorney and full power of attorney; as well as durable power of attorney. Durable power lets another individual act on the incapacitated person's behalf.

Ex. Which one of the following is the most common method for investors to use in determining the cost basis of mutual fund shares?

Average Cost. The average cost method is the most widely used as fund companies provide this information, thus making it simple for fund shareholders. The first-in, first-out method requires the taxpayer to reconstruct his or her purchases in determining gain or loss, and results in greater gains during a rising market. Thus, it is not as widely used as the average cost method. The specific identification method results in the lowest tax liability, although it requires meticulous record keeping that most taxpayers will not adhere to. Also, the shares sold would have to be specifically identified to the mutual fund when the sale is made. This is practically impossible.

Ex. It is January 15, 2021. Bill and Mary both attained age 67 in 2020. They want to employ the restricted application strategy. Bill is the higher income earner. What can be said about their options?

Bill should file a restricted application for spousal benefits because he is the higher income earner. Because they were 62 by December 31, 2015 (or were born on or before Jan 1, 1954), Bill and Mary are eligible to use the restricted application strategy when they claim their benefits. Since they were 67 in 2020, they were born in 1953. They are late but they can still apply. Bill should file a restricted application for spousal benefits because he is the higher income earner. Mary will need to file an application for her own benefits in order to trigger Bill's spousal benefit. Bill's own benefit will accrue at 8% per year until age 70.

Duration

Bond investors, including mutual fund shareholders who own bond funds, often want to know how sensitive their bond (or bond fund) is to interest rate risk. For instance, if interest rates rise 1%, how much will the bond fund drop in value? Bond investors can estimate this drop with a concept called duration. The lower the coupon rate, the lower level of current interest rates and the longer the YTM. Investors who are risk-averse and concerned about losing principal would want to own bonds with lower durations. Duration is less than YTM; ex. a 10-year bond may have a duration of 6. A ZC Bond's duration is equal to the YTM, however. Ex. If interest rates are going to fall 1%, choose the longer duration; if rates are going to rise 1%, choose the shorter duration.

Defined Benefit Plans

Businesses today are less likely to offer these plans. DB plans are designed to provide participants with a guaranted lifetime income or pension; these plans are becoming increasingly scarce. Mostly, there are costs and risks to employers and people are living longer! Defined contribution (DC) plans are their replacement. The investment accounts are focused on investment returns and account value rather than income goals. Plan risks are borne by the participants, too.

Ex. In-service withdrawals prior to age 62 are not permitted from which of the following?

Cash Balance Plans

Plans Under the Affordable Care Act

Catastrophic plans pay for less than 60% of the total average cost of care. Only available to individuals under age 30 unless they qualify for a hardship exemption. Bronze plans pay 60% on average and the insured pays 40%. Silver plans pay 70% on average and the insured pays 30%. Gold plans pay 80% on average and the insured pays 20%. Platinum plans pay 90% on average and the insured pays 10%.

Coinsurance

Coinsurance is a percentage of the expenses that is paid by the insurance company once the deductible has been met for covered services. A copayment is a set amount that the insured will pay for a service such as a doctor visit. The copay amount may or may not be applied to the annual deductible or coinsurance percentage, depending on the plan.

Conduit IRA

Conduit IRA. The conduit IRA acts as a way station between qualified plans (or 403[b] accumulations). Thus, this IRA applies only to the person who expects to join a new employer and a new qualified retirement plan. Typically, such an account is used by individuals who receive a distribution from a qualified plan upon termination of employment and wish to retain the fund's qualified status, but do not expect to be reemployed within the permitted 60-day rollover period. Maintaining the "qualified character" of a distribution by using a conduit IRA may provide certain advantages and flexibilities. For one, IRAs and qualified plans are treated differently when it comes to required minimum distributions. The date by which required minimum distributions must start is called the required beginning date (RBD). The RBD for distributions from employer-sponsored plans to participants other than those who own exactly 5% or more of the employer is April 1 of the year following the later of (1) attainment of age 72, or (2) retirement. The RBD for IRAs (other than Roth IRAs) and 5% or more owners who participate in a qualified plan is April 1 of the year following the attainment of age 72, regardless of when an individual retires. A second reason for maintaining the qualified character of a distribution is that the next employer's retirement plan may offer loans. No IRA of any type can ever offer a retirement plan loan. Finally, distributions from an IRA are generally subject to a 10% early withdrawal if taken prior to age 59½. Qualified plan distributions may occur penalty-free following termination of employment after age 55.

Core-Satellite Allocation

Core-satellite asset allocation combines strategic and tactical asset allocation by dividing a portfolio into two parts: (1) the core, which represents 70% to 80% of the portfolio and is invested often in index funds or broad-based exchange-traded funds (strategic asset allocation); and (2) the remaining part of the portfolio, the satellite portion, is used to try to take advantage of particular opportunities that add return and/or diversification to the portfolio (tactical asset allocation).

Factors for Filing Social Security

Current resources, life-expectancy, and breakeven age, whether you are still employed (earnings test reduction). Breakeven Age: The age at which the total value of the higher benefits you receive from delaying starts to exceed the total value of the lower benefits you will receive if you start early.

Ex. A "rising equity glidepath" typically will lead to which equity exposure over one's total lifetime?

Decreased. The strategy of increasing equity exposure throughout retirement can result in less equity exposure over one's lifetime due to the reduced exposure in the early years.

Expenses Likely to Decrease During Retirement

During retirement, many items of expense tend to be less or zero. These may include the following: Transportation costs: train, bus, and auto expenses will likely drop when commuting to work ends. One or two cars may be eliminated altogether. Food and housing costs usually are less—not as a result of not working, but because most clients have their mortgages paid and children out of the home by the time they retire. Term life insurance and disability premiums can usually be stopped entirely. Dry cleaning bills, professional fees, clothing expenses, and other costs associated with working diminish. On the other hand, some costs usually go up: medical and dental expenses expenditures on hobbies, recreation, and travel

ERISA of 1974

ERISA was enacted to stem company retirement plan abuses and to make sure that employees were protected and that they would be paid any promised benefits. ERISA set standards for participation, vesting, funding, reporting, and disclosure, and it also established the Pension Benefit Guaranty Corporation (PBGC). ERISA requires that anyone giving investment advice to a company retirement plan must be a fiduciary.

Early Retirement Programs

Early retirement programs generally offer a package of benefits that makes the offer attractive. Depending on the circumstances, these benefits may include the following: step-ups in the employee's years of service and/or age for pension purposes; severance pay based upon some formula (e.g., one month of current salary for every year of actual service to the company); and continuation of health insurance coverage, either at no cost or a reduced cost.

Three Types of Beneficiaries for Deaths after 2020

Eligible designated beneficiary, designated beneficiary, and beneficiary.

Defined Contribution Plans

Employer contributes specific % No guarantee on future benefits Employee bears investment risk Pension expense = employer contribution Example. Bentley participates in a defined contribution plan. His employer contributes a specified amount to the plan. What Bentley will receive during retirement will depend on the investment results of the employer's contributions. There is no formula based on Bentley's earnings, years of service, etc., as in the defined benefit plan.

Home Equity / Reverse Mortgage

Equity in a house is often the major financial asset for seniors. A reverse mortgage allows senior homeowners to tap into the equity in their homes without having to make any repayments for as long as they remain in the house. The core requirements are that the individual be at least 62 years old, owns the home, and occupies the home as the primary residence. Upon the death of the homeowner (or when the homeowner vacates), the loan must be repaid. This can be done by selling the house, or simply by using other available funds. As stated previously, HUD/FHA guarantees that the maximum loan repayment amount will not exceed the value of the home. Amount borrowed. The amount a homeowner can borrow depends on their age, the current interest rate, other loan fees, and the appraised value of their home or FHA's mortgage limits for their area, whichever is less. Higher home values, lower interest, and greater age normally equal higher amounts that can be borrowed. This money can help pay for health care expenses.

Ex. When gathering data during the retirement planning process, financial goals should be quantified in dollar amounts and which of the following?

Established time frames.

Post-Retirement Employement

Extending one's working life beyond the full retirement age solves a number of retirement planning problems: fewer years of retirement must be financed gives you an opportunity to build up your retirement plans monthly Social Security benefits will increase take advantage of employer's health care coverage social and health benefits

Taxation of Bonds

For taxable bonds. At the election of the taxpayer, the premium may be amortized on a constant yield basis and taken as an annual, tax-deductible adjustment to the cost basis of the bond, in this case it would be $10 per year. The deduction is claimed in the form of an offset to the interest income received. Alternatively, if this election is not made, the premium paid becomes part of the cost basis used in calculating capital gain or loss in the event of a sale or redemption. For tax-exempt bonds. In contrast with the tax treatment for taxable bonds, the premium paid for tax-exempt bonds must be amortized on a straight-line basis as an adjustment to the bond's cost basis and cannot be used to reduce income each year.

Computing FICA

Fred makes $100,000 working for the ABC Corporation. How much FICA does he pay as an employee? $100k x .0765 = $7,650 Sarah makes $150,000 in 2021. What is her share of FICA? $142,800 x 0.0765 = $10,924 $150,000 - $142,800 x 0.0145 = $104 $10,924 + $104 = $11,028

Essential Elements of an IPS

GRASP: Goals, Risk, Asset Allocation, Strategies, Periodic Review Goals must be clear Understand a risk level acceptable to the client Understand how client's assets should be allocated amongst suitable classes of investments A statement identifying the investment vehicles and investment strategies deemed suitable for the portfolio A provision for periodic review.

Ex. You have just finished identifying and disclosing all of the apparent and potential conflicts of interest in the relationship with your client. What is the next step that you would undertake as you continue through the planning process?

Gathering information necessary to fulfill the engagement.

Hardship Withdrawals

Hardship withdrawals are generally available from TSA, profit sharing, and 401(k) plans only. The participant must demonstrate an "immediate and heavy financial need" and a "lack of reasonably available resources." Medical expenses, the purchase of a primary residence, tuition payments, and payments to prevent eviction from one's home are all occasions when the hardship withdrawals may be allowed. "My disastrously faulty emergency fund." Medical, disasters, first home buying, education, foreclosure.

Ex. Harry contributed $2,000 to a Roth IRA six years ago. By this year, the investments in his account have grown to $3,785. Finding himself in a financial bind, Harry, now 34, is compelled to withdraw $2,000 from this Roth IRA. What is the tax and penalty status of this withdrawal?

Harry does not have to pay a penalty or tax despite being 34. All Roth IRA contributions are made with after-tax funds, and contributions are considered to be withdrawn first, tax-free, then conversions are accounted for as being withdrawn next, and finally earnings are withdrawn after the contribution and conversion amounts have been completely withdrawn.

Ex. Which one of the following is covered under Medicare Part A and Part B?

Home health care. Medicare Part A covers expenses such as inpatient hospital care, post-hospital skilled nursing care, post-hospital home health care, hospice care, psychiatric hospital care, and blood in excess of three pints. Medicare's Supplemental Medical Insurance (Part B) provides coverage for physicians' services and for the following services that are not already covered under Part A: home health care; medical services, which include physician services, therapist (physical, speech) services, supplies, and ambulances; outpatient hospital services; and certain costs for blood that are not covered by Medicare Part A. Medical expenses not covered by Part B include most routine physicals, most immunizations, eyeglasses (and eye exams), hearing aids (and hearing exams), cosmetic surgery, dental care, orthopedic shoes, and most prescription drugs.

Ex. Maxine is 36 years old. She first entered the workforce two years ago and has been continuously employed since then. Which of the following benefits would Maxine be entitled to under OASDI-HI? survivor's benefit for Maxine's dependent child lump-sum death benefit for Maxine's spouse or child survivor's benefit for Maxine's dependent parent who is age 62 or older survivor's retirement benefit for Maxine's spouse or former spouse who is age 60 or older

I and II With eight quarters of continuous coverage, Maxine would be currently insured, but she would not be fully insured. The test for being currently insured is earning six of the last 13 credits (a.k.a. quarters). She has eight of the last 13. To be fully insured, she would need one credit per year since age 21. She is 36, so she needs 15 credits to be fully insured (36 - 22 = 14, and 14 is more than the minimum of six credits), but she has only eight credits. To calculate the number of credits needed to be fully insured, you always subtract 22 from the age and then ensure this is at least the minimum requirement of six credits. The maximum is 40. After 40 credits you are fully insured for life; however, to be eligible for disability benefits you also need to have a recent attachment to the labor force. For those 31 and over, that usually means at least 20 of the most recent 40 credits. Options I and II are available to a currently insured worker. Options III and IV are only available to a fully insured worker.

Ex. Dan died at age 69. His beneficiary was his son Robert, age 44. Robert has come to you to ask about his required minimum distribution (RMD) options. Which of the following would be acceptable RMD options for Robert? Robert must begin distributions in the year following the year Dan died. Robert can move Dan's account into an inherited IRA. He must begin taking RMDs in the year following the year Dan died based on Robert's life expectancy in the year following the year of death and then reduced by 1 for each subsequent year. Robert's only requirement is to have the account totally distributed by December 31 of the year with the 10th anniversary of Dan's death. Robert will have no mandatory RMDs until the 10th year after Dan's death.

III and IV As a healthy person more than 10 years younger that Dan, Robert is only a designated beneficiary, not an eligible designated beneficiary. Thus, he is under the 10-year rule. There are no mandatory annual contributions until December 31 of the year containing the 10th anniversary of Dan's death.

Ex. Which of the following limit ownership to spouses only? tenancy in common joint tenancy tenancy by the entirety community property

III and IV. Only spouses can hold title as tenants by the entirety and as community property. Nonspouses can hold title as joint tenants (JTWROS) or tenants in common.

Surviving Spouse for IRA

If a surviving spouse is the sole eligible designated beneficiary, their required distribution period is the greater of their recalculated life expectancy factor (using the Single Life Table) or the deceased IRA owner's remaining actuarial life expectancy (using the Single Life Table and then subtracting one for each subsequent year). Only a surviving spouse may move the IRA or employer retirement plan into their own name, add new contributions to the account, and be subject to the RMD rules as the original owner of the account.

Ex. Harry, a single professor who is age 36, started his Roth IRA three years ago, contributing $5,000 for his first year. He has since made a contribution of $5,500 in Year 2 and also in Year 3. He converted a traditional IRA of $17,000 to the Roth IRA last year. His total contributions are $16,000 plus the $17,000 conversion, and the account is now worth $36,497. Harry would like to make a complete withdrawal so that he can buy a new car. He wants to know what his options are and what the tax consequences would be. Which one of the following statements would be the correct information for Harry?

If a withdrawal of converted IRA funds is made from the Roth account before five years has elapsed, such a withdrawal may be subject to the 10% penalty. Contribution amounts always come out of a Roth IRA account first, and then conversion amounts, if any. Because taxes have already been paid on these amounts, there are no income taxes. In this case, Harry can withdraw up to $33,000 income-tax-free. If he withdrew all $36,497 he would only owe income taxes on $3,497. However, if a withdrawal of converted IRA funds is made from the Roth account before five years has elapsed, such a withdrawal would be subject to the 10% penalty unless it meets one of the exceptions. Thus, he would be subject to the 10% early withdrawal penalty on the $17,000 from last year's conversion. If the Roth IRA earnings are withdrawn and the distribution is not "qualified," the earnings will be subject to income taxation and the 10% penalty unless it satisfies an exception. If he withdrew the entire amount, he would owe income tax on $3,497 and the 10% early withdrawal penalty on $20,497.

RMD for Estate, Charity, or No Designated Beneficiary

If no beneficiary has been named by September 30th of the year following the owner's death (or beneficiary is an estate, charity, or certain trusts), the account must be fully distributed before the end of the fifth year following the year of death. The account balance may be distributed over any schedule prior to the end of the fifth year but may never extend beyond.

Charitable Donations of Appreciated Stocks

If you are looking to make a donation, perhaps a donation of stock is the best method; donation of an appreciated stock means that you may take a deduction. The charity may sell the stock as a tax-exempt organization and nets the full amount. The stock must be held LT.

Ex. Which one of the following statements is correct regarding a nondeductible IRA?

In many cases, a person who is eligible to deduct an IRA contribution may choose to make a Roth IRA contribution instead. A person may always choose not to deduct their IRA contribution regardless of AGI or whether or not the person is an active participant. However, why contribute to a nondeductible IRA if you are eligible to make a contribution to a Roth IRA? The taxation of withdrawn earnings on Roth IRAs can be tax free. On the other hand, people who make too much to contribute to a deductible IRA or a Roth IRA can always contribute to a nondeductible IRA if they have earned income. A nondeductible IRA would be eligible to convert to a Roth IRA. Finally, if the plan is not to convert to a Roth IRA, why not contribute to a nonqualified fixed or variable annuity instead of a nondeductible IRA? There is no annual limit on the amount that can be contributed to a nonqualified annuity and it would keep the accounting for any other IRAs simple.

Adjusting Income Deficit for Inflation Over Preretirement Period

In order to complete this future value calculation, the necessary inputs on your financial calculator are: PV = present value of retirement income deficit N = number of periods (years) until retirement I/YR = Inflation rate Example. Continuing with Fred and Wilma, they are both age 40 and plan to retire at age 65, so they have 25 years until retirement. They anticipate that inflation will be 3%. So the future value of the income amount they would need in the first year of retirement is: 30,000 PV 25 N 3 I/YR FV = 62,813

Value Averaging Strategy

In value averaging, the client commits to increasing the portfolio value by a certain dollar amount each period—by $2,000 per month, in the case of Anna. Given the current share price of $22, Anna's initial 100 shares have a total value of $2,200. Therefore, to maintain a monthly value average of $2,000, Anna needs to invest $1,800. At $22 per share that results in the purchase of $1,800 ÷ $22, or 82 shares (81.818 rounded). Total value should be $4,000 after two months. To check: 182 shares x $22/share = $4,000 ($4,004 actually, due to rounding up to whole shares).

Income in Respect of a Decedent (IRD)

Income received by a beneficiary that was due the decedent but wasn't paid to the decedent before death.

Ex. Which one of the following techniques will result in tax deferral?

Investing in high-growth stocks As they rarely pay dividends. Investing in high-growth, low-dividend-paying stock is one form of deferring tax liability.

Ex. Which is true regarding Medicare Part A?

It helps pay for care in a skilled nursing facility for up to 100 days. Within certain parameters, Medicare Part A helps pay for care in a skilled nursing facility. Medicare Part A is free for most recipients (who have worked in covered employment for at least 40 quarters). Doctor bills and outpatient hospital care are covered by Medicare Part B. On the other hand, Medicare has only very limited coverage for long-term care. Having Medicare does not mean a person has adequate LTC coverage. Medicare LTC coverage should be seen as rehabilitative care rather than as true LTC.

Restricted Application for Spousal Benefits Long Example

It is January 15, 2021. Bill and Mary both attained age 67 in 2020. They want to employ the restricted application strategy. Bill is the higher income earner. What can be said about their options? Because they were 62 by December 31, 2015 (or were born on or before Jan 1, 1954), Bill and Mary are eligible to use the restricted application strategy when they claim their benefits. Since they were 67 in 2020, they were born in 1953. They are late but they can still apply. Bill should file a restricted application for spousal benefits because he is the higher income earner. Mary will need to file an application for her own benefits in order to trigger Bill's spousal benefit. Bill's own benefit will accrue at 8% per year until age 70.

Ex. Which one of these statements regarding the applicable credit amount is FALSE?

It is the amount of taxable transfers that a person can make without having to actually pay gift or estate tax. The applicable exclusion amount is a dollar-for-dollar offset against gift and/or estate tax liability. The applicable credit amount represents the amount of gift and estate tax liability that a person can incur without having to actually pay gift or estate tax. It is applied directly against a tax owed. The two amounts will increase together in future years because the applicable credit amount is the corresponding tax liability for the applicable exclusion amount. Use of the applicable credit is mandatory. It must be taken. There is no option to pay cash instead of using the applicable credit.

Ex. Mark, age 54, funded a nonqualified annuity with a $10,000 deposit. His annuity is now worth $16,000. He would like to make a $5,000 withdrawal. How will this distribution be taxed?

It will be fully taxable and subject to an early withdrawal penalty. Lump sum distributions from an annuity are fully taxable until all earnings have been distributed; this is referred to as last-in, first-out. Because Mark is under age 59 1/2, his distribution will be subject to a 10% early withdrawal penalty. If the contract were annuitized, payments would be taxed on a pro rata basis.

Capital Preservation

Living off only the cash flow of an asset pool.

Longevity Risk

Longevity risk is the risk that a retiree will outlive his or her financial resources. As such, it is a significant risk for a retiree.

Social Security Reforms

Many reforms are now being considered to address the projected 23% Social Security shortfall. These include cutting benefit payments, raising Social Security payroll taxes, further increasing full retirement age, changing how excess funds are invested, privatizing Social Security, and providing direct government subsidies to the program.

Ex. All the following are health plan options under Medicare Advantage plans except

Medicaid provider plans (MPPs), which don't exist.

Ex. Tin parachutes apply to

Middle management employees.

Net Worth

Net Worth indicates the monetary value the client would have if all assets were converted to cash at the fair market value listed; then used to pay of outstanding debts.

Ex. The increase in value in the shares of stock distributed from a qualified stock bonus plan is known as

Net unrealized appreciation.

Premature Distributions for Defined Benefit and Defined Contribution Plans

Normally, qualified plan distributions to participants under the age of 59½ are, like IRA distributions, subject to a 10% penalty. However, the tax code provides a special "separated from service" exception for employees age 55 and older. There is no exemption from the income tax liability created by these distributions, however.

Ex. Distributions from a mutual fund can be made in which of the following forms?

Ordinary dividends, nontaxable distributions, capital gains distributions

Medicare Part A

Part A of Medicare provides insurance for inpatient hospital care, post-hospital skilled nursing care and home health care, hospice care for the terminally ill, psychiatric hospital care, and blood. Most of these benefits are limited. For example, inpatient hospital care will pay for up to 90 days of hospitalization per benefit period, with a 60-day lifetime reserve.

Ex. Which one of these is correct regarding Medicare Part D?

People who enroll in Part D pay a monthly means-tested premium that varies based on the particular plan.

Loan Provision Option in Cash Value Policies

Policyholders can borrow an amount equal to some or all of their accumulated cash value. Typically, loans can be made up to the current surrender amount of the policy (less one year's interest). Interest charges are not tax deductible for individuals.

Ex. Which one of the following is not considered to be a qualified medical expense for purposes of the health savings account rules?

Premium payments for a Medigap policy Premium payments for a Medigap policy are not considered qualified medical expenses for purposes of the health savings account rules.

Probate

Probate is a public process. Thus, the decedent's private financial affairs, creditors and debts, and the identity of people receiving property will be a matter of public record. Many people see this as a negative. The probate court must ascertain the validity of the will, and the personal representative must gather and identify the property of the deceased's estate, and carry out other time-consuming activities. This delays the transfer of the deceased's probate property to the ultimate recipients. Various legal and administrative costs are associated with probate. In most cases, the larger the estate, the higher the cost.

Provisional Income & Taxes

Provisional income is calculated as your adjusted gross income, plus any tax-exempt income (e.g., from municipal bonds) and excluded foreign income, plus one-half of your Social Security benefits. 85% of your SSB may be taxed if your provisional income is above $34k, $44k for couples filing together.

Ex. Sam, age 62, retired two years ago and is currently relying on his Social Security retirement benefit for income. Faced with a tight budget, Sam is considering going back to work. Which one of the following would not be true if he returned to work?

Regardless of the income he earns, he will continue to receive his full Social Security Benefit. Old-age benefits of Social Security recipients may be reduced if the client earns income from wages and salary during retirement prior to Social Security's full retirement age. Benefits paid to persons in the years prior to attaining full retirement age are reduced by $1 for every $2 earned over the limit.

Income Replacement Percentages

Replacement Ratios are rough guides in determining the amount of income needed in retirement. It's common to say that retirees need 70% to 80% of preretirement income to support a similar lifestyle in retirement. This is entirely dependent on the lifestyle that the person wants to live later on.

Ex. Mike recently terminated employment with ENCO Inc. He has a $70,000 account balance in ENCO Inc.'s simplified employee pension (SEP) plan. Which one of the following steps should Mike take to roll over his SEP account into an IRA?

Roll over all of the distribution he receives, within 60 days of receipt, into an IRA. The direct rollover rules do not apply to plans that use IRAs as funding vehicles, i.e., SEPs, SARSEPs, and SIMPLE IRAs. The 20% withholding rules don't apply to rollover distributions from a SEP. A SEP is not a qualified plan, so he could not transfer it to an IRA.

Separation of Service at age 55

Section 72(t) of the Internal Revenue Code allows penalty-free distributions from qualified plans and 403(b)s to participants who separate from service at age 55 or older. Thus, the 55-plus early retiree can take benefits, either in a lump sum or in regular or irregular payments, and escape the 10% penalty. Of course, there is no escaping income tax on these distributions. Attaining age 55 is defined by the IRS as being 55 on December 31 of the year of separation.

Ex. John wants to have $1 million in his retirement fund when he retires in 25 years. Assuming that he earns 11% and inflation is at 3%, how much does John need to save on a level basis at the end of each year?

Set calculator to END mode, one payment per year, and C/ALL Keystrokes: 1000000, FV 25, N 11 I/YR PMT Solution: $8,740 Notice that the inflation rate does not come into play here because the question notes that John will be saving on a level basis. Also, the goal is not expressed in today's dollars. The goal is simply to have $1 million in the account at retirement.

Ex. When using the "bucket approach" to withdrawals from retirement savings, the "first" bucket should be comprised of

Short-term, liquid investments.

LTCG Rates

Single: 0% Under 40,400 15% 40,401 - 445,850 20% Over 445,851 Head of House: 0% Under 54,100 15% 54,101 - 473,750 20% Over 473,750 Married: 0% Under 80,800 15% 80,800 - 501,600 20% Over 501,600 Estates & Trusts: 0% Under 2,700 15% 2,701 - 13,250 20% Over 13,250

Small Stock Strategy Investing

Small stocks are not for everyone, and certainly not for many retirees. They may be suitable, however, for clients with high risk tolerances, entrepreneurial instincts, and long investment horizons.

Ex. Which one of the following is false regarding taxation of Social Security benefits?

Social Security benefits are never taxable after full retirement age.

The purpose of Social Security

Social Security was created in 1935 with the intent of protecting families from poverty after a worker's retirement. It was established as a social insurance program, where benefits are earned by contributing to the system during the course of employment by means of a payroll tax, or FICA (Federal Insurance Contributions Act). The total FICA tax is 15.3 %. The employer and employee each pay 6.2 % for old-age, survivors and disability insurance (OASDI) and 1.45% each for hospital insurance. That's 7.65% each. The Social Security wage base is $142,800 in 2021.

Ex. Which one of the following can be used to measure a mutual fund's risk-adjusted return as measured by total risk?

Standard Deviation

Taxation of Treasury Securities

T-bills. T-bills are short-term versions of zero-coupon bonds, i.e., they make no interest payments per se but are sold at a discount to face value. They are available in terms ranging from four weeks to 52 weeks. An investor might buy a T-bill for $9,530 and receive $10,000 six months later at maturity. (T-bills are available in denominations as low as $100.) The difference between the holder's tax basis and the face value is the total return, which is treated as interest income for income tax purposes. That income is taxed in the year in which the T-bill matures, not the year when the T-bill is purchased. The interest income from the T-bill is exempt from state and local income taxes. Treasury notes and bonds. Tax treatment of these securities is the same as it is for corporate bonds, with two exceptions: (1) interest is exempt from state and local taxation, and (2) any original issue discount must be accrued annually and treated as interest income. Treasury inflation-indexed securities. These Treasury securities combine a fixed interest rate with the principal amount of the securities adjusted for inflation. The interest payments are taxed in the year received. The inflation adjustments to the principal are taxable in the year in which such adjustments occur even though the inflation adjustments are not paid until maturity. The interest is exempt from state and local income taxation. The drawback to Treasury inflation-indexed securities, just like zero-coupon bonds, is that if they are held in taxable accounts, they generate phantom income—tax obligations generated without the cash to pay them. For this reason, they are generally purchased in tax-deferred accounts.

Types of Risk, Measures of Risk

Take a look at Module 2 of AAMS; Systematic and Non-Systematic Risk portions are repeated here. As is SD, Beta, Treynor, Sharpe, Alpha, and Duration.

Tax Defferal & IRAs

Tax deferral refers to the ability to postpone the recognition of taxable earnings on interest or investment gains. The benefit of deferral is that monies that would otherwise be used to pay taxes are allowed to continue to generate additional earnings. Example. Ramona had $40,000 in corporate bonds in her IRA. These earned $1,400 in interest this year. Had they been in her regular investment account, the earnings would have been reduced by her normal tax rate of 32%, or $448. But because the earnings occurred within her IRA, no taxes were incurred and all of her earnings were reinvested to earn even more the next year.

Medicare Advantage

The Balanced Budget Act of 1997 created Medicare Part C, or Medicare Advantage, which includes plans offered by health maintenance organizations (HMOs), preferred provider organizations (PPOs), and provider-sponsored organizations (PSOs).

Ex. The vested accrued benefit in George's tax-sheltered annuity is $87,500. He has never taken a loan from the plan but is interested in building an addition to his home. Which of the following statements correctly describes George's option?

The amount of the loan would be limited to $43,750 and the term would be limited to five years. George wants to remodel, not purchase, his home. The amount of the loan cannot exceed 50% of the vested amount in George's account, and the term of the loan would be limited to five years.

Who Receives Benefits Under A & B

The benefits of Part A are provided to most Medicare enrollees; there are some exceptions when the Medicare beneficiary must pay a premium for Part A. However, Part B benefits are only available to people who pay regular monthly premiums.

Ex. The distribution strategy that strives to mitigate sequence of returns risk by segmenting a portfolio according to when the funds will be needed is referred to as

The bucket strategy.

Deferred Annuity

The deferred annuity has two phases: an accumulation phase and a payout phase. During the accumulation phase, the client contributes capital—either in a single premium payment or in a series of contributions. That capital increases in value, either at a rate guaranteed by the insurance company (a fixed annuity) or at a rate dictated by the performance of the underlying investments selected by the client (stocks, bonds, etc.), for which the client bears the risk.

Ex. Distributions from qualified plans, 403(b) plans, SEPs, SIMPLEs, and IRAs are assessed a 10% penalty if they are taken before age 59 1/2. There are exceptions to this rule. Which of the following is not an exception to this penalty?

The distribution is made to pay homeowners insurance. Distributions for the purpose of paying homeowners insurance would be assessed the 10% penalty. Distributions for the other stated reasons would be exempt from the 10% early withdrawal penalty.

Expected Value or Mean

The expected value is the man of a probability distribution of potential observations. The symbol for the mean is X. Ex. Returning to the previous example of investments QRS and TUV, suppose the possible returns for investment QRS are 10% and 14%, each with a probability of occurrence of 25%, and the probability of occurrence of a 12% return is 50%. The expected value (return) for investment QRS is: 0.25(10%) + 0.50(12%) + 0.25(14%) = 12%

Ex. Which one of the following statements correctly describes the method for calculating the exclusion ratio for a fixed annuity?

The investment in the annuity contract is divided by the total expected return. The exclusion ratio for a fixed annuity contract is not calculated by dividing the number of expected payments by the investment in the contract. It is calculated by dividing the investment in the contract by the total expected return. The "total expected return" is an industry term meaning the monthly payment times the life expectancy. For example, if the monthly payment is $1,000/month and the life expectancy is 20 years, the total expected return would be $240,000 ($1,000/month X 12 X 20). The exclusion ratio for a variable annuity contract is calculated by dividing the investment in the contract by the number of expected payments.

What are Key Policy Features to Consider for LT Care Policies?

The key policy features to consider in selecting a long-term care policy are similar to those that must be considered in disability income policies. These features are: the elimination (or waiting) period before which benefits are paid the maximum benefit period (e.g., five years) the daily benefit (e.g., $100 per day) inflation protection The long-term care policy, however, has a unique provision: "providers of care." Some policies will pay benefits only if the person enters a nursing home; others stipulate that they will provide benefits for home care only, while others will pay for either.

Single Premium Immediate Annuity (SPIA)

The purchase of a lifetime annuity eliminates the need to manage the investment of those funds, determining which assets should be used to fund distributions, and the fear of outliving one's assets. Knowing that one's fixed expenses are covered frees up their remaining savings, which can then be used to fund discretionary expenses. Research points to the partial annuitization of a portfolio improving its sustainability.

Purpose of Asset Allocation

The purpose of asset allocation is to apportion funds in a way that meets the client's investment goals and dampens the effects of periodic market fluctuations. Two common factors that can alleviate retirement investors' concerns with security price volatility are time and asset allocation. Longer investment horizons can manage greater volatility than short investment horizons. Asset allocation can select asset classes that are aligned with both the investor's investment horizon and his or her risk tolerance.

The Role of the Retirement Counselor

The role of the retirement counselor is to facilitate comprehensive retirement planning through a prudent and coordinated set of recommendations consistent with the client's needs, goals, attitudes, and resources. This invariably requires a relationship between the client and counselor based upon trust and a mutually defined understanding of the scope of services to be offered.

What is a Benefit Period?

The term benefit period is very important in Part A Medicare coverage. A benefit period begins when the patient first enters a hospital or covered facility, and ends when that patient has been out of that facility or another for 60 consecutive days. This period is important because each one involves a patient deductible. For example, if a patient is admitted to a hospital, goes home, but has a relapse 61 days after release, readmission to the hospital will initiate a new benefit period—and a new deductible for the patient.

Who Qualifies for Medicare Advantage

To be eligible for a Medicare Advantage plan, an individual must have Medicare Part A and Part B, cannot have end-stage renal disease (ESRD), and must live in a county or geographic area where a Medicare Advantage Plan is available.

Two Qualities of Retirement Goals Useful in Planning

To be useful in planning, retirement goals should be specific and prioritized. A specific goal indicates an event, an amount, and/or a time.

Calculating the Social Security Benefit

To calculate a Social Security benefit, start with your earnings record and then apply an inflation adjustment to each year of earnings shown, which puts all of your past earnings in today's dollars. Next, determine your "lifetime average earnings," which Social Security defines as your highest 35 years of earnings, as adjusted for inflation. Your highest 35 years of inflation-adjusted wages are then totaled and divided by 420 (the number of months in 35 years) to come up with your average monthly earnings, or your AIME (average indexed monthly earnings). Social Security then applies a formula to your AIME to determine your monthly benefit, or primary insurance amount (PIA). Henry would receive 50% of Etta's PIA only if his PIA was less than 50% of Etta's PIA. The family maximum benefit for a couple with no ancillary beneficiaries does not apply when both are receiving benefits based on their own earnings histories.

Ex. The word "fiduciary" comes from the Latin "fiducia" which means

Trust.

Ex. Ann has reached her full retirement age (FRA). She can elect to receive $1,000 now, or delay receipt by two years. She expects to live until age 90. Ignoring outside factors, when should she begin her benefits?

Two years from now. By delaying two years, her benefit will increase 16%, to $1,160. Forfeiting: $1,000 24 months = $24,000 Gaining: $160/month 24,000 / $160 = 150 months or 12.5 years 66 + 12.5 = Ann would need to live until 78 to "break even." Because she is expecting to live until age 90, she should opt to delay receipt of benefits.

To Main Choices that SEC Wants for Customers under REG BI

Under Regulation BI, it is clear that the SEC wants to maintain two choices in the marketplace: a sales-based and an advice-based approach. Regulation Best Interest is an extension of the suitability standard that is already in place, and does not mention or cross the line into fiduciary advice.

Ex. Which of the following is not a possible subtraction from total gifts for the year?

Unused applicable credit amount The unused applicable credit amount is a subtraction from the current tentative tax. The marital and charitable deductions and the annual exclusion are all possible subtractions from a donor's total gifts for the year.

Stock Dividends

When there's a stock dividend, the cost-basis is affected. Original per share cost basis / (100% + stock dividend %) = Adjusted per share cost basis

Assets Not Included in a List of Retirement Income Producers

When you look through the statement of financial position to identify assets that might produce income during retirement, do not include: Emergency funds—the client will need these funds for emergencies during retirement. Funds intended for college education. The value of the personal residence. In most cases, even if the client sells the house, he or she will have to purchase a replacement or begin paying rent. However, be alert to situations in which the retiree sells his or her current residence and replaces it with a lower-cost dwelling; the cost difference may be available for income-producing investments.

Ex. Which one of the following cannot achieve the estate planning goal of providing for incapacity?

Will. A durable power of attorney and a trust can be used to manage the financial affairs of an incompetent person. Disability insurance can be used to replace income when an incapacitated person is no longer able to work. Because a will is only effective at death, it cannot be used for incapacity planning.

Duty to Keep Current

With all the changes inside and outside the securities industry, all those operating in the industry have an ethical obligation to keep current with developments that affect their clients. These developments can be tax law changes, changes in the economy, new product development, or changes in the fortunes of individual securities issuers.

Taxation of Lump Sum/Periodic Non-Qualified Annuities

Withdrawals from a nonqualified annuity come first from earnings/gains (LIFO treatment). Distributions are fully taxable as ordinary income until all of the gains have been withdrawn. The principal amount—the original contribution(s)—is then withdrawn and is not subject to tax, as it is attributable to after-tax money. In addition, withdrawals from an annuity prior to age 59½ are generally subject to a 10% penalty on the taxable portion of the distribution.

Ex. Strategic asset allocation is

a "target allocation" approach to investing.

Conservator

a court-appointed person given authority to manage the financial affairs of an incompetent person.

Qualified Longevity Annuity Contract (QLAC)

a deferred income annuity contract in which a lump sum premium is paid today to provide lifetime income at some future date, typically 2 to 40 years in the future

Medicare Part D, "donut hole"

a gap in payment causing an amount of out-of-pocket costs the patient must pay for medications even though they are on Medicare. Finally, the term "donut hole"/"coverage gap" meant the plan did not pay any of the drug costs in this range. Thus, the individual used to pay all drug costs in this range. Now the individual only pays 5% and gets credit for 70% of the cost that he or she does not pay if the drug is a name brand.

Ex. The 10% penalty on early distributions from a qualified plan can be avoided if

a plan loan is repaid on a timely basis. A loan is not considered a distribution subject to taxation and possibly a 10% early withdrawal penalty if it is repaid on a timely basis and does not go into default. To avoid the 10% early withdrawal penalty, payments would need to be taken as substantially equal periodic payments over one's life expectancy. The exemption applies to certain medical expenses that are not reimbursed by insurance and exceed 7.5% of the participant's AGI in 2021. The first-time home purchase exclusion applies only to IRAs.

Borrowing from Accrued Benefits

a. What is the maximum repayment period for such loans? The plan participant may borrow for a period of no more than five years, except in the case of loans used to acquire a principal residence. b. What happens if loans are not repaid within the allowed period? Loans that are not repaid within the specified period are treated as taxable distributions.

Qualified Plans and In-Service Withdrawals

a. Which type of qualified plans may permit withdrawals before the participant has reached age 62? Only profit sharing/stock bonus and thrift/savings plans may include provisions for in-service withdrawals by plan participants who are younger than age 62. b. Which plans typically include provisions for withdrawals by plan participants who elect to continue working past the plan's normal retirement age? Defined contribution plans typically allow withdrawals by participants who continue to work past the plan's normal retirement age. Theoretically, defined benefit plans can do the same, but the record-keeping complexity resulting from these withdrawals discourages most from doing so.

Home Equity for Retirement Funding

a. downsize May be able to avoid having a mortgage and may generate excess cash. May reduce utilities, property tax, insurance, etc. b. refinance Lower your monthly payment and may be able to "cash out" some of your equity. c. reverse mortgage Will receive cash in the form of a monthly payment, lump sum, or line of credit, and will not be required to repay it until death or sale of home. There are risks, however; costs can be excessive and homeowner is still responsible for the maintenance of the home.

Valuation Dates

a. gifts The valuation date for gifts is the date on which the transfer is completed. b. estates The valuation date for property in a decedent's gross estate is either the decedent's death or six months after that death (the alternate valuation date).

Ex. Mary wants to retire the first of next year. She wants to receive monthly retirement income payments on the first day of each month. To solve the amount of capital required to provide her the income she wants, you need to solve for

annuity due-set calculator at begin.

Ex. Carl is going to reach FRA later in the current year. He has begun Social Security benefits but is still working. His Social Security benefits will

be reduced $1 for every $3 earned above the earnings cap.

Taxation of Stock Returns

cash dividends dividend reinvestment plans stock dividends charitable donations of appreciated stock

Ex. The cost basis of a capital asset is generally its initial cost, adjusted by

costs incurred in buying and improving the asset.

Ex. As a general rule, a Medigap insurance policy is designed to cover which one of the following Medicare-approved charges that are not paid by Medicare?

deductibles or coinsurance amounts. The costs not covered by either Part A or Part B of Medicare are referred to as Medicare gaps or Medigaps. Medigap insurance is designed to supplement Medicare's benefits by filling in some of what Medicare does not cover. A Medigap policy pays for Medicare-approved charges that are not paid by Medicare because of deductibles or coinsurance amounts for which the beneficiary is responsible. The cost and services covered by Medigap policies varies from vendor to vendor and from plan to plan. Some, but not all, Medigap policies cover such items as Part D deductibles, skilled nursing coinsurance amounts, and Medicare Part B excess amounts.

Ex. Exceptions to the 10% early withdrawal penalty for distributions taken from a 401(k) prior to age 59 1/2 include all of these except

distributions for a first-time home purchase, up to $10,000. Distributions for a first-time home purchase and qualified higher education expenses are exempt from the 10% early withdrawal penalty only in IRAs. The other options pertain to 401(k)s as well as IRAs.

Ex. A qualified plan must withhold 20% of any distribution that is

going to be rolled over to another qualified plan within 60-days.

Ex. Qualified longevity annuity contracts (QLACs) may be suitable if your client

has a family history of longevity.

Ex. Provisions of the Affordable Care Act include all of the following except

health savings accounts (HSAs) can now be used to cover over-the-counter medicines not prescribed by a doctor. The provisions prohibit both HSAs and FSAs from being used for over-the-counter medicines not prescribed by a doctor.

Dollar Cost Averaging

investing roughly equal amounts of money at regular intervals.

Ex. A lump sum payment of the proceeds of a life insurance policy that is made to the beneficiary upon the insured's death

is generally exempt from income taxation.

Ex. The two major risks associated with individual common stocks are

market risk and business risk. The primary risks associated with common stock are business risk and market risk. Interest rate risk, default risk, and purchasing power risk are the major risks of bonds.

10 Essential Health Benefits from the Affordable Care Act

outpatient care emergency services hospitalization maternity and newborn care mental health and addiction treatment prescription drugs rehabilitative services and devices lab services preventive services pediatric services

Ex. Monte Carlo analysis is based upon a given set of assumptions regarding rates of return and

standard deviations. It is used to calculate the probability of specific scenarios.

Ex. Which of the following is not one of the four areas that the CFP Board looks at to determine whether a CFP® professional is a financial planner or carrying out material elements of financial planning?

the CFP® professional's understanding of the engagement It is the client's understanding and intent in engaging the adviser that the CFP Board considers, not the CFP® professional's understanding of the engagement. All of the other choices are areas that the CFP Board takes into account to determine if a financial planning engagement is taking place.

Ex. All of the following are disadvantages to performing an indirect rollover from a qualified plan to an existing IRA except

the entire distribution will be subject to immediate taxation. By rolling over assets to an existing IRA, the plan assets less the amount withheld escape immediate taxation. Taxes are deferred until the participant begins withdrawing money. A mandatory 20% withholding is imposed on a qualified plan distribution if the plan issues a check to the participant. Finally, if an indirect rollover is not completed within 60-days the full distribution amount will be taxed.

Ex. All of the following are characteristics of a qualified longevity annuity contracts (QLACs) except

the participant can elect either a fixed or variable annuity.

Ex. Which of the following is correct regarding voluntary severance retirement plans.

they often provide for immediate and full vesting of terminating employees. Early retirement programs can cut through the normal vesting requirements and provide full vesting of terminating employees.

Ex. What is the primary function of central clearing counterparties (CCPs) that have been set up as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?

to facilitate the netting of swap contracts

Ex. Reverse mortgages can be used for which one of the following purposes?

to generate a lump sum that can be used to fund long-term care

Ex. Lucy received a $1,200 profit sharing contribution this year. Lucy is married to George, an artist who had no earnings this year. Their combined AGI for this year is $220,000. How much of their $12,000 IRA contribution can they deduct for 2021?

$0 Lucy is an active participant because she received a profit sharing contribution. Their AGI is greater than the phaseout limit for active participants in 2021 ($105,000-$125,000). Thus, Lucy cannot make a deductible contribution. George has the full spousal deduction available, but the deductibility of the spousal IRA is also phased out because their AGI is greater than $208,000 in 2021. Lucy and George's total deduction is zero. They do not qualify for any deduction. Additionally, their ability to make Roth IRA contributions was also phased out when their AGI went over $208,000 for 2021. If they had no other traditional IRAs, they could make nondeductible IRA contributions and then convert them to Roth IRAs. They could also skip the IRA rules altogether and invest in nonqualified fixed or variable annuities or universal life insurance, to defer taxation on accumulations in the policies.

Ex. Lucy received a $1,200 profit sharing contribution this year. Lucy and George are married, filing jointly. George is an artist who had no earnings this year. Their combined AGI for this year is $215,000. How much of their $12,000 IRA contributions can they deduct?

$0 Lucy is an active participant since she received an annual addition. Their AGI is greater than the phaseout limit for active participants, so Lucy cannot make a deductible contribution. George has the full spousal deduction available, but the spousal IRA is also phased out because their AGI is greater than $208,000 in 2021. Lucy and George's total deduction is zero. Option "a" correctly states that they do not qualify for any deduction.

Ex. What is the price of a bond with a 7% coupon, a $1,000 par value, and a maturity of 20 years if the market interest rate for similar bonds is 6%?

$1,115.57 Set the calculator for 2 P/YR and use the END mode. The inputs then are as follows: 1,000 [FV], 35 [PMT], 20 [SHIFT] [N] = 40, 6 [I/YR], and solve for PV = $1,115.57. Note: The $35 payment is the semiannual payment of the bond. This is computed by taking the 7% coupon rate the par value of $1,000 = $70 and divide that by 2 to get the semiannual interest paid, in this case $35. Also, the yield to maturity (YTM) is less than the coupon rate, thus the bond must be selling at a premium.

Ex. Under value averaging, if an investor desired to increase his or her investment by $1,000 per month and the asset value had declined by $250 from the previous month, the investor would invest ______ the next month, assuming the price of the investment did not change.

$1,250, the loss from the previous month must be made up in addition to the following month's contribution.

Ex. Bill and Lisa Hahn have determined that they will need a monthly income of $6,000 during retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per month at the beginning of each month. Over the 12 remaining years of their preretirement period, they expect to generate an average annual after-tax investment return of 8%; during their 25-year retirement period, they want to assume a 6% annual after-tax investment return compounded monthly. They want to start their monthly retirement withdrawals on the first day they retire. What is the lump sum needed at the beginning of retirement to fund this income stream?

$389,957 The monthly retirement income need is not specified as "today's dollars," and no inflation rate specified; therefore, it must be assumed that the $2,500 net monthly income need represents retirement dollars, and the retirement period income stream is level. To calculate the lump sum needed at the beginning of retirement, discount the stream of monthly income payments at the investment return rate: 10BII+ PVAD calculation: Set calculator on BEG and 12 periods per year, then input the following: 2,500 [PMT] 25 [SHIFT] [N] - b/c compounding monthly? 6 [I/YR] 0 [FV] Solve for PV = $389,957

Ex. Over a period of 10 years, Mike contributed a total of $20,000 to a nondeductible IRA. The current value of his IRA is $32,000, and Mike, who is 50 years old, has decided to use his IRA assets toward the purchase of a second home in the mountains. Assuming Mike's marginal tax bracket is 24%, how much will he owe in taxes and penalties?

$4,080 Mike must pay income taxes on $12,000 ($32,000 - $20,000 of after-tax contributions). Mike's effective tax rate is 34% (24% + 10% early withdrawal penalty = 34%). Remember, penalties in a nondeductible IRA apply only to earnings. Mike will have to pay $4,080 in taxes and penalties (34% of $12,000 = $4,080). Mike is not a "first-time homebuyer" in this question because he is buying a vacation home.

Ex. George and Mabel Taylor, ages 45 and 43, each put $6,000 into their respective IRAs. George's employer does not provide a qualified retirement plan, but Mabel participates in a 401(k) plan at work. Their AGI is $200,000, and they file jointly. How much of their IRA contributions will be deductible for 2021?

$4,800 Their AGI precludes Mabel, an active participant, from being able to make a deductible contribution. In some cases, the IRA rules allow an IRA deduction for individuals who are not active participants but whose spouses are. However, that option is phased out for 2021 if the couple's AGI is between $198,000 and $208,000. With a combined AGI of $200,000, they would be able to deduct $208,000 - $200,000 = $8,000; ($8,000/$10,000)*$6,000 = $4,800.

Ex. Richard, age 45, and his wife Betty, age 44, plan to contribute a total of $12,000 to their IRAs for 2021. They both work outside the home, and they file a joint income tax return. Richard is a teacher at the local high school and participates in a 403(b) plan. Betty's employer does not provide a retirement plan. They expect that their adjusted gross income for the year will be $130,000. What amount, if any, can they deduct for their IRA contributions?

$6,000 An individual is not denied a deduction for his or her IRA contribution simply because of the other spouse's active participation, unless the couple's combined AGI exceeds $198,000 (phasing out to $208,000 in 2021). Based on their AGI, Betty will be able to deduct a contribution of up to $6,000 to an IRA. Richard cannot deduct any of his IRA contribution because their AGI is beyond the 2021 phaseout range for active participants of $105,000-$125,000 for 2021. Because their combined AGI is too high for Richard to make a deductible IRA contribution, he should consider contributing to a Roth IRA. Their AGI is well below the start of the phaseout range for married people filing jointly who contribute to a Roth IRA.

Ex. Norman and Brenda Walker are married taxpayers filing jointly. They are both 44 years old. Norman earned $132 this year, and Brenda earned $100,000. Brenda is an active participant in the qualified plan offered by her employer, and she contributed $1,500 to her IRA for this tax year. How much can be contributed to a spousal IRA and deducted for Norman for 2021?

$6,000 The maximum deductible contribution to a spousal IRA for Norman is $6,000. The deductible amount phases out at AGI of $198,000-$208,000 (for 2021) for Norman, who is the nonactive participant spouse.

Ex. James and Doris Stewart, both age 40, will contribute a total of $12,000 to their IRAs for 2021. They both work outside the home, and they file a joint tax return. James is a teacher at the local high school and contributes to a TSA. Doris's employer has no retirement plan. Their adjusted gross earnings for this year will be $113,000. What amount can they deduct for their IRA contributions?

$9,600 Doris is entitled to deduct the full $6,000 spousal IRA amount and James is in the phaseout range for active spouses: $125,000 - $113,000 = $12,000; $12,000/$20,000 phaseout range = 0.6; 0.6 x $6,000 = $3,600; $3,600 + $6,000 = $9,600. Notice that the Stewarts are in the phaseout range for active participants. Also, one of the spouses is not an active participant in a qualified retirement plan. Thus, the nonparticipant spouse can deduct the full amount and the active participant can deduct at least something. Thus, $6,000 is too small. Also, $12,000 is too large because at least some of the active participant's ability is phased out.

Ex. James and Doris Stewart will contribute a total of $12,000 to their IRAs for this tax year. James is a teacher at the local high school and contributes to a TSA. Doris's employer has no retirement plan. Their adjusted gross earnings for 2021 will be $113,000 and they file a joint tax return. What amount, if any, can they deduct for their IRA contributions?

$9,600 Doris is entitled to deduct the full $6,000 spousal IRA amount. James is in the phaseout range for active spouses. $125,000 - $113,000 = $12,000; ($12,000/$20,000 phaseout range) = 0.6; (0.6 x $6,000) = $3,600; $3,600 + $6,000 = $9,600.

Ex. Ken and Barbie (both 31) file jointly. Both work, and their combined AGI is $112,150. This year, Ken's profit sharing account earned over $4,000, but the company made no contributions, Ken made no contributions, and there were no forfeitures. Barbie declined to participate in her company's defined benefit plan because she wants to accumulate and manage her own retirement money. (Her current accrued benefit at age 65 under the plan is $240 per month.) How much of their combined $12,000 IRA contribution can they deduct?

$9,680 Barbie's status is active. She cannot decline active status, even if she declines participation in a defined benefit plan. Ken's status is not active since he received no annual additions. His available IRA deduction is $6,000 and hers is $125,000 - $112,150 = $12,850; ($12,850/$20,000) x $6,000 = $3,855, which we bump up to the next higher $10, or $3,860. $3,860 + $6,000 = $9,860. Notice that the ten's digit is bumped up - not rounded up. For example, if the equation would have given $3,850.01, then the final answer would be $3,860.

Ex. Assume your client has a 5% bond, par value of $1,000, and 15 years to maturity. Comparable bonds are yielding 6%. What is the value of this bond?

$902. If the calculator is set for 1 P/YR, then all factors, other than FV, need to be adjusted for semiannual payments. The keystrokes would be: 1,000 [FV], 25 [PMT], 3 [I/YR], 30 [N], then solve for [PV] = -902. If the calculator is set at 2 P/YR, then [I/YR] is 6 and [N] is entered as 15 [SHIFT] [N].

What Determines Active Participant Status?

(1) defined benefit plan An individual is an active participant if the individual is eligible under plan provisions, even if the individual elected not to participate, the employer failed to make mandatory contributions, and/or failed to perform the minimum service required. (2) profit sharing, 401(k), or stock bonus plan An individual is an active participant if the individual's account received an employer contribution, an employee contribution, and/or a forfeiture allocation. c. How do an individual's retirement plan contributions affect active participant status? An individual who makes voluntary or mandatory retirement plan contributions is an active participant. d. How do investment earnings affect active participant status? An individual is not an active participant if only earnings (no contributions or forfeitures) are allocated to their account. e. To contribute to an IRA an individual must have earned income. Give some examples of income that is not considered "earned." Examples include unemployment compensation, passive income, deferred compensation, pension and annuity payments, Social Security, workers' compensation, and capital gains.

Ex. Gary reached FRA in 2020 and filed for his Social Security benefits. His wife, Mary, is 62 and wishes to file for spousal benefits when she turns 63 later in 2021. If Gary's full benefit is $2,000, what will Mary's benefit be?

$716.70 The first thing to do is determine Mary's FRA. She will turn 63 in 2021. Thus, she was born in 1958. FRA for someone born in 1958 is 66 + 8 months. Mary is entitled to 50% of Gary's full benefit amount as her full spousal benefit at her FRA. By filing early, Mary will receive a reduced benefit. If she files at age 63, she will be three years and eight months early. This is 44 months early. The reduction for the first 36 months is 25/36 of 1%, which equates to a 25% reduction. The remaining eight months are reduced by 5/12 of 1% per month. This is an additional 3.33% (8 x 5/12% = 3.33%). Thus, the total reduction will be 28.33% for starting at age 63 (44 months prior to age 66 + 8 months). So, her reduction will be 28.33% of Mary's spousal benefit of $1,000. $1,000 x 0.2833 = $283.30. Thus her final spousal benefit for starting at 63 will be $716.70 ($1,000 - $283.30). This question demonstrates the actual calculation required for a client situation.

Ex. Sam, age 62, begins receiving his Social Security income. His PIA is $1,500 per month. Because he has filed at age 62, his payment will be reduced by 25% to $1,125. His wife Linda, age 67, would like to begin spousal benefits. Her monthly income would be

$750. Linda has attained FRA, she is eligible for 50% of Sam's full PIA which is $750.

Ex. Ray purchased shares in Maxgrowth Mutual Fund on July 1 of the current year. The ex-dividend date is September 15. On October 15 of the same year, Maxgrowth paid ordinary dividends of $100 and long-term capital gain distributions of $900, but Ray had the distributions reinvested in the fund. Ray sold the shares on December 23 of the current year. How will these distributions be taxable to Ray?

$100 qualified dividend income, subject to long-term capital gain rates and $900 long-term capital gain The treatment of the capital gain income is determined by the mutual fund, regardless of how long the investor has held those shares. The dividend income may be taxed at long-term capital gain rates, if the holding period is met. In this situation, the taxpayer held the shares for at least 61 days of the 121-day period that begins 60 days before the ex-dividend date. The $100 dividends and the $900 capital gains distributions were subject to income taxes, so they would increase Ray's basis in the Maxgrowth fund shares. The mutual fund will document the capital gain or loss on an IRS Form 1099-B. While the capital gains distributions are accounted for from the perspective of the fund portfolio, mutual fund sales are accounted for from the investor's perspective. In this case, Ray sold his shares a year or less after his purchase, so his December 23 sale will be short-term.

Ex. Joan is a married taxpayer. She and her husband, Johnny, file jointly and have a combined AGI of $144,000. Johnny is covered by his employer's profit sharing plan. No employer or employee contribution was made for this plan year, but Johnny's account balance increased by $1,200 due to investment earnings. Joan does not have a plan where she works. If they contribute $12,000 to their IRAs for this year, what amount, if any, can they deduct?

$12,000 Because he's not active (there was no worker contribution, employer contribution, or reallocated forfeiture for this year), Johnny receives the full $6,000 deduction. The IRA deduction for Joan is also $6,000, since she is not active. The total deduction is $12,000.

Ex. Sally and Joe are married, filing jointly. They are both 45. Their combined AGI is $148,000, and they are both active participants in their employers' plans. Their plan is to first contribute the maximum to their deductible IRAs and then use the remaining available IRA contribution amounts for contributions to their Roth IRAs. How much will they be able to contribute to their Roth IRAs?

$12,000 Both are phased out from making deductible IRA contributions since both are active. A Roth IRA is not affected by active status. Sally and Joe can make the full Roth contribution ($12,000) since their AGI is below the Roth phaseout threshold for 2021 ($198,000).

Ex. Mary Goodwin's financial situation is as follows: Cash/cash equivalents $15,000 Short-term debts $8,000 Long-term debts $133,000 Tax expense $7,000 Auto note payments $4,000 Invested assets $60,000 Use assets $188,000 What is her net worth?

$122,000 Assets = $263,000; liabilities = $141,000, so net worth is $122,000. Taxes and auto note payments appear on the cash flow statement.

Ex. If an investor wants to accumulate $250,000 over the next 12 years, can invest $8,000 at the end of each year, and expects to earn an 11% compound return over the 12 years, what lump sum must she deposit today in the investment to meet her goal?

$19,521 The correct calculator inputs are $8,000, +/-, [PMT]; 11 [I/YR] 12 [N]; $250,000 [FV]; solve for PV = $19,521.

Ex. Charles will have $100,000 in his IRA on December 31, 2023. He would like to determine the amount that must be withdrawn under the RMD rules set out by the SECURE Act. He will turn 72 in 2024. What will his RMD be for 2024? (The Uniform Table factor is 25.6 at age 72.)

$3,906 $100,000/ 25.6 = $3,906.25, which rounds down to $3,906.

Ex. If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by their retirement date in 25 years (rather than an amount that grows with inflation each year), what level annual end-of-year savings amount will they need to deposit each year, assuming their savings earn 7% annually?

$31,621 Keep in mind that it says LEVEL and they provide you with a savings rate here. Set calculator "End" and "1 P/Yr" Inputs: FV = 2000000, i = 7, N = 25, PV = 0, then Pmt = $31,621

Ex. John Jorgenson is married and his spouse is not employed. They file jointly and their AGI is $114,700. Each has contributed $6,000 to an IRA. John waived participation in the defined benefit plan at work when he became eligible. What is the amount of their IRA deduction for 2021?

$9,090 $125,000 - $114,700 = $10,300; ($10,300/$20,000) x $6,000 = a $3,090 deduction for John since he is active. Even though he waived participation, being eligible for the defined benefit plan makes him active. His wife is allowed the spousal deduction of $6,000. Their total deduction is $9,090.

Taxation on Withdrawals from IRAs

Deductible: As it is under a number of retirement plans, a person who makes a withdrawal from an IRA must ask, "What is my basis in the account?" If only pretax dollars were contributed (the contributions were fully deductible), the owner has no basis in the account and all withdrawals will be fully taxable. Non-deductible: As it is under a number of retirement plans, a person who makes a withdrawal from an IRA must ask, "What is my basis in the account?" If only after-tax dollars were used (a nondeductible IRA), then the total of the contributions represents the owner's basis. Distributions are partially a return of capital and partially interest income. The portion of the withdrawals representing basis is tax-free.

In-Service Withdrawals for Pension Plans

Defined benefit, cash balance, money purchase, or target plans generally can make distributions only upon death, disability, separation from service, or after the attainment of age 62. (Separation from service includes retirement of the participant.) Defined benefit plans are not likely to allow in-service withdrawals due to the complex recordkeeping required. Typically, money purchase or target plans include provisions for in-service withdrawals after the plan's normal retirement age. This creates an option for the employee who elects to continue working past the plan's retirement age but who would like to begin tapping their retirement benefits

Arguments for Late Retirement

Defined contribution plans are displacing defined benefit pensions; the former favors longer careers. Deductions are made from Social Security benefits payable to a worker (and to his or her dependents) who has not attained his or her Social Security full retirement age—currently age 66-67 for persons born in 1943 and later, based on birth year —if the worker has excess earnings. In 2021, a person under the full retirement age loses $1 in Social Security benefits for every $2 earned above the allowable limit of $18,960 until the first day of the year the worker reaches full retirement age. In that final year, the person loses only $1 in Social Security benefits for every $3 earned above the allowable limit of $50,520. This reduction ends on the first day of the month the person reaches full retirement age. The delayed retirement credit for those who work past their Social Security full retirement age has been increased dramatically. The Social Security full retirement age has been increased to ages ranging from 66 to 67 for younger groups of American workers. The FRA (Full Retirement Age) for those born in 1960 or later is 67.

Cash Dividends

Distribution from earnings paid in the form of cash. Dividends received on any share of stock (including mutual fund shares) that is held for less than 61 days during the 121-day period that began 60 days before the ex-dividend date do not qualify for preferential treatment. The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. When counting the number of days the stock is held, include the day the stock was disposed of, but not the day it was acquired. Consider the following examples. Example 1. Karl Knight bought 5,000 shares of XYZ Corp. common stock on July 1. XYZ Corp. paid a cash dividend of 10¢ per share. The ex-dividend date was July 9. Karl's Form 1099-DIV from XYZ Corp. shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, Karl sold the 5,000 shares on August 4. Karl held his shares of XYZ Corp. for only 34 days of the 121-day period (from July 2, through August 4). The 121-day period began on May 10 (60 days before the ex-dividend date), and ended on September 7. Karl has no qualified dividends from XYZ Corp. because he held the XYZ stock for less than 61 days during the 121-day period.

Lump-Sum Distribution from Qualified Retirement Plan

Distributions from qualified plans, such as what Harold envisions, are fully taxable in the year in which they are received. Thus, if Harold received a $300,000 lump-sum distribution in a single year, the entire amount would be counted as taxable income in that year. If Harold was born before 1936, he should consult his tax adviser to determine if he is eligible for special forward averaging. Harold could avoid or minimize the tax. Rolling over the lump sum into an IRA would make the distribution nontaxable. Of course, any amounts withdrawn from the IRA would be taxable. If he does not choose to do a direct rollover, Harold could reduce the amount of his tax liability by receiving distributions from a life annuity or a fixed period annuity. He would then be liable only for the amount received each year.

Dodd-Frank Wall Street Reform and Consumer Protection Act

Dodd-Frank was the direct result of the Great Recession of 2008-2009. There was great concern that the global financial system had almost come to a halt, and there was a need to address systemic risk within the financial system. Dodd-Frank addressed the issue of "too big to fail" and required that banks meet certain capital requirements and go through stress tests to make sure they would be able to survive an unexpected shock to the financial system. Dodd-Frank also regulates derivatives. It has shifted derivatives trading from the over-the-counter (OTC) market to central clearing counterparties (CCPs) that facilitate the netting of swap contracts in order to reduce systematic risk. There are also investor protections in the bill, and the Consumer Financial Protection Board (CFPB) was established. Dodd-Frank also directed the SEC to look into a fiduciary standard that would apply to both investment advisers and broker-dealers. Finally, Dodd-Frank directed the SEC to look into a uniform fiduciary standard for both advisers and brokers, and the recommended rule proposals released in April 2018 continue to recommend that there be two standards—a suitability standard for brokers and a fiduciary standard for investment advisers.

Qualified Plans and Loan Offerings

Due to the tax implications associated with hardship withdrawals, taking a loan may be a better option for individuals who are in financial need. As long as a loan complies with the following IRC requirements, it will not be treated as a distribution and will not be subject to income tax or the 10% penalty on premature distributions: The term of the loan must not exceed five years, except if for the purchase of a primary residence, which may be for a longer period. Although there is no legal restriction on how long a retirement plan loan can be when buying a home, many plans choose to limit the repayment to 10 years. Loans must be available to all participants and beneficiaries on a nondiscriminatory basis. Hence, loans must not be available to highly compensated employees in greater proportions (as a percentage of account balance) than to nonhighly compensated employees. Loan repayments must be made at least quarterly on a substantially level amortization basis. Hence, "balloon deductions" are not allowed. Repayments are generally made through payroll, and if not repaid by termination of employment the loan may be considered a taxable distribution. The loan must be evidenced by a legally enforceable loan agreement or note specifying the amount of the loan, the term, and the repayment schedule. The amount of the loan typically may not exceed the lesser of $50,000 or one-half of the vested balance. The exact rules are: If the vested balance is under $10,000, then the entire vested balance is available for a loan. If the vested balance is between $10,000 and $20,000, then the available loan is $10,000 (which is greater than 50% until $20,000). If the vested balance is $20,000-$100,000, then the maximum loan is half the vested balance. The maximum retirement plan loan is usually $50,000, so having a vested balance greater than $100,000 generally does not impact the available loan balance. The exception to $50,000 being the maximum is for a qualified disaster loan. When a retirement account loan is taken due to a federally declared disaster, the $50,000 loan cap is replaced with $100,000. The maximum available loan balance is always reduced by the highest loan balance in the previous 12 months. For example, if a person had a vested balance of $120,000, their maximum loan would be $50,000. However, if they had a retirement plan loan with the highest balance in the last 12 months of $5,000, then the maximum loan available would be $45,000. A plan that offers loans must have a written loan policy in effect so that loans are made in accordance with plan provisions, and the loan policy. When a loan is taken, securities are sold and funds are actually removed from the participant's account. The amount repaid includes a "commercially reasonable interest rate"—typically prime. Interest payable on a loan is considered a personal expense of the borrower and is not deductible for income tax purposes. The SECURE Act bans retirement plan loans from being offered using credit cards or similar arrangements.

Are Early Retirement Plans a Good Deal?

Early retirement plans represent a set of pluses and minuses for the eligible employee. These must be analyzed in a structured format that considers the monetary value of those things that will change if the employee accepts the plan. For example, the employee will lose regular salary and anticipated bonuses but will gain pension plan payments and/or a cash severance. Because gains and losses will occur over a period of time, they are analyzed best if they are reduced to their present values. When summed, they represent a net present value that is either positive or negative in terms of the employee's interests. Alternatively, the client who feels in danger of losing her job after the voluntary reduction has past can calculate a breakeven time. This is the period at which the worker will receive the same amount of money from the employer as received by the retirement offer. If the client loses her job before the breakeven time, the retirement offer was better. If the client continues to be employed after the breakeven time, refusing the offer meant getting more money from the employer. On the other hand, losing the job after the voluntary retirement offer has expired will mean the worker will have less post-employment money to tide her over. Also, it is easier to explain to a possible new employer that you took a firm-wide early retirement offer than to explain the company laid you off.

Bridge Jobs and Later Retirement

Early retirement, or at least full retirement, is on the decline. Semi-retirement, or continuing to work "bridge" jobs, is the new norm. Many retirees continue to work part-time jobs after being laid off or being passed over for promotions in favor of younger employees. Highly compensated employees approaching retirement are the exception; they tend to work longer than their lower-paid peers.

Tax Deductibility & IRAs

Ex. Conrad, a 45-year-old single individual in 2021 who was not covered by an employer-sponsored retirement plan, figured that his taxable income for this year would be $60,000. Because he was eligible to contribute $6,000 to an IRA that year and deduct that sum from his taxable income, he did so, thereby lowering his taxable income to $54,000. His federal marginal tax rate was 22%, so his contribution reduced his tax bill that year by $1,320 ($6,000 × 22%).

Example:

Example. Fred and Wilma's annual retirement income need (in today's dollars) is $70,000. They anticipate annual Social Security benefits of $36,000, and Wilma will receive a small government pension (adjusted each year for inflation) for $4,000 a year (in today's dollars). Their retirement income deficit can be calculated as follows: $70,000 - ($36,000 + $4,000) = $30,000. This means that, expressed in today's dollars, their retirement income deficit is $30,000. Do the rest on paper. See the example on Ch. 4 on Module 1.

Basis on a Home

Example. John and Susan purchased their primary residence for $200,000 in 2002. In 2021, they sold the home for $800,000, net of sales expenses. Their basis in the asset was the $200,000 spent acquiring it. At first glance, the couple would have a $600,000 capital gain on the sale ($800,000 less the basis of $200,000). However, the couple had made a number of capital improvements to the home over the years: a room addition, a second bathroom, a remodeled kitchen, and so forth; these involved expenditures of $80,000. Capital expenditures (improvements) such as these can be used to increase the basis. Thus, John and Susan have an adjusted basis of $280,000. They recalculate their capital gain on the sale as follows: $800,000 - $280,000 = $520,000 Since the couple qualifies for the $500,000 exclusion on the sale of a primary residence, they must pay tax on only $20,000 ($520,000 - $500,000).

Inflation-Adjusted Return

Example. Let's continue with Fred and Wilma. We have already determined that they will need $62,813 at the beginning of their first year of retirement, and we are using an assumed inflation rate of 3%. Let's further assume that the planner, Fred, and Wilma want to plan for a 30-year retirement period, and have also determined that 7% is a reasonable rate of return, given the investment mix of Fred and Wilma. As we saw above, we don't just take the difference between the 7% and 3% to come up with an inflation-adjusted return; we need to use the inflation-adjusted return formula: The keystrokes for this calculation on your financial calculator are as follows: 1.07 ÷ 1.03, -, 1, x, 100 = 3.8835%. You then simply press i/YR to enter this as the applicable inflation-adjusted yield. Now that we have the inflation-adjusted return, we can complete the calculation. Again, make sure this is done in the "BEGIN" mode: 62,813 PMT 30 N 3.8835 I/YR PV = 1,144,480 -- Living off only the cash flow of an asset pool is a strategy of capital preservation. Going back to our example, let us assume that Fred and Wilma do not want to exhaust their funds, but instead want to use the capital preservation approach and have the full $1,144,480 of principal left at the end of their 30-year retirement period. It is very simple to calculate the additional amount of savings needed. You would simply enter $1,144,480 as a future value, and then discount it back 30 years at the estimated rate of return: 1,144,480 FV 30 N 7 I/YR PV = 150,347

Ex. The "suitability rule" is one of the key rules of the

FINRA Conduct Rules require that recommended investments be suitable for clients.

Medicaid Spend Down

First, there is a five-year lookback period to review an individual's assets to determine Medicaid eligibility. If the individual has made a transfer of assets within the past five years, Medicaid will require the individual to contribute an amount equal to what was transferred. The following are examples of what a Medicaid applicant may be able to keep after a "spend-down": less than $2,000 in liquid assets home (if they intend to return, or if a spouse or disabled child live there) furnishings and personal belongings car prepaid burial assets $1,500 face value life insurance limited current income Properly structured annuities are exempt here; annuities that are not immediate, complete payout at life expectancy, substantially equal amounts, and the state must be named as first death beneficiary unless the recipient has a spouse or child (then the state is contingent).

Term vs Cash Value Life Insurance

For most individuals, term insurance is the better alternative: Low cost High cash-value premiums can lead to less coverage than you actually need Cash-value insurance has tax advantages. Growth of the cash-value is tax-deferred. Life insurance is not considered part of your estate. Term life insurance provides a death benefit equal to the face value of the policy if death occurs while the policy is in force. Cash value life insurance, in contrast, provides a death benefit and an element of tax-deferred savings. Though initially more expensive than term life per $1,000 of death benefit coverage, cash value life insurance relieves the client's family of the financial risk of an untimely death, while also representing a pool of financial value that increases, tax-deferred, with time and with each premium payment

Substantially Equal Periodic Payments (Section 72t)

For substantially equal periodic payments to be exempt from the 10% penalty, these payments: must continue for at least five years or until the participant reaches age 59½, whichever is later and the distribution amount may not be altered during this period This means that individuals beginning distributions at age 40 must continue them until at least age 59½, since this is the later of the two choices. Someone who begins distributions at age 58 must continue distributions until at least age 63, the later of the two choices. Payments will qualify as a series of "substantially equal periodic payments" if they are made according to one of the following three methods: Method 1: Required minimum distribution method. Using Method 1, the annual payment is determined by dividing the account balance for the year by the applicable life expectancy obtained from the chosen life expectancy table. The participant or IRA owner must select the table from among the three alternatives: the RMD Single Life Table, the RMD Joint and Last Survivor Table, and the Uniform Table. Each year's result is based upon the life expectancy factor for that year and the account balance for that year. The payments are recalculated each year. When using this method, there is not a deemed modification of the series of substantially equal payments if the amount of the payment changes, as long as the method remains unchanged. The life expectancy factor used is the factor obtained by entering the selected table at the age the participant attained on their birthday in the distribution year. If the joint life table is used, the beneficiary's age on their birthday in the distribution year is used. Once selected, the table may not be changed. Method 2: The fixed amortization method. Under Method 2, the annual payment is determined by amortizing in level payments the account balance over a specified number of years (determined from the selected table) and the elected interest rate. The interest rate must be less than or equal to 120% of the federal mid-term rate (the "IRS Section 7520" rate—0.6% for December 2020) for either of the two months prior to the month the distribution begins. Once the initial distribution amount is determined it cannot be changed; the payment is the same in all subsequent years. Method 3: The fixed annuitization method. This method determines the payment by dividing the account balance by an annuity factor that is the present value of an annuity of $1 per year, beginning on the participant's or owner's age in the first distribution year. The annuity factor is derived by using the mortality table in Appendix B of Revenue Ruling 2002 and selecting the interest rate. Once the first payment is determined, it remains unchanged in the subsequent years.

Collecting Social Security

Full Retirement Age (FRA) By starting your Social Security benefits at full retirement age, you will receive 100% of your primary insurance amount (PIA). Before FRA While benefits can begin as early as age 62, if you collect Social Security before your FRA, you will receive a permanently reduced benefit. The reduction is calculated as follows: Payment is reduced 5/9 of 1% for each month filed before FRA, up to 36 months, Payment is reduced 5/12 of 1% for each month filed early in excess of 36 months. After FRA If you delay receipt of benefits until after your FRA, you will receive a payment in excess of that which you would have otherwise received. For those just reaching full retirement age, this increase equates to an 8% of PIA raise per year for each year you delay filing after your FRA, up until a maximum of age 70. Social Security refers to this raise as a delayed retirement credit. Paying Back Social Security: Let's say an individual realizes that they took social security too early, what happens? Claimants have 12 months from the date they filed their original claim to pay back all payments, and they can then refile for increased benefits at a later date. This strategy can be employed to increase benefits by waiting past FRA and then receiving delayed retirement credits.

Fully Insured vs. Currently Insured

Fully: Having at least one credit for every year since turning 21 with a maximum of 40 credits; that's 10 years of work. One must be fully ensured to receive these retirement benefits barring special exceptions due to disability or widows age 60+ Currently: Have at least 6 credits in a 13 credit period preceding the event where eligibility is sought. Child benefits, mother or father benefits, and the lump sum death benefit become available.

Social Security FRA Long Example

Gary reached FRA in 2020 and filed for his Social Security benefits. His wife, Mary, is 62 and wishes to file for spousal benefits when she turns 63 later in 2021. If Gary's full benefit is $2,000, what will Mary's benefit be? The first thing to do is determine Mary's FRA. She will turn 63 in 2021. Thus, she was born in 1958. FRA for someone born in 1958 is 66 + 8 months. Mary is entitled to 50% of Gary's full benefit amount as her full spousal benefit at her FRA. By filing early, Mary will receive a reduced benefit. If she files at age 63, she will be three years and eight months early. This is 44 months early. The reduction for the first 36 months is 25/36 of 1%, which equates to a 25% reduction. The remaining eight months are reduced by 5/12 of 1% per month. This is an additional 3.33% (8 x 5/12% = 3.33%). Thus, the total reduction will be 28.33% for starting at age 63 (44 months prior to age 66 + 8 months). So, her reduction will be 28.33% of Mary's spousal benefit of $1,000. $1,000 x 0.2833 = $283.30. Thus her final spousal benefit for starting at 63 will be $716.70 ($1,000 - $283.30). This question demonstrates the actual calculation required for a client situation.

Ex. Which one of the following individuals would be best served by a $5,000 Roth conversion?

George, a 28-year-old father of two whose wife is completing school; their income is $24,000 George is young, so converting now would give him the longest time for the Roth account to grow and thus produce tax-free income in retirement. Second, George's gross income is below the standard deduction for a couple married filing jointly. Also, they will receive two child tax credits and an earned income credit. Thus, the conversion will not be income taxed. The others are older and subject to income tax now. Rachel does not need to convert because she does not seem to be on a path that will make her pay income taxes in retirement when she claims her monthly benefit.

Determining Goals

Goals need to be specific, sometimes multiple.There must be clear time horizons and amounts. These goals must be prioritized since there may be insufficient resources to accomplish them. The typical hierarchy of financial goals are: 1. basic needs 2. safety 3. managing finances (debt, mortgages) 4. esteem (vacations, travel, etc) 5. self-actualization (financial freedom)

Ex. Harry, who is 34 years old, contributed $2,000 to a Roth IRA six years ago. By this year, the investments in his account had grown to $3,785. Finding himself in a financial bind, Harry is now compelled to withdraw $2,000 from this Roth IRA. What is the tax and penalty status of this withdrawal?

Harry does not have to pay any tax or penalty on the $2,000 distribution, even though he is only 34. All Roth IRA contributions are made with after-tax funds, and contributions are considered to be withdrawn first, tax-free, then earnings. Also, the IRC rules allow the aggregation of all Roth IRAs for this calculation. Penalties would apply only to the gains the account experienced or withdrawals of converted amounts within five years of the conversion.

Ex. Charlie contributed $2,000 to Roth IRA 1 last year, when he was age 24, and $2,000 to Roth IRA 2 this year. Two years from now, Roth IRA 1 will have a balance of $2,650, and Roth IRA 2 will have a balance of $2,590, and Charlie will close Roth IRA 1, receiving the balance of $2,650. Which one of the following statements best describes his tax and penalty status for that year?

He will not pay taxes or a penalty. The distribution is not qualified because Charlie is under age 59½, not disabled, not dead, or not making a first-time home purchase and he is withdrawing the money before the waiting period of five tax years. Withdrawals within five years are not prohibited, but taxation may occur and penalties may apply in some cases. None of this withdrawal, however, is included in Charlie's taxable income because the $2,650 sum is less than the aggregate total of his contributions ($4,000). Also, no penalty applies because the withdrawal is accounted for as coming from his contributions.

Ex. Which of the following are true statements about the level of trust in the financial services industry according to different major studies? The trust level of elites has recovered from the lows of the Great Recession, but the mass population's trust level is still low and has not recovered as much as it has for the affluent. Just over 50% of executives at financial firms feel the need for flexible ethics to get ahead at their firms. Trust comes far below expertise in the eyes of prospects when they are looking for an adviser. The financial services industry enjoys a high level of trust in comparison to most other industries when rated by the American public.

I and II. According to different the Edelman Trust Barometer, the trust level for the affluent has mostly recovered from the Great Recession, but the level of trust for the rest of the population is far lower. Also, 53% of executives reported to the CFA Institute that their career progression would be hindered if they were not flexible in their ethics. On the other side, no one has felt thankful after dealing with a financial services person whose "flexible ethics" misled them. Stories about this and other ethical lapses have led to the financial services industry receiving low marks in trustworthiness.

Ex. An income-tax-penalty-free distribution cannot be made from a tax-sheltered annuity (TSA) until the employee does which of the following? separates from service after attaining age 55 attains age 55 becomes disabled or dies takes a distribution under most hardship withdrawal rules

I and III Penalty-free distributions can be made from a TSA or 401(k) when an employee separates from service after attaining age 55, attains age 59½, becomes disabled or dies, or takes a hardship distribution for deductible medical expenses only. All other hardship withdrawals are subject to early withdrawal penalty rules. Attaining age 55 means the worker is 55 on December 31 of the year of separation-not that the worker was 55 on the day of separation.

Ex. Which of the following are correct statements about the capital utilization strategy? It produces an annual retirement income over a finite number of years. Assuming the yield remains the same, the larger the retirement income that is paid, the shorter the number of years over which it will be paid. When the capital utilization approach is used, the planner must be careful in making assumptions about the life expectancy of the client. The effect of taxes on retirement savings and distributions should be considered when the before-tax approach is used to calculate the future value of retirement assets.

I, II, III, and IV

Ex. Which of the following types of information are important to gather from a client prior to developing retirement planning recommendations? his or her desired age of retirement the client's assumption for the long-term rate of inflation investments the client prefers not to use number of children client and spouse intend to have

I, II, III, and IV

Ex. Which of the following are correct statements about the legal requirements for a loan to a participant from a retirement plan? The term of a loan for a medical emergency must not exceed five years. Loans from SEP IRAs are not permitted. The term of a loan used to acquire a principal residence may exceed five years. Loans from a SIMPLE 401(k) plan are permitted.

I, II, III, and IV. All of the statements are true. The term of most qualified retirement plan loans must not exceed five years; however, loans to acquire the participant's principal residence may be for a longer (unspecified) period. If a loan requiring repayment within five years is not repaid in five years, it may be treated as a distribution and taxed (and penalized) as such. Loans from IRAs, SEP IRAs, and SIMPLE IRAs are not permitted under current tax law; however, loans from a qualified plan, including a SIMPLE 401(k) plan, are permitted.

Ex. Which of the following statements accurately describe basic provisions of Medicare Part B? Coverage includes benefits for physicians' services. Individuals who are eligible for Part A are automatically eligible for Part B. Coverage includes benefits for inpatient hospital services. Participants pay a monthly premium.

I, II, and IV Medicare Part B includes coverage for physicians' services; Part A covers hospital charges. Part A is provided to eligible individuals at no charge, but participants must pay a premium for Part B. Individuals who are eligible for Part A are automatically eligible for Part B, and receive it if they pay the related premium.

Ex. Which of the following are examples of the second step of the retirement planning process? prioritize goals disclose compensation arrangements examine a person's tax situation determine important time horizons

I, III, and IV The second step in the retirement planning process is to gather client data, including goals and expectations. The first step is to establish and define the client-counselor relationship, which includes disclosing the counselor's compensation arrangement.

Your client has asked you what sources exist for long-term care insurance. Which of the following are generally considered potential sources for the funds to cover at least some of the cost of long-term care (LTC)? Medicaid health insurance Medicare group long-term care insurance offered through employers

I, III, and IV These three are possible sources of LTC except health insurance. Medicaid and long-term care insurance provide recipients with benefits such as nursing home care. Medicare provides only 20 days of skilled nursing care at full cost and 80 days thereafter with a substantial copay, in only a limited number of situations. It is designed only to provide temporary care while patients improve enough to go home, but it does provide some level of LTC coverage.

Ex. Which of the following are key obligations a broker-dealer must meet to satisfy Regulation Best Interest? act in accordance with the fiduciary standard exercise "reasonable diligence, care, and skill" when recommending transactions make "fair and considerate" disclosure of material facts regarding the investment at or before the making of a recommendation to an institutional client a broker-dealer must have and enforce written policies and procedures that identify conflicts of interest and either eliminate or disclose these conflicts

II and IV. A broker-dealer must exercise "reasonable diligence, care, and skill" in recommending transactions and have policies and procedures that address conflicts of interest by either disclosing or eliminating them. Regulation Best Interest is designed to maintain the two approaches in the marketplace: the sales-based and advice-based channels. One of the main points of Regulation Best Interest is to maintain a suitability approach and a fiduciary approach. Disclosure is required to be "full and adequate" disclosure of all material facts concerning its relationship with a retail customer before making a recommendation.

Ex. Under the Affordable Care Act, "Platinum" plans offered on the exchanges vary in the services that they provide. how the insured and insurer share the costs of care.

II only.

Ex. Which of the following are correct statements about income replacement percentages? Income replacement percentages are typically much higher for those with higher preretirement incomes. Income replacement percentages vary between low-income and high-income retirees. Income replacement ratios should not be used as the only basis for planning. Income replacement ratios are useful for younger clients as a guide to their long-range planning and investing.

II, III, and IV The inverse of Option I is true. Those with a lower preretirement income typically need a much higher income replacement percentage in retirement.

Ex. Which of the following are correct statements about survivor benefits from a qualified retirement plan? Profit sharing plans that accept direct transfers from pension plans are not required to provide a qualified joint and survivor annuity (QJSA). The QJSA may be waived if the spouse gives written consent to the effect of the election and the naming of another beneficiary. Defined benefit, money purchase, cash balance, and target benefit plans must provide a QJSA. The QJSA payable to the spouse must be at least 50%, but not more than 100%, of the annuity amount payable during the joint lives and actuarially equivalent to a single life annuity over the life of the participant.

II, III, and IV The spouse may waive the QJSA option via written consent, which includes acknowledging the effect of the waiver and the naming of another beneficiary. If the participant and spouse have been married for less than one year, the plan does not have to provide a survivor annuity. The QJSA must be actuarially equivalent to a single life annuity over the life of the participant and at least 50%, but not more than 100%, of the annuity payable during the joint lives of the participant and spouse. Profit sharing plans that accept direct transfers from pension plans are subject to the QJSA requirements.

Ex. Which of the following statements regarding the suitability standard and the fiduciary standard are correct? The suitability standard takes into account all relevant factors. The fiduciary standard accounts for only the client's risk profile, age, objectives, and time horizon. Disputes under the suitability standard are addressed in public courts while disputes under the fiduciary standard are addressed using arbitration. The main categories under the suitability standard are registered reps and agents. The main categories under the fiduciary standard are registered investment advisers and trustees. The major regulators of under the fiduciary standard are the SEC, DOL, and the states. The major regulators for the suitability standard are FINRA and the states.

III and IV. The main categories under the suitability standard are registered reps and agents. The main categories under the fiduciary standard are registered investment advisers and trustees. The major regulators of under the fiduciary standard are the SEC, DOL, and the states. The major regulators for the suitability standard are FINRA and the states. The fiduciary issues are settled in public courts while suitability disputes are generally settled through arbitration. The suitability standard takes into account all relevant factors. The fiduciary standard accounts for only the client's risk profile, age, objectives, and time horizon.

Types of Conversions

IRA to Roth IRA Conversion: 60-day rollover (indirect): The individual accepts payment and redeposits the distributed assets within 60 days. Trustee-to-trustee transfer (direct) Same trustee transfer: The money stays within the same institution. The individual simply sets up a Roth IRA account with the trustee holding the traditional IRA, and then directs them to move the money to the Roth IRA. Qualified Plan, 403b, 457 to Roth IRA Conversion: request a direct transfer of an eligible rollover distribution (direct rollover transfer) to a Roth IRA Converted funds are subject to ordinary income tax at the time of conversion (except to the extent they represent a return of after-tax contributions) but are not subject to the 10% early withdrawal penalty. Example. Lucy's MAGI is $42,000. She can convert her traditional IRA (balance of $142,000) to a Roth IRA. The tax due will be based on her new MAGI of $184,000. Lucy's boyfriend, Milo, has a MAGI of $333,000. Milo may convert his IRA to a Roth IRA because he can do a conversion regardless of his MAGI. That was not always the case in the past.

In-Service Withdrawals for Profit Sharing Plans and 401k

IRS guidelines generally permit 401(k) and other profit sharing plans to offer in-service withdrawals. In-service means you are still working for the employer sponsoring the plan. It is important to note that the plan document must specifically allow this type of in-service withdrawal. If a profit sharing plan provides for in-service withdrawals, generally, no special emergency or hardship conditions are required. The plan may, however, impose such restrictions. It may also require attainment of age 59½ or a service requirement (usually two to five years), or both. Plan provisions also specify the portions of the participant's account that may be available for in-service withdrawal—usually, only the vested portion of the employer's contributions (matching and nonelective contributions) prior to age 59½. Taking advantage of an in-service withdrawal is not only a way of obtaining cash from a plan, but it may also offer a good opportunity to expand the investment options available to your client if choices are limited by their employer-sponsored plan. By doing a direct or 60-day rollover of an in-service distribution to an IRA, an individual will typically find that they have more funds to choose from, often with lower investment fees. They may also have more freedom when naming beneficiaries and to create a customized income plan at retirement.

Windfall Elimination Provision

If any part of your government pension is based on work not covered by Social Security, you may be affected by the Windfall Elimination Provision. For 2021, the reduction is $498/month or one-half of the monthly pension benefit. This is phased out for individuals who have 30+ years of substantial earnings in a covered position.

Government Pension Offset

If you receive a government pension based on work not covered by Social Security, your Social Security spouse's or widow(er)'s benefits may be reduced. The GPO provision will reduce the spousal or survivor benefit by two-thirds amount of the pension. Ex. Carla is collecting $600 per month from a government pension and is also eligible to receive a Social Security spousal benefit of $1,000 per month. Due to the GPO, her Social Security spousal benefit will be reduced to ____________. Due to the GPO, her Social Security spousal benefit will be reduced by 2/3 of her state government pension amount, or $400. $1,000 - $400 = $600.

Earned Income Restrictions

In 2021, if you are under your FRA and working, you will lose $1 in Social Security benefits for every $2 earned above the earnings cap of $18,960 (indexed to inflation). In the year in which you reach your FRA this reduction is reduced to $1 for every $3 earned above the earnings cap of $50,520 for 2021 . Once you obtain your FRA you may continue to work and earn money without it impacting your Social Security benefit.

Ex. Which one of the following statements regarding Henry, who recently married for the first time, is correct?

In a community property state, Henry's earnings from his job subsequent to the date of his marriage will be considered community property. Only property acquired after marriage is considered community property unless separate property acquired before marriage is later commingled with community property. Community property does not have a right of survivorship feature. Also, spouses can own property in their sole names in a community property state. Items received during the marriage by gift or inheritance are separate property.

Real Estate

In general, real estate has offered a respectable average rate of return. However, poor liquidity, high transaction costs, and tax-reporting responsibilities are major disadvantages. And real estate can become overvalued like any asset, leading to negative returns. For those who directly own property, few can afford to diversify across several properties and locations. Many of these disadvantages are addressed through REITs, which own various properties (for equity REITs), mortgages (for income REITs), or both (for hybrid REITs) and trade on organized exchanges and over the counter. One aspect of real estate that is applicable to retirees is the reverse mortgage, which provides cash flow to a homeowner with significant equity in his or her home.

Four Key General Obligations that BDs Meet Under REG BI

In order to comply with Regulation BI's general obligation best interest rule, broker-dealers are required to meet four key obligations: disclosure reasonable care conflict of interest compliance

Ex. The Simpsons need to save an additional $300,000 (in retirement year 1 dollars) to build a sufficient retirement fund to support their targeted retirement lifestyle. They expect to earn a 7% after-tax return on their retirement savings and want to assume a 5% long-term inflation rate. Their preference is to allocate a level annual savings amount to build this fund. What level annual end-of-year savings amount will the Simpsons need to deposit at the end of each year during their 20-year preretirement period?

In the level payment calculation, inflation is irrelevant. Calculator inputs are: $300,000 [FV], 20 [N], 7 [I/YR]; solve for [PMT] (with calculator set for end-of-year payments) = $7,318. Notice that there was not a need to use the inflation rate because the payment was level and not a serial payment. Also, the goal was not stated in terms of "today's dollars" or "inflation-adjusted dollars."

Ex. In long-term care insurance policies, "benefit trigger" refers to an event or condition that must occur before benefits can be paid. These include all of the following except

Inability to take a walk Benefit triggers may be physical (e.g., inability to bathe, dress, or eat) or cognitive (e.g., inability to think, reason, or orient). Normally, insurers require that more than one activity of daily living exist before benefits are triggered. Cognitive impairment is not an activity of daily living and will trigger LTC benefits on its own. Inability to work does not trigger benefits in a long-term care policy. That would be a disability policy. Also the inability to take a walk is not an ADL.

Medicare Part A Enrollment Periods

Individuals not receiving Social Security benefits and otherwise eligible for Medicare should enroll in Part A and/or Part B during what is referred to as the initial enrollment period. This is a seven-month window: the three months prior to turning 65, the birthday month, and the following three months. Individuals who attain age 65 but are still working and are covered under their employer's group health coverage have eight months following the first month after this group coverage ends to enroll in Medicare Part A and/or B. This period is referred to as the special enrollment period, and enrollment during this window requires documentation that the individual was previously enrolled in an employer-sponsored plan. If an individual misses the initial enrollment period, penalties will begin to accrue. The penalty is equal to 10% of the premium amount for every 12-month period during which they could have signed up but didn't. This is a cumulative penalty. Those who do miss their initial enrollment can enroll during the general enrollment period, which runs from January 1st through March 31st each year. Coverage would begin July 1st.

Back-Door Roth IRAs

Individuals who are prevented from making deductible contributions to a traditional IRA or after-tax contributions to a Roth IRA due to their AGI have the option of making a nondeductible IRA contribution. Because there is no AGI limit on a taxpayer's eligibility to convert funds held by a traditional IRA into a Roth IRA, an individual can convert nondeductible IRA assets into a Roth IRA. Of course, the individual must pay any applicable income taxes on gains in the account in the year of conversion. Also, the existence of a deductible IRA complicates the issue, as a portion of the deductible IRA will be treated as converted also.

Who Can Have an IRA?

Individuals who receive earned income or alimony from divorce settlements prior to 2019, and who are not active participants in employer-sponsored qualified retirements plans, SEP, or SIMPLES, can contribute up to $6k/year regardless of AGI. Earned income, according to the IRC definition, includes the following: salaries, fees, bonuses, and commissions an individual receives as a result of services performed (W-2 income, Schedule C net income, or K-1 income from a partnership if the partner is a material participant) taxable alimony from divorce settlements prior to 2019. (As a result of TCJA, alimony from divorce settlements in 2019 and beyond are no longer earned income to the recipient nor tax deductible by the payor) Earned income does not include the following: unemployment compensation passive income, such as interest, dividends, and pension distributions capital gains deferred compensation (until it is taxed) amounts received as pension or annuity Social Security income workers' compensation income from the sale of property rental property income, unless this income is derived from a personal-service business

Ex. The amount paid from a reverse mortgage can come in any of the following forms except

Interest Only

Ex. Which one of the following statements best describes a golden parachute plan?

It is an arrangement between an employer and an executive that will provide the executive with severance benefits if the employer is sold and the new owner fires the executive. A golden parachute is an agreement between an executive and his or her company requiring the company to pay certain benefits in the event of a change in control of the company. The agreement, therefore, provides a guarantee of financial security to the executive in the event of a takeover. The agreement typically provides severance pay, which takes the form of cash, stock, compensation, extra pension benefits, medical and life insurance, other fringe benefits, and various combinations of all of these benefits. The other choices describe nonqualified deferred compensation benefits.

Ex. Jennifer recently separated from service with Acme Inc. at age 52, and rolled her qualified plan lump sum into a new IRA. She had been a plan participant for 12 years. This year, she began working for a new employer that provides a profit sharing plan for employees. Jennifer will be eligible to participate in her new employer's profit sharing plan in June of next year. Which one of the following statements describes an option that will be to Jennifer's benefit?

Jennifer should use the direct rollover to roll the entire IRA over into her new employer's qualified profit sharing plan in accordance with tax requirements and plan provisions if the plan allows her to do so and allows for loans. If the qualified plan allows for loans, rolling the IRA into the qualified plan would give her a resource to meet a financial need without incurring income tax or a tax penalty. Forward-averaging treatment is not available on any distribution from an IRA, but that point is moot because Jennifer was not born before January 1, 1936. Jennifer would not qualify for capital gains treatment since all distributions from IRAs and qualified plans are taxed as ordinary income. Taking a current distribution from the IRA would result in a current tax liability.

Ex. Which one of the following statements regarding different forms of property co-ownership is correct?

Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and community property (CP) are all forms of co-ownership that can be used by a husband and wife. JTWROS can be used by anyone, including spouses; only spouses can use TBE and CP. CP requires the asset to go through probate. TBE requires the co-owner spouse to consent before the other spouse can sell his or her interest. This is unique to holding an asset as TBE. For example, a couple holding an asset as TBE is a good idea if one spouse has an addiction problem (gambling, drugs, etc.). T.O.D. and P.O.D. accounts are not completed gifts. They do not give the person named in the T.O.D. or P.O.D. any rights in the asset until the current owner dies.

Ex. David began receiving Social Security benefits in June 2021. He later learned that he should have delayed receipt of his benefits until a later age. He has until _______ to pay back all payments and refile for increase benefits at a future date.

June 2022.

Ex. Wally and Kim, a married couple with an average life expectancy, have a retirement budget of $6,000/month. While they are both alive their Social Security and Kim's military retirement will pay $4,500/month. Wally's IRA is sufficient to generate $1,505/month as a lifetime annuity with the features they need. What Retirement Level have they achieved?

Level 1. If Wally and Kim annuitize their entire IRA, they will have an income sufficient to meet their retirement budget. The good news is that they will have the income for the rest of their lives; however, they will have very little in reserve and inflation will be a problem, especially over time. Still, annuitizing the money protects them against running out of income. It also can help them say no to children and grandchildren asking for money they do not have. While annuitizing all their retirement assets has many downsides, at least they have achieved Level 1 retirement preparedness according to this model.

Ex. Which one of the following statements regarding the uses of life insurance in estate planning is false?

Life insurance benefits will always be in that person's taxable estate if the deceased is the person insured. Life insurance benefits when the deceased is the insured person will not always be the decedent's taxable estate. First, the deceased might not be the owner of the life insurance policy. For example, the owner of the policy could always have been the decedent's spouse or child. Also, the policy might have been given away more than three years before the death. In these cases, the life insurance policy would not be in the decedent's gross estate in the first place. Thus, the policy could not be in the taxable estate. Also, if the deceased owned the life insurance policy and the beneficiary of the policy was a spouse or charity, then the death benefits would not be estate taxed due to the marital or charitable dedcution. Life insurance is often used to provide estate liquidity needed to pay funeral expenses, medical expenses of a final illness, probate costs, living expenses of survivors, and estate taxes when the applicable credit will not cover the taxes due. Insurance can also facilitate the transfer of a business by providing the funding mechanism for business buy-sell agreements. Cash from a life insurance policy is always a welcome asset to the beneficiaries.

Ex. Which one of the following assets would not be included in a decedent's probate estate?

Life insurance proceeds received by a named beneficiary from a policy on the decedent's life Life insurance proceeds paid to a designated beneficiary pass by virtue of contract provisions in the policy that act as a will substitute. Therefore, probate is avoided. Any property received by a will provision or a provision of the intestacy statutes would be considered probate property. If there is no living primary or secondary/contingent beneficiary of a retirement account or life insurance policy, then the assets are in the deceased owner's probate. There is no other way to determine who the new owner of the asset would be.

Medicaid

Medicaid is a joint federal and state program that picks up the deductible and copayments ordinarily paid by Medicare enrollees. 6.2. Who is eligible for Medicaid benefits? Eligibility in Medicaid is limited to certain individuals with low incomes. Individuals are generally eligible for Medicaid if they meet the requirements for the Aid to Families with Dependent Children (AFDC) program. Children under age 6 whose family income is at or below 133% of the federal poverty level (FPL)—the FPL percentage amount is set by each state, resulting in what is often confusing disparity. Pregnant women whose family income is below 133% of the FPL (services to these women are limited to those related to pregnancy, complications of pregnancy, delivery, and postpartum care). Supplemental security income (SSI) recipients in most states (some states use more restrictive Medicaid eligibility requirements that predate SSI). Recipients of adoption or foster care assistance under Title IV of the Social Security Act. Special protected groups (typically individuals who lose their cash assistance due to earnings from work or from increased Social Security benefits, but who may keep Medicaid for a period of time). All children who are under age 19, in families with incomes at or below the FPL. Certain Medicare beneficiaries.

Medicare in LT Care

Medicare does not provide much coverage for long-term care. At the most, it will cover some of the cost of staying in a skilled nursing facility or at-home care that follows the release from a covered hospital stay. Even in these cases, the number of covered nursing home days and hours-per-day of at-home care are limited.

Medigap Insurance

Medigap insurance aims to fill many of the gaps between the costs of health care and the coverage provided by Parts A and B. To help consumers make sense of a variety of competing insurance plans—which cover some charges and not others—these policies fall into 10 standardized packages labeled A through N (E, H, I, and J no longer issued, but may be grandfathered). Things to Remember: -Filing for Part B starts the six-month clock for obtaining a Medigap policy without medical underwriting. Individuals who work beyond age 65 may sign up for Part A, but should wait to sign up for Part B until they leave employment and are no longer covered by the employer plan in order to preserve this opportunity to acquire coverage regardless of any health conditions they may have. -Medigap supplemental insurance will not work with Medicare Advantage Plans, (Medicare Part C) and therefore, is not needed. -New Medigap plans cannot include prescription drug coverage, but it is permissible for someone who already has such coverage to maintain it. However, such plans will not work with Part D coverage, so the individual has to choose between Part D prescription drug coverage and existing Medigap plan prescription drug coverage. -Medigap supplements do not provide much of a long-term care benefit. These plans coordinate with Medicare and fill-in deductibles, etc., but they do not expand or increase Medicare-approved amounts. So, for example, if substantial long-term care coverage is desired, it must be provided for separately. Medigap plans also do not normally provide coverage for things such as vision care, dental care, or hearing aids. -Medigap policies do not cover spouses together; each must buy a separate policy.

Rules Associated With Distributions from Roth IRA

Nonqualified distributions from a Roth IRA are taxable and are subject to ordering rules, which treat all amounts distributed as contributions first and then as earnings. Therefore, no portion of such a distribution is treated as ordinary income (and thus taxable income) until the total of all prior distributions exceeds the total of all prior contributions. There are three possible categories of Roth IRA distributions, and they are considered to be distributed in this order: Return of contributions. Principal is returned first, and there is no income tax or 10% penalty assessed on this portion. Return of conversion amount. This will not be subject to income tax since it was taxed when converted; however, if the individual is under age 59½ it may be subject to the 10% early withdrawal penalty tax if the converted funds have not been in the Roth IRA for at least five years from the date of conversion. Return of earnings. Earnings come out last, and will not be taxed if it is a qualified distribution (attaining age 59½ and the five-year holding period requirement has been met). If it is not a qualified distribution, then it will be subject to income tax and the 10% early withdrawal penalty if the individual is under age 59½ (unless one of the exceptions is met). The ability to tap contributions first, and thus avoid taxation, is a tremendous advantage with Roth IRAs.

RMD for Trust Beneficiary

Note: Since the passage of the SECURE Act, making a trust the beneficiary has certain pitfalls that are beyond the scope of the course. Anyone using a trust as a beneficiary of a retirement account should seek proper legal counsel. If a trust is named as beneficiary, the beneficiaries of the trust will be treated as the eligible designated beneficiaries or simply as designated beneficiaries, provided each of the following apply: The trust is valid under state law or will be as soon as it is funded. The trust must be irrevocable or will, by its terms, become irrevocable upon the death of the IRA owner, etc. The beneficiaries of the trust must be identifiable. Although they don't have to be identified by name, it must be possible to identify the class (or group) of beneficiaries and the oldest beneficiary. The trustee of the trust must deliver the final list of all beneficiaries of the trust and a copy of the trust document to the administrator of the qualified plan (or to the trustee or custodian of an IRA if an IRA is involved).

Ex. Which one of the following is a correct statement about old-age Social Security benefits?

Old-age Social Security benefits are not reduced for persons who have attained their Social Security FRA regardless of the amount of earned income received.

Periodic IRA Payments

Once John has begun taking periodic IRA payments, he must stick with this distribution method for five years. (The rule is for five years or until age 59½, whichever comes later.) Failure to observe this rule will trigger the 10% penalty on all previous payments. After five years, John can change his distribution arrangement without penalty.

Taxation of Annuity Payments from Non-Qualified Annuity

Once annuitized, each monthly payment is considered partially a return of principal and partially distribution of gain, so each payment is taxable to some extent. The amount of each payment that is subject to tax is proportional to the extent it represents gain versus a return of principal.

Key Concepts and Requirements of the Fiduciary Standard Proposed by Department of Labor

One key concept was that the new rules would have applied to anyone giving advice to a retirement investor about his or her retirement plan. If an adviser was giving advice to a retirement investor about his or her retirement account, including an IRA, then the adviser would have been considered a fiduciary and required to look out for the best interest of the client. Another major change would have been clients no longer being forced to waive 100% of their legal rights and accept mandatory arbitration.

Intestate Succession

Only specified blood relatives can receive property. The amount that will go to these heirs is fixed and cannot be varied. Nothing will go to friends or charities (possible exception for registered domestic partners). The income or use of property cannot be separated from its legal ownership, as would be possible in a trust established in a person's will. Transfer tax planning is impossible since the intestacy statute will control where the property goes and in what amounts.

Medicare Part B

Part B of Medicare provides supplemental medical insurance to help Medicare enrollees pay for physician services and other services not covered under Part A. For example, in 2021, after the patient pays the first $203 of physician charges and outpatient hospital care, Part B will pay for 80% of subsequent charges. It also pays 100% of home health care costs. The following medical services are covered by Part B: doctor's services, including preventive care and many screenings ambulance services durable medical equipment blood mental health home health services (skilled nursing or therapy) x-rays and lab tests limited outpatient prescription drugs The following Medical expenses are not covered by Part B: most prescription drugs most dental care eye exams related to prescribing glasses dentures cosmetic surgery acupuncture hearing aids and exams for fitting them routine foot care long-term care

Variable Annuities

Payments fluctuate according to the value of an account invested primarily in common stocks and provides conservative to aggressive investments that are not guaranteed. A variable annuity is a form of deferred annuity. Its unique feature is the fact that its rate of accumulation is not fixed or guaranteed but varies with the performance of an underlying portfolio of assets—thus, the term variable annuity. The benefit to contract owners saving for retirement is that most variable annuities—like mutual funds—offer a variety of investment portfolios, including common stocks. Variable annuities based on such investment portfolios put the burden of investment risk on investors' shoulders but give investors an opportunity to get higher returns—and stay ahead of inflation.

Ex. To understand the long-term care (LTC) market, a financial planner must be familiar with the wide array of financial products designed to serve the unique needs of this market. As such, which one of the following statements is correct?

Payments from a qualified LTC policy paying up to an annually adjusted per-day limit for charges from an LTC facility will be income tax free. Payments from a qualified LTC policy are income tax-free up to the per-day limit for policies that pay per diem benefits. The per-day cap on tax-free LTC benefits cannot exceed $400 (for 2021). While many LTC policies cover all levels of care, many provide only for home care or exclude any care provided outside of a long-term care facility. Policies sold in states that have adopted the National Association of Insurance Commissioners' Long-Term Care Insurance Model Regulation must cover Alzheimer's. Although medical screening might prevent a person with Alzheimer's disease from purchasing an LTC policy, it cannot prevent a healthy person from purchasing an LTC policy in states that have adopted the model regulation (i.e., a qualified policy). Medicare is not much help in financing long-term care; it covers relatively intense care during a brief period of convalescence that follows a covered hospital stay.

Defined Benefit Plans

Plans that provide for the payment of determinable retirement income benefits. This is specified in advance. Example. As a retiring employee of BladeTek Corporation, Fred is slated to receive 2% of his average salary over his last five years times his years of service. Since Fred's average salary during those last five years was $80,000, and since he put in 25 years of service, his annual retirement benefit is calculated as follows: $80,000 × 0.02 × 25 = $40,000

Medicare Part D

Prescription Drug Coverage Individuals who are enrolled in Part A and B and who don't already have creditable, or verifiable, prescription drug coverage (for example, from a current or former employer or union) but would like Medicare prescription drug coverage must join a Medicare Prescription Drug Plan. These plans are available through private companies under contract with Medicare. People who enroll in Part D, or the prescription drug plan, pay a monthly means-tested premium that varies based on the particular plan. Note that Medigap Plans do not offer a prescription drug benefit, making enrollment in Part D necessary if one is a participant in one of these plans. Most Medicare Advantage Plans (Part C) do offer prescription drug coverage so Part D is not needed. People who delay enrollment in Medicare Part D beyond their initial eligibility period may be assessed a penalty (as with Medicare Part B). The penalty is based on the national average premium and the amount of time the individual was eligible but went without Part D or other creditable prescription drug coverage. It may be as high as 1% per month of delay. As with the Part B penalty, this premium increase is permanent. From a Planning Perspective There are a number of factors that need to be considered when choosing a Part D prescription drug plan. Perhaps most importantly, the individual should compare the list of covered prescription drugs under available plans against the prescription drugs they take. Next, the cost of premiums, copayments, deductibles, and coinsurance need to be considered.

Ex. Inpatient hospital care under Medicare Part A coverage includes all the following costs except

Private Rooms. Inpatient hospital care includes costs for semiprivate rooms, meals, operating and recovery rooms, and prescription drugs. It does not cover the cost of private rooms.

Ex. Which of these is false regarding the tax-deductibility of qualified long-term care insurance (QLTCI) premiums?

QLTCI premiums are deductible for this year only, after which they are no longer deductible. The deductibility of QLTCI premiums does not expire after the current year. There are no known plans for such an expiration date to be implemented.

Qualified Default Investment Alternative (QDIA)

Qualified default investment alternative (QDIA) rules are designed to make it easier for fiduciaries of defined contribution plans with participant-directed investment accounts, such as 401(k) plans, to automatically enroll participants. These rules describe qualified default investments which include, but are not necessarily limited to, targeted-retirement funds, balanced funds, or a professionally managed fund. These investment options, discussed below, delegate the very important investment considerations of asset allocation and portfolio management to professional money managers.

RAND Study Findings

RAND contacted households and held focus groups to find out if investors understood the differences between broker-dealers and advisers. Both financial professionals and investors found the landscape to be complex and confusing. Many were unaware that broker-dealers and advisers were held to different standards, and there was a lot of confusion over credentials and job titles. The SEC in 2018 proposed that there be limitations on the use of the terms "advisor" or "adviser."

Spousal Benefits

Receiving an ex-spouse benefit: So long as you were married for 10+ years, are currently unmarried, and are age 62 or older you will qualify for benefits based on your ex-spouse's record. The divorced spouse's benefit at FRA equals one-half of the worker's PIA, and will be reduced if taken prior to FRA. Such a benefit will end if you remarry, die, or become entitled to a retirement or disability benefit that equals or exceeds one-half of the worker's PIA. If an individual remarries before the age of 60, the widower's benefit will be terminated. If an individual is over the age of 60 when they remarry, their marriage will not affect their Social Security widower's benefit. Ex. Betsy, the spouse with the lower Social Security benefit, will take her own $1,200 benefit. Jeff, the spouse with the higher Social Security benefit, will receive a $600 spousal benefit, deferring receipt of his own benefit until age 70. The plan is for Jeff to receive the delayed retirement credit. This will increase his monthly benefit and it will also increase the survivor benefit for Betsy. The "restricted application for spousal benefits only" was available to people born on or before Jan 2, 1954 and who has achieved their FRA. Thus, it is no longer possible for anyone to initiate this strategy as of Jan 3, 2020. However, retirement planners need to understand this strategy because many people have implemented it. Survivor's Benefit: Survivors can collect benefits based on their deceased spouse's work history and earnings once they turn age 60, even if they have no children. If they're caring for a qualifying child, they can collect benefits before age 60. No matter what, the first step is that the surviving spouse starts by receiving whatever check the worker was receiving or was entitled to receive. The second step is to check if the surviving spouse is starting survivor benefits earlier that the surviving spouse's survivor FRA. The surviving spouse's survivor FRA is a schedule that is two years behind the worker's FRA. If the surviving spouse has not yet achieved the survivor's FRA, then the amount the deceased worker was receiving is reduced 25/36th of 1% for the first 36 months and 5/12th of 1% for all months in excess of 36 months. Note that the surviving spouse having filed early for his or her Social Security benefits does not impact the survivor benefit. For example, if Ralph would have been able to file for Social Security benefits at age 62, but Mary does not die until after Ralph achieved his survivor FRA, then Ralph's early benefits under another aspect of Social Security would not harm his survivor benefits.

Trusts

Revocable Living Trust: substantial funding should occur when the trust is created. The trust is operative and manages the transferred assets even before incapacity occurs. Contingent Trust: A contingent trust (standby trust) describes the timing of funding and fully operating a revocable living trust. It is not a different type of trust legally. In a contingent trust, substantial funding occurs only after the grantor becomes incapacitated. Prior to the grantor's incapacity, the trust does not actively manage the grantor's assets—it is only a shell into which assets can be transferred later. Thus, someone must be given a durable power of attorney—usually a springing power—to transfer assets to the trust so that the trustee can manage the assets for the incapacitated person's benefit. An advantage of a contingent trust is that it delays the power of the new trustee until he or she is actually needed. This reduces the likelihood of fraud and combats elder abuse by the trustee prior to incapacity. On the other hand, if the trustee is highly unlikely to take personal advantage of the arrangement, a simple funded revocable living trust smooths the transition if the donor does become incapacitated. A problem with the funded revocable living trust is it opens the door to temptation for the trustee to abuse the power.

Ex. Carla is collecting $600 per month from a government pension and is also eligible to receive a Social Security spousal benefit of $1,000 per month. Due to the GPO, her Social Security spousal benefit will be reduced to ____________.

SS Spousal Benefit is reduced by ⅔ of state pension amount; $400 in this case; so she gets $600.

Advantages of HSAs, Individual

-An individual (account owner) may claim an income tax deduction for cash contributions made to an HSA, even if such person does not itemize deductions on their income tax return. In contrast, medical expenses must exceed 7.5% of adjusted gross income in 2021 before they may be deducted by an individual as itemized expenses on their income tax return. -Interest and earnings on amounts held in an HSA accumulate tax free. -Employer contributions to an HSA on behalf of an employee-account owner do not result in taxable income. -Distributions from an HSA to an account owner are tax free as long as they are used to pay for qualified medical expenses.

Benjamin Graham's Four Rules of Thumb for Value Investing

1. Buy stocks for two-thirds or less of their net current assets. 2. The earnings-price ratio (earnings yield) should be twice the current AAA bond yield. 3. The dividend yield should be no less than two-thirds of the AAA bond yield. 4. Avoid companies that are currently losing money or that have more than 60% debt-to-total-assets.

Four Steps of Asset Allocation

1. The first step of the process is to determine which asset classes should be represented in the portfolio. This step recognizes the client's policy directives in terms of risk tolerance, investment goals, requirements for cash distributions, etc. It is important to remember that no specific securities are identified at this stage—only the general classes of assets (stocks, bonds, real estate, etc.). 2. After the asset classes have been determined, the percentage representation of each asset class in the portfolio should be determined. This is the point at which the allocation formula is made. For example, 60% stocks, 20% real estate, and 20% fixed-income securities. 3. The third step is security selection. Here, the most suitable individual stocks, bonds, real estate, or mutual funds for the portfolio are identified and acquired. 4. The final step of the asset allocation process is review of portfolio performance and the investment climate. There is an important feedback loop between this review and the first step of the allocation process.

Early Retirement Factors

2.1. As described in the text, what two time-related factors make early retirement financially challenging? Assuming that the early retiree will enjoy the same life span as others, he or she (1) will have fewer working years in which to accumulate assets, pension benefits, and Social Security credits and (2) will have to finance more nonworking years. 2.2. Explain how pension benefits are reduced by early retirement. Early retirement reduces the benefits paid by defined benefit pension plans. This is because benefits are a function of final average salary (which is generally lower for the early retiree) and years of service.

Examples

2.3. Shirley and Jim Smitten are married and file their taxes jointly. Their modified AGI is $215,000 (2021). Jim makes contributions to the 401(k) plan at work. Shirley's employer offers no such plan; however, she plans to contribute to her Roth IRA, and Jim has told you he will contribute to his traditional IRA. They've asked for your help in analyzing their situation—specifically, can they make a contribution to the Roth IRA for Shirley as they have planned, and can they make a deductible contribution to Jim's IRA? Their AGI is $215,000. Shirley cannot contribute to a Roth IRA because their AGI is too high (phaseout is from $198,000 to $208,000 in 2021). Jim cannot deduct his contribution to a traditional IRA because their AGI is greater than the phaseout range for a traditional IRA ($105,000-$125,000) and he is an active participant. Both Shirley and Jim can contribute (but not deduct) $6,000 to a traditional IRA because their AGI is above the phaseout for the spousal IRA and Jim is an active participant. 2.4. Peter quit his job last year to paint full time. In 2021 his net earnings are $100. His wife Amy's earnings are $300,000 in 2021, but she doesn't have a retirement plan at work. Their modified AGI is $300,100 (2021). They want to know their options for contributing to traditional and Roth IRAs for 2021. How much can they contribute to their Roth IRAs and to their traditional IRAs? They are both younger than 50. Since neither is an active participant in a qualified plan, the deduction for the spousal IRA deduction doesn't phase out. They can contribute and deduct $6,000 for Jim's traditional IRA and contribute and deduct $6,000 for Shirley's traditional IRA. They cannot contribute to the Roth IRA since their MAGI is above the 2021 phaseout ($208,000 of AGI). 2.5. In 2021, Buster and Priscilla Gleason's AGI will be $199,000. Priscilla joined the 401(k) plan at work as soon as it was offered, and she defers $300 per month. Buster is disabled and has no income. They have told you they want to deduct the maximum allowed for Buster, while Priscilla wants to contribute the maximum allowed to her Roth IRA. They ask you to determine those amounts for each. Buster's deductible contribution under the spousal IRA is $5,400 and Priscilla's Roth contribution is the same amount. ($208,000 - $199,000)/$10,000 = .9 x $6,000 = $5,400. Because the Roth phaseout and spousal IRA phaseouts are the same, the calculation is the same for each.

Ex. On average, social security represents:

33% of income for seniors.

Section 121

5.1. Under Section 121, what amounts can a single person or married couple (filing jointly) exclude from capital gains tax on the sale of a primary residence (if all conditions are met)? Section 121 allows a qualified single taxpayer to exclude up to $250,000 in capital gains from taxation on the sale of their primary residence. The exclusion is $500,000 for a married couple filing jointly. Anything left over is a capital gain. This does not apply to rental or business properties. The taxpayers must have lived in the home for two of the five years prior to the sale. There are exceptions, however; like when a taxpayer lives in the residence less than two years and moves because of a new job or unforeseen circumstances. Example. John is single and has lived in his principal residence for six months. His employer has transferred him to another part of the country. Given this situation, John can exclude up to $62,500 (25% of $250,000) of capital gains.

Eligibility Requirements for Medicare

65 y/o eligible for SSDI Disables once they are on SSDI for 24 months ESRD or on dialysis or requires transplant Medicare benefits are available to U.S citizens who are 65 years old and older, disabled (according to the Social Security Administration's stringent definition), or victims of permanent kidney failure.

Estate Planning Strategies for Retiree Ex. 1

9.1. Explain how a married couple with a combined gross estate of less than the estate tax applicable exclusion amount can use the marital deduction to avoid estate tax altogether when transferring property to their children or others. For married couples with combined gross estates of less than the applicable exclusion amount, avoiding estate tax is very simple. They simply arrange for the estate of the first to die to be passed to the surviving spouse. The estate of the first spouse to die will owe no estate tax, because the estate tax marital deduction will keep anything in the gross estate from being taxable. When the surviving spouse dies, their estate will still be under the applicable exclusion amount (assuming inflation in the value of estate assets does not increase their total value in excess of the applicable exclusion amount) and, thus, this estate will be able to cover any estate tax due by application of the decedent's applicable credit amount.

Estate Planning Strategies for Retiree Ex. 2

9.2. For married couples with large combined estates (i.e., over the estate tax applicable exclusion amount), what is the drawback of simply transferring the estate of the first spouse to die to the surviving spouse? For couples with larger combined gross estates, the drawback to transferring the first to die's gross estate to the surviving spouse is that doing so eliminates the opportunity to use the estate tax applicable credit amount of the first spouse to die if portability of credit amounts between spouses is not continued to the date of the second spouse's death. Also, the surviving spouse will probably die with a gross estate that exceeds the applicable exclusion amount, and thus will not be able to negate all of the estate tax by application of the applicable credit amount. One solution to this problem would be to transfer part or all of the first estate to other beneficiaries (perhaps by use of a bypass trust), thus making use of that spouse's estate tax applicable credit amount, and reducing the gross estate of the surviving spouse below the estate tax applicable exclusion amount without portability of the unused credit amount from the first spouse to die.

Qualified Optional Survivor Annuity (QOSA)

A QOSA is an annuity for the life of the participant with a survivor annuity for the life of the spouse, which is equal to either: 75%, if the survivor portion of the annuity provided under the QJSA is less than 75% 50%, if the survivor portion of the annuity provided under the QJSA is 75% or more Married participants in a pension plan must be permitted to elect payment of their benefits in the form of a QOSA. This election requires a participant and their spouse to waive the right to a QJSA in favor of a QOSA. Example. The survivor annuity provided by Tremont Corporation's defined benefit plan is equal to 80% of the annuity payable during the joint lives of the participant and spouse. Mike, age 65, plans to retire from the corporation next year. His goal is to provide somewhat smaller survivor benefits for his wife, Jan (age 72), than those payable by the QJSA. Mike, with his wife's consent, waived the QJSA and elected to have his pension benefits payable in the form of a QOSA that provides a survivor annuity equal to 50% of the annuity payable during their joint lives.

Qualified Domestic Relations Order (QDRO)

A court-issued order that instructs a plan administrator how to pay all or a portion of a pension plan benefit to a divorced spouse or child. Example. Anne and Henry have negotiated the terms of their divorce. One issue in their negotiations was Henry's defined benefit plan. By agreement, Anne will receive half of the benefits of the plan. Once the court approves their divorce, a QDRO is issued to the plan administrator to effect the division of interests in Henry's plan. Note: The plan administrator is prohibited from making this division without the submission of a QDRO. Therefore, both proper availability and drafting are critical. Example: Former spouse is taxed on distribution received through a QDRO. Kim participates in QualCo's qualified retirement plan. She was recently divorced. The court awarded 42% of Kim's benefit to her former spouse, Ross, under a QDRO. Her benefit is valued at $167,000; Ross has elected a lump sum. The plan is not contributory, so Kim has no basis in the benefit. Unless he rolls over the distribution, Ross will be taxed on the full distribution of $70,140 (42% of $167,000). The 10% early withdrawal penalty does not apply, even though both parties are age 42—QDRO distributions are exempt from the 10% penalty.

Ex. Which one of the following types of distributions are eligible for rollover treatment?

A lump sum payment from a profit sharing plan payable upon separation from service is eligible for rollover treatment. A lump sum payment from a profit sharing plan payable upon separation from service is eligible for rollover treatment. The following distributions are not eligible for rollover treatment: Distributions that are part of a series of substantially equal periodic payments are not eligible for rollover treatment. Distributions that are made to comply with the minimum distribution requirements are not eligible for rollover treatment. The nontaxable portion of any IRA distribution is not eligible for rollover treatment. With an IRA, there is no one but the owner to validate that the contributions were after-tax. With an employer retirement plan, the administrator of the plan validates that the contributions were actually after tax.

Durable Power of Attorney for Health Care (Medical Proxy)

A medical proxy is a revocable written document in which the principal authorizes a named person to make health care decisions on the principal's behalf in the event of their own incapacity. The medical proxy is also known as an advance medical directive. It is broader in scope than a living will and usually encompasses decisions for all health care situations where the principal is unable to give informed consent. In other words, it applies to more than just the decision whether to commence or end artificial life-sustaining procedures. It also applies even when the principal is not terminally ill. The agent, not the attending physician, makes the health care decisions.

Buy & Hold Strategy

A passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market.

Living Wills

A revocable document that allows a person to make their own wishes regarding life-prolonging medical treatment in cases where individuals get the care they want. Generally, a living will must be written, signed, and witnessed by persons who are not heirs or beneficiaries of the maker. Usually, it cannot provide for the appointment of a surrogate decision maker. It applies only when the patient is terminal and death is imminent. Conflict between the family and the physician may occur because the family may disagree with the attending physician about whether the patient is terminal, whether death is imminent, and/or what medical treatment to administer.

Rising Equity Glidepath

A rising equity glidepath is defined as "the asset allocation path that results from spending down fixed income assets in the early years and letting equity exposure rise over time." Research has shown that the biggest threat to a retirement portfolio is poor market returns throughout the first half of retirement. Reducing exposure to equities in the early years can help ease the transition to retirement when sequence of return risk is the greatest.

Ex. Which one of the following U.S. citizens is currently eligible for Medicare Part A coverage at no cost?

A self-employed truck driver, age 66 The truck driver is in a covered occupation (covered by Social Security) and is over age 65. Thus, he or she would receive benefits if fully insured. The independent corporate director is incorrect because although this individual is in a covered occupation for Social Security purposes, he or she must be age 65 to be eligible for Medicare benefits. Although the federal government employee is employed in a covered occupation, he or she must be age 65. The unmarried heiress is wrong because although this person is age 65, she is not in a covered occupation for Social Security purposes.

Window Plan

A window plan describes a set of incentives used to reduce corporate headcount through voluntary early retirement. Unlike most severance packages, employees have the option to decline a voluntary severance package. These are often referred to as open window plans since they offer a window of three to six weeks during which eligible employees can choose to accept or reject the offer. Once that time has elapsed, the window shuts and the offer is off the table. Early and phased retirement programs achieve their goal of encouraging employees to retire early by providing targeted employees who agree to retire (or enter phased retirement) before the normal retirement age with incentives in the form of cash benefits/severance benefits continued health care coverage early access to distributions from retirement plans additional contributions to retirement or deferred compensation plans Example. XYZ Corporation wanted to reduce the ranks of its managerial staff in a particular division. Voluntary early retirements seemed the best way to achieve that purpose and maintain employee morale. The company offered employees who met specific age and years of service requirements what it called the "XYZ 5-5-1 plan." The 5-5-1 plan would add five years of service to an employee's actual years of service and five years to the employee's age in calculating pension benefits. It would also provide one year's salary in a lump sum upon termination. Let's look at some of these common incentives in more detail. Severance benefits. Early retirement plans often provide a lump-sum payment that is equal to a certain percentage of annual salary (e.g., one to two years of salary) or a certain number of months' pay, based upon years of service (e.g., one to two months' salary for every year of service). Health and insurance benefits. Early retirement programs may provide departing employees with continuation of their health insurance and group term life insurance benefits. Health insurance, in particular, is a great benefit, as it would normally cost $400-$450 per month for an early retiree to acquire the same benefit in the marketplace. Dental insurance may add $70-$90 per month to this cost. Ideally, the term of continuing health insurance benefits will extend to the date at which the departing employee will be eligible for Medicare. Enhanced Pension Benefits. If an employee is already a participant in a pension plan, the early retirement program will most likely result in some enhancement of the current plan for the affected employee. With qualified plans, the employee cannot begin to draw benefits until age 55, and then at permanently lower rates. Pension funding rules, however, allow employers to enhance the pension to provide income between the time of early retirement and the time at which regular pension benefits can be drawn.

ADL

ADLs are activities of daily living: dressing bathing toileting continence transferring (the ability to move in and out of a bed, chair, or wheelchair) eating In a qualified LTCI policy, the inability to perform any two of these ADLs triggers the long-term care benefit.

Ex. Which one of the following is correct regarding most types of tax exempt interest and the taxation of Social Security benefits?

All of the tax-exempt interest is included in the computation of the taxation of Social Security benefits. All tax-exempt interest income is included in computing the portion of Social Security benefits that are subject to taxation. However, tax-free Roth distributions are not counted when determining provisional income. A maximum of 85% of the Social Security benefits are subject to taxation.

Ex. Which of the following statements is correct about qualified joint survivor annuities (QJSAs)?

All pension plans must offer QJSAs.

Ex. What does Jensen's alpha tell you?

Alpha is the percentage a manager over- or underperformed based on the amount of risk taken. The percentage of return that can be attributed to systematic risk is referred to as the coefficient of determination (R2).

Exemptions from Early Distribution Penalty

Although IRC Section 72(t) specifies that distributions from IRAs taken before age 59½ generally will be subject to the 10% early withdrawal penalty, an exception is made when distributions from an IRA are made for one of the following reasons: death of the IRA owner (inherited IRA assets) disability of the IRA owner (must be permanently disabled) medical expenses in excess of 7.5% of AGI (for 2021) medical insurance premiums while unemployed qualified higher education expenses (tuition, fees, books, supplies, and equipment, must be postsecondary, includes graduate level) qualified first-time homebuyer (neither taxpayer nor spouse can have had ownership in a principal residence for a two-year period prior to the date of purchase or commencement of construction) up to $10,000 qualified reservist distribution made to an individual who is a reservist or national guardsman called to active duty for a period of 180 days (or more) or for an indefinite period disaster-related distributions (such as a tornado) a series of substantially equal periodic payments up to $5,000 per parent for distributions taken after the birth or adoption of a child. Distributions taken prior to the birth or adoption date are not an exception to the 10% early withdrawal penalty. Note that the premature distribution rules also apply to qualified retirement plans and Section 403(b) plans, but not 457 plans; another set of exceptions to the 10% early withdrawal penalty are allowed for qualified plan and TSA distributions.

Ex. Stock A has an expected return of 15% and a standard deviation of 7.5%. Stock B has an expected return of 18% and a standard deviation of 9%. Based on the coefficient of variation, which stock has more relative risk?

Although Stock A has a lower absolute risk, it has the same relative risk as measured by its coefficient of variation (CVA = 7.5%/15% = 0.50) as Stock B (CVB = 9%/18% = 0.50). The coefficient of variation formula can be used to compare two stocks.

Taxation of ZC Bonds

Although there is no annual income received from "zeros," their annual increase in value is taxed to the investor each year. This taxation of phantom income is not much different than the taxation of dividends reinvested in a mutual fund—the investor has a current tax liability without the cash in hand to pay it.

Liabilities

Amounts owed to creditors and there are both short and long term liabilities included on the statement of financial position. There are short and long term; short being less than one year from the statement date.

Ex. Which is true if a long-term care policy is qualified?

Benefits are generally excluded from taxable income. Qualified long-term care insurance policy benefits are, like accident and personal injury benefits, excludible from taxable income regardless of your AGI. LTCI premiums may be tax deductible if they exceed the 7.5% of AGI limit. Don't confuse benefits with premiums.

COBRA for Terminated Employees

COBRA requires most employers, those with 20 or more employees, to provide continued coverage through their group medical plans to employees and their dependents—without proof of insurability—in the case of certain qualifying events: the employee is terminated (and not for gross misconduct); the employee dies; the employee is divorced or legally separated. In most cases, this continued coverage must be made available for a period of 18 months and may be available for up to 36 months for certain situations. The former employee, however, must pay the full premiums (plus 2% for administrative costs) for the group policy that COBRA has made accessible.

Objectives of a Mutual Fund

Capital appreciation (growth)—increase in the value of the securities in the fund, which is reflected in the fund's value. Current income—interest or dividends paid on the underlying securities in the fund. Capital preservation—maintaining the value of the fund regardless of market conditions.

Strategies in Living Off Their Retirement Assets

Capital preservation. Followers of this strategy live off the income produced by their assets without touching the principal. This strategy assures that they will not outlive their incomes. A very large asset pool is required to follow this strategy. Capital utilization. In this strategy, both income and principal are tapped for retirement living expenses. These retirees must make a good estimate of their life spans, otherwise they risk outliving their incomes.

Cash Equivalents

Cash equivalent investments are short-term (maturities of one year or less) money market instruments that are highly liquid and have a high safety of principal. In exchange for this safety they generally offer low rates of return and thereby are subject to purchasing power risk. They do, however, provide a place for an emergency fund and a temporary parking place for retirement funds when other securities markets are in turmoil. They also have a diversification effect on a portfolio.

Statement of Cash Flow (Income Statement)

Cash inflows less cash outflows is the net cash flow or deficit.

Assets

Cash/cash equivalents, invested assets, and personal assets. Assets should be valued at their current fair market value. Leased property and equipment are typically not included as assets but are shown in the footnotes.

Policy Features and Benefits for Health Care Plans

Catastrophic plans for eligible individuals under age 30 or low-income individuals with hardship provisions; cover three annual primary care visits and preventive care services at no cost and have high deductibles for other covered charges. Bronze plans pay 60% on average and the insured pays 40%. Silver plans pay 70% on average and the insured pays 30%. Gold plans pay 80% on average and the insured pays 20%. Platinum plans pay 90% on average and the insured pays 10%.

Common Stock

Common stocks have earned higher returns over time than other asset classes. Common stocks have outperformed nearly every asset class by a wide margin. In addition, they offer the prospect of rising dividends over time. Their disadvantage to the investor is their volatility, which is also higher than most other asset classes. This volatility makes many clients reluctant to make large allocations to stocks; but the fact is that many of these same clients will be unable to accumulate sufficient retirement savings without the greater returns enjoyed by stocks over time. The two major risks for common stock are business risk and market risk.

Ex. Which one of the following assets is not held in will substitute form?

Community property Unlike tenants by the entirety and joint property with right of survivorship, traditional community property is not a will substitute because this form of property does not have a right of survivorship feature. In other words, the deceased can will his or her portion of community property to anyone he or she wishes; the surviving spouse does not automatically inherit the property. Property in a revocable inter vivos trust is held in will substitute form because its disposition upon the death of the grantor will be controlled by the trust rather than the grantor's will or the state laws of intestacy.

COLA

Cost of living adjustment. Once you begin receiving your Social Security retirement benefit, widow/widower's benefit, or disability related benefit, you may be given a yearly cost-of-living increase in the month of December (which will actually appear in your January check). Consequently, the check that you receive in the month of January will reflect any applicable cost-of-living increase for the year.

Two Standards for Advisors Providing Investment and Retirement Advice

Currently there are two types of standards that are applied to investment and retirement advice, depending upon the type of adviser involved: a fiduciary standard established under the Investment Advisers Act of 1940 for registered investment advisers (RIAs), and a suitability standard for registered representatives and insurance agents.

Identifying Current Trends in Retirement Planning

businesses today are less likely to offer defined benefit (DB) plans increased focus on planning for longevity expansion of employer sponsored financial wellness initiatives expansion of plan distribution options

Ex. All of the following are ways that a person can voluntarily transfer estate assets to another person or entity at death except

by gift. Gifts are during life. Probate and will substitute are ways that a person can voluntarily transfer estate assets to another person or entity at death. Gifting is one of the two ways that a person can voluntarily transfer estate assets to another person or entity during life, not at death. Selling is the second way to transfer property while alive. T.O.D. passes the brokerage account to the named person when the owner of the account dies. P.O.D. (payable on death) transfers a bank account in the same way.

Summary of Medicare Advantage Plans (Medicare Part C)

You're still in the Medicare program. You still have Medicare rights and protections. You get complete Part A and Part B coverage through the plan. You can only join the plan at certain times during year, and are generally enrolled for one year. You can join even if you have a preexisting condition, except for end-stage renal disease. You can review the plan before getting a service to see if it's covered and what your costs may be. You must follow plan rules; i.e., get a referral to see a specialist to avoid higher costs if your plan requires it. The specialist you're referred to must also be in the plan's network. If you go outside of the network your services may not be covered, or your costs could be higher. This typically applies to Medicare Advantage HMOs and PPOs. Providers can join or leave a plan's provider network anytime during the year. If this happens, you may need to choose a new provider. If you join a clinical research study, some costs may be covered by your plan. Medicare Advantage plans can't charge more than original Medicare for certain services like chemotherapy, dialysis, and skilled nursing facility care. Medicare Advantage plans have a yearly limit on your out-of-pocket costs for medical services. Limits vary by plan and can change each year, therefore it pays to shop around. If the plan you are on decides to stop participating in Medicare, you'll have to join another Medicare health plan, or return to original Medicare.

Ex. All of the following are true regarding Roth 401(k)s except

a $1,000 catch-up provision is available to individuals age 50 and older. In 2021, participants age 50 and older can contribute an additional $6,500 as a catch-up provision; this is in addition to the regular deferral limit of $19,500.

Rollovers

a. Explain what the text described as an indirect rollover. An indirect IRA rollover is one in which the plan participant takes receipt of a retirement plan distribution and, within a period of 60 days, places it into an IRA or other retirement plan. b. Describe an important negative aspect of this indirect approach to handling a lump sum distribution. The indirect IRA fulfills the purpose of the rollover; however, the IRC requires the plan administrator to withhold 20% of the initial qualified plan or TSA distribution for tax purposes. c. How can the negative aspect of the indirect rollover be avoided? The negative withholding aspect of the indirect rollover can be avoided by using a direct rollover. In this type of rollover, no funds are withheld for taxes.

Settlement Options

a. straight life income The insurance company considers the age and gender of the beneficiary, and commits to a specified level payment for as long as that person lives. When the beneficiary dies, all future payments stop. An unhealthy beneficiary would rarely choose this option. b. life income with period certain Lifetime income is paid to the beneficiary, but a minimum number of payments is guaranteed. c. life income with refund Income is guaranteed for the life of the beneficiary, but if that individual dies before the entire proceeds of the policy have been paid out, the remaining funds are refunded to a contingent beneficiary, either as continued payments or as a lump sum. d. joint and survivor income The insurance company sends regular checks for as long as either joint beneficiary is living. The magnitude of each payment under any one of the life income options is affected by the conditions attached. The insurance company will pay less per month on a life income settlement option if it is obliged to continue full payments for two lives instead of one. e. interest only A beneficiary chooses to preserve the principal amount of the insurance proceeds and simply receive the interest the proceeds earn while held by the insurance company. That interest will be currently taxable. Many companies will limit the number of months the proceeds may remain under this option.

Federal Unified Transfer Tax

a. unified The term unified indicates that the once-separate systems for federal gift taxes and estate taxes now share a single tax rate schedule. b. applicable exclusion amount The applicable exclusion amount is the amount of taxable property that can be transferred without having to actually pay any federal gift or estate tax because the tax on that amount is offset by the applicable credit amount. The estate tax applicable exclusion amount in 2021 is $11.7 million. The gift tax applicable exclusion amount is also $11.7 million in 2021. c. applicable credit amount The applicable credit amount is a dollar-for-dollar offset against any tentative federal gift or estate tax liability. The estate and gift tax applicable credit amount is $4,625,800. It pays tax on the first $11.7 million of taxable transfers—lifetime or at death.

Description of Estate Terms

a. will A will is a legally enforceable declaration of how an individual's probate property is to be distributed when they die. It is revocable until the time of death. b. probate Probate is a court-supervised process for administering and distributing property subject to a will or state laws of intestacy at a person's death. c. intestate The term intestate refers to dying without a will. Thus, a person who died without having first created a will is said to have died intestate. d. personal representative Personal representative is the generic term given to a person appointed by a court to administer a decedent's estate. e. executrix/executor These are alternative names (female/male) given to a personal representative of a decedent who died with a valid will by some states.

Ex. It is anticipated that the percentage of people who continue to work after they reach age 65 or 66 will increase in the future. All of the following are reasons for this increase except

almost all categories of living expenses increase during retirement years. With some exceptions, most categories of living expenses (such as transportation, clothing, and housing) decrease during retirement years. Some expenses, such as travel and medical, may increase during retirement years. It is true that Social Security benefits may increase for people who work past their Social Security full retirement age. Additionally, wages and salaries earned during retirement will obviously increase retirement income and longer life spans will result in a need for more retirement income.

Ex. The applicable credit amount is the amount of transfer tax on the

applicable exclusion amount. The applicable credit amount is the tax on the corresponding applicable exclusion amount. The applicable exclusion amount is the amount of taxable transfers a person can make without actually having to pay gift or estate tax. No tax is actually paid on this amount because the applicable credit amount is the amount of transfer tax on the applicable exclusion amount and can be applied against any tax owed. The annual exclusion amount applies to federal gift tax. The first $15,000 (indexed annually) given to any donee in any calendar year is excluded from the donor's total gifts as "free" from tax. Cumulative taxable gifts are simply the sum of the taxable gifts given.

Ex. When must the designated beneficiary be determined in order to avoid having to distribute the full IRA balance under the five-year rule?

September 30 of the year following the participant's death.

Sequence of Returns Risk

Sequence of returns risk involves the order in which investment returns occur. Employing distribution strategies to reduce/eliminate the need to draw from a portfolio during a period of negative returns is essential. This is especially true during the first few years of retirement when large losses, coupled with withdrawals, could cripple an investment portfolio and cause it to fall short of its original goals.

Serial Savings Approach

Serial savings are payments that increase with inflation. This is often the preferable way to fund a long term goal because the savings dollar amount will increase annually at rate of inflation. 1. deflate the lump sum needed at retirement into today's dollars using hte inflation rate as a discount rate 2. calculate the payment using the discounted lump sum from step 1 as a future value and an inflation-adjusted return as the interest rate 3. once the payment has been solved, it will need to be increased by that inflation rate in order to arrive at the end of first year payment Example. We have already determined that Fred and Wilma need a lump sum of $1,144,480 at the beginning of retirement 25 years from now, the inflation rate is 3%, and the rate of return 7%. There are three steps in the serial payment calculation: Deflate the lump sum needed at retirement into today's dollars, using the inflation rate as the discount rate. The lump sum needed at the beginning of retirement is $1,144,480. We are going to deflate it back over 25 years to today's dollars using the 3% inflation rate. The result is then used as a future value in the calculation. The reason for this is that we have taken inflation into account in coming up with the lump sum amount needed at the beginning of retirement, but since we are going to be taking inflation into account with our payments (increasing them by the inflation rate each year), we need to back out this inflation from the lump sum. 1,144,480 FV 25 N 3 I/YR PV = $546,610 Calculate the payment using the discounted lump sum from step (1) as a future value and an inflation-adjusted return as the interest rate. Now we are going to solve for payment, using the present value we just solved as a future value, and using an inflation-adjusted return for the interest rate (the 3.8835 we solved previously). Make sure you are in the "END" mode: 546,610 FV 25 N 3.8835 I/YR PMT = $13,332.46 Once payment has been solved, it will need to be increased by the inflation rate in order to arrive at the end of first year payment. Since this is a serial payment, we will now need to increase the $13,332.46 by the inflation rate of 3% in order to come up with the end of first year payment, so: $13,332.46 × 1.03 = $13,732.43 Notice that this end of first year serial payment of $13,732 is lower than the level payment amount of $18,095, but each year it will grow by the inflation rate of 3% and ultimately be more than the level payment.

Ex. Your client's current retirement income deficit is $80,000. In 31 years, that figure will be _________, assuming a 4% rate of inflation.

Set calculator to 1 payment per year, and C ALL Keystrokes: 80000 PV 31 N 4 I/YR FV Solution: $269,851.

Ex. If you invest $10,000 in an account that compounds at an annual rate of 5%, what will the account be worth after 10 years?

Set calculator to 1 payment per year, and C/ALL Keystrokes: 10000 PV 10 N 5 I/YR FV Solution: $16,288.95.

Ex. Mary wants to have a retirement income of $60,000 protected against 3% inflation. She assumes that she will earn 9%, and wants to have the income for 30 years. How much capital will be required to provide Mary this much income at the first of each year? (Set your calculator for four decimal places.)

Set calculator to BEG mode, one payment per year, and C/ALL Because the problem indicates that Mary wants her income to be protected against inflation, you will use the inflation-adjusted rate of 5.8252% [((1.09/1.03) - 1) x 100 = 5.8252]. Keystrokes: 60000, PMT 5.8252, I/YR 30, N PV Solution: -$890,593

Ex. Margaret needs an annual retirement income of $48,000 protected against 2% inflation. You are to assume that she will earn 8%, and wants to have the income for 25 years. How much capital will be required to provide Margaret this much income at the first of each year?

Set calculator to BEG mode, one payment per year, and C/ALL. Because the problem indicates that Margaret wants her income to be protected against inflation, you will use the inflation-adjusted rate of 5.8824% [((1.08/1.02) - 1) x 100 = 5.8824%] Keystrokes: 48,000, PMT 5.8824, I/Y 25, N PV, -$657,022

Ex. John has been promised a stream of $30,000 annual payments at the beginning of each year for a period of 20 years. The present value of these payments, discounted at a rate of 6%, is

Set calculator to BEG, 1 payment per year, and C/ALL Keystrokes: 30000 PMT 20N 6 I/YR PV Solution: $364,743

Exceptions to Penalties before 59 1/2

Seven exceptions to the 10% premature distribution penalty are: the plan participant dies and the distribution goes to a beneficiary or the participant's estate the distribution is attributable to permanent disability distributions are part of a series of substantially equal periodic payments made over the plan participant's life expectancy or the joint life expectancy of the participant and spouse (or beneficiary of an IRA) distributions are made at separation from service at age 55 or older (not applicable to an IRA) the distribution is made to a former spouse or dependent under a QDRO (not applicable to an IRA; IRA assets can be transferred without penalty to the IRA of a former spouse when it is so ordered in a divorce decree) distributions do not exceed the amount of the participant's deductible medical expenses for the tax year in 2020 and later, up to $5,000 per event per parent may be taken from an IRA or employer retirement plans after the birth or adoption of a child under 18 Also, qualified education expense distributions from an IRA are not subject to the penalty. Distributions from an IRA or Roth IRA would also be exempt from the 10% penalty if used by first-time homebuyers for expenses, up to the $10,000 lifetime cap.

Ex. Margaret is confused about her options and takes a friend's advice to file and begin collecting benefits at age 62. Two years later, she attends one of your seminars on Social Security and realizes that this was a mistake, as she has sufficient personal assets to get her through until at least age 70 and her life expectancy is nearly 100. What can you suggest to her?

She can suspend payments, keep the benefits she has received, and resume payments later at an increased rate. She would only have the option of paying back benefits if she made the election within one year of beginning benefits. The point would be for her to get the delayed retirement credit and thus increase her monthly benefit.

Ex. Susan has reached full retirement age (FRA). She is trying to decide between starting Social Security benefits of $1,000 per month now, or delaying receipt for three years and using her savings to provide current income. By delaying three years her benefit would increase to $1,240 per month. Ignoring the time value of money and cost-of-living adjustments, use the break-even calculation to determine how much longer Susan will need to live in order for delaying to "pay off."

She should delay only if she expects to live beyond the next 15½ years or so. By delaying three years, Susan is forfeiting $1,000 X 36 payments or $36,000 of benefits. She would then gain $240 per month going forward: $36,000/$240 = 150 months, or 12.5 years, from three years from now. If she thinks she is going to live beyond 15.5 years from now, it would pay to delay benefits by three years.

Social Security for Retirement

Social Security represents half or more of total retirement income for 53% of married couples and 74% of unmarried individuals. In fact, for most retirees, Social Security is their only income source that protects against inflation risk, market risk, and longevity risk. However, Social Security was never designed to replace your full preretirement income. Instead, it is meant to provide a foundation, or income floor, and to prevent poverty during one's retirement years. The intent is for individuals to build other retirement savings in order to create a financially secure retirement. On average, Social Security represents 33% of the income of seniors according to ssa.gov's Fast Facts for the most recent year reported (2015). See page 6 of the Module for the graph. 2015 is the latest edition of this report because Social Security is reconsidering the methodology it uses.

Tax Treatment of Stock Distributions

Stock distributions trigger a tax event for a terminated plan participant. Frequently, the distributed shares will have increased in value since the employer contributed them to the participant's individual account. This increase is known as net unrealized appreciation, or NUA. Example. John is a participant in his company's stock bonus plan. Three years ago, the company contributed 100 shares of its stock to John's plan account. At the time, these shares were each valued at $20. John took a lump sum distribution from the plan this year. He was pleased to find that his 100 shares were each worth $25—a gain of $5 per share. The net unrealized appreciation (NUA) of John's shares is $500 (100 × $5). This $500 of NUA will be taxed as a long-term capital gain. So, how are the distributed shares handled for tax purposes? If the account balance is taken as a lump sum distribution (i.e., the entire account balance from all plans of the same type during the same taxable year), then: The employee-recipient is immediately taxed on the cost, or basis, of the securities received, and at ordinary income rates. In our example, John would have to include $2,000 (100 shares × $20) in his ordinary income this year (i.e., the year in which he took the distribution). The NUA is not taxed until the recipient actually sells the shares. When these shares are sold, however, the NUA is taxed as a long-term capital gain, regardless of how long the securities were actually held by the recipient. Again, in our example, let's suppose that John actually sold his company stock at $25 per share this year. He would have to report a long-term capital gain of $500 ($5 NUA per share × 100 shares). Any gain realized in excess of the amount of the NUA is treated as either short-term or long-term gain, depending upon how long the securities were held by the recipient after their distribution from the plan.

Strategic Asset Allocation

Strategic asset allocation attempts to identify the asset mix that will provide the optimal balance between expected risk and return for a long investment horizon. Once the asset mix is determined and the weights assigned, the portfolio manager tries to maintain that balance. With fluctuating asset prices, some asset classes will naturally do better than others, unbalancing the portfolio relative to the weights originally assigned to each asset category. For example, during a period of growing stock prices and rising interest rates, a portfolio that begins with 50% of the dollar value in stocks and 50% in bonds will quickly become unbalanced, with stock values dominating the portfolio. Thus, intervention (with the client's approval) becomes necessary to rebalance the mix to the original strategic balance.

Tactical Asset Allocation

Tactical asset allocation is an active approach that tries to position a portfolio into those assets, sectors, and individual securities showing the most promise of above-average gains. Changes are then made as the prospects for these assets, sectors, and securities change. Many approaches can be used in tactical asset allocation. It can use sector rotation and market timing approaches, or it can incorporate momentum investing, whereby money is moved from areas with below-average performance to areas that are performing above average. -Tactical asset allocation may also be seen as the opposite of momentum investing, moving money away from the asset category that has been most successful to one that has been the least successful. The theory here is that the most successful asset class has either become fully valued or overvalued, and the least successful asset class has become undervalued. Naturally, caution is advised with any such simple strategy. Sector rotation (moving, for example, from financial services stocks to capital goods stocks or from large-cap stocks to small-cap stocks) and market timing are typical methods of implementing this approach to asset allocation.

Level Savings Approach

Take the lump sum amount needed at retirement and calculate the payment needed to reach that amount using the assumed ROR. Example. Returning to Fred and Wilma, we had determined that they needed to save an additional $1,144,480 by the beginning of retirement to make up for their shortfall from Social Security and any inflation-adjusted pensions to achieve the level of retirement income that they desired using the capital utilization method ($30,000 in today's dollars, $62,813 in retirement year one dollars). Remember that Fred and Wilma have 25 years until retirement, so the annual level savings amount would be: 1,144,480 FV 25 N 7 I/YR PMT = $18,095

Investment Types

Target Date Funds -Target funds, which are often found in retirement accounts, enable the investor to invest for retirement in just one fund, automatically allocating between stocks and bonds for the investor. The longer until retirement the more that will be invested in stocks, and then as retirement approaches and into retirement the amount allocated to stocks will decrease, and the amount allocated to bonds will increase. This is called the "glide path." Advantages include ease of investing in just one fund, and the allocation being changed automatically over time. Disadvantages are that the "one size fits all" approach may not be the optimum choice for the investor, and the fund may not be in sync with the risk tolerance of the investor. Balanced Funds -Balanced funds have a portfolio mix of bonds, preferred stocks, and common stocks with the dual investment objectives of current income and capital appreciation. As a general rule of thumb, these funds have an asset mix of about 60% stocks and 40% bonds. Balanced funds are considered "total return" funds, since they provide both current income and appreciation. Managed Accounts -A managed account, commonly called a separate account or a privately managed account, is one that is managed by a professional money manager who creates a portfolio tailored and customized to the needs of an individual. This customization provides much greater portfolio flexibility should the individual's circumstances, needs, or preferences change, because the individual securities are actually held in the client's name.

Health Savings Account (HSA)

Tax-sheltered savings account similar to an IRA but created primarily to pay for medical expenses. Save up to $3,600 a person. Extra $1,000 if 55 or older. Cannot be covered by Medicare, be claimed as a dependent, are not entitled to coverage under any other health plan that is not a high-deductible health plan.

Floor-and-Upside Strategies

The "floor-and-upside" strategy is focused on safety over growth potential. It locks in a secure stream of retirement income before investing any remaining retirement assets in a riskier portfolio. A so-called "income floor" is a level of income below which an individual will not fall. It is a fixed amount that is typically enough to cover one's fixed expenses. To create this floor, a retiree could devote a portion of their retirement savings to a life annuity in exchange for the guarantee of a certain amount of income for as long as they live. Investing in a bond ladder is another way of establishing an income floor. To do this, you would identify specific bonds that will mature at the appropriate time to meet a client's cash flow needs. Zero coupon bonds are widely used for this purpose as they do not pay regular interest payments, but mature with a designated amount of income at maturity. Most flooring strategies are done with U.S. government bonds in order to avoid the default risk inherent in corporate bonds. Care should also be taken in using municipal bonds. Despite their tax advantages, they too carry default risk. Social Security and pensions also provide secure lifetime sources of income, or income floors. Regrettably, in the U.S. today, few households will have additional resources beyond those required to establish their floor. Those who do have additional capital beyond what is required to establish an income floor could invest the excess, usually in a stock portfolio. This part of the portfolio can afford to take on an additional element of risk because living expenses are already secured by the floor. If investments perform well, gains can be used to provide an increase in your client's standard of living. If not, your client's fixed expenses are still covered.

Commodity Futures Modernization Act of 2000

The Commodity Futures Modernization Act essentially exempted derivatives such as credit default swaps from regulation by the CFTC or any other government regulatory agency. This led to an explosion in the notional (face value) of derivatives, which contributed heavily to the subprime mortgage meltdown and financial crisis in 2008.

Investment Advisers Act of 1940

The Investment Advisers Act of 1940 wrote into law the fiduciary duty owed by investment advisers to their clients. This act requires investment advisers to register with the SEC by filing Form ADV. It also contains certain prohibitions regarding advertising practices and certain requirements for disclosure. Currently, investment advisers with over $100 million AUM register with the SEC, and all other investment advisers register at the state level.

Investment Company Act of 1940

The Investment Company Act of 1940 subjects both the structure and the operations of mutual funds to detailed regulation. Mutual funds belong to a class of investment companies defined in the 1940 act as "management companies," which are further classified as either diversified or nondiversified. The act also requires mutual funds to maintain detailed books and records on the securities owned, to use a custodian to safeguard the securities, and to send semiannual and annual reports to both the SEC and shareholders. The act also requires that proceeds from redeemed shares be sent to shareholders within seven days of the redemption.

Senior Citizens' Freedom to Work Act of 2000

The Senior Citizens' Freedom to Work Act of 2000 repealed the Social Security retirement earnings limit on the amount that a person who has attained his or her Social Security full retirement age may earn without having their Social Security benefits reduced. Deductions, however, are still made from Social Security benefits payable to a worker (and to his or her dependents) who has not attained his or her Social Security full retirement age if the worker has earnings above the designated annual threshold.

Increasing Savings Rate

The Vanguard Group offered its shareholders some timeless advice about getting personal savings on track with retirement expectations: -Pay yourself first. Shareholders should put themselves at the top of the list of bills to be paid. Invest automatically. Automatic fund transfers assure that the saver will not "forget" to save regularly. What isn't seen cannot be spent. -Split your next raise. Allocate part of each pay raise to regular living expenses and the remainder to retirement savings. -Invest any bonuses or tax refunds. Bonuses and tax refunds should be viewed as "found money" and allocated to savings, or, as a compromise, at least split between consumption and saving.

Fixed Income Securities

The advantages of fixed-income securities are their fixed cash flow stream and return of principal if held to maturity, high certainty of return with high quality securities, and generally low price volatility. The big disadvantages are their low-to-moderate rate of return and their two major risks: -exposure to inflation (purchasing power risk) due to the fixed dollar amount of their interest income and principal, and -interest rate risk (as interest rates increase, bond prices decrease). One type of bond, the Treasury inflation-protected security (TIPS), pays a fixed rate of interest and has its principal increase with the Consumer Price Index, thereby providing a hedge against inflation. Bond investors look to two sources for these returns: periodic interest payments and capital gains. Those interest payments may be taxable or, if from municipal securities, tax-exempt.

Barbell Strategy

The barbell strategy splits the bond portion of the portfolio between a short-term bond series and a long-term bond series; both ends then stagger maturities similar to the ladder approach. The essence of this strategy is to blend short-term and long-term bonds to provide an overall income stream that is acceptable to the client.

Cash Flow Statement & Equation

The cash flow statement is a financial statement that describes cash inflows (from salaries, investment returns, rents, etc.) and cash outflows (for living expenses, loan payments, savings, taxes, etc.). It is defined by the following equation: Cash inflows - Cash outflows = Net cash surplus (deficit)

Ex. The process of data gathering is the second step in the retirement planning process. All of the following are examples of data to be gathered except

The client's ability to purchase health insurance or investments is reviewed in step three of the planning process, in which an analysis and evaluation of financial status takes place. During the data gathering process the planner should identify the client's retirement account balances and income sources and amounts, and determine his or her risk tolerance.

Duty of Care

The duty of care requires the fiduciary to have the competency to give fiduciary advice, which requires a certain level of knowledge and skill. Good intentions alone are not enough. Fiduciaries must be competent enough to give advice, and if they delegate or consult with others, they need to be competent enough to vet other experts.

Duty to Consult

The duty to consult requires consulting with experts when the investment professional might not have the knowledge and experience needed in a particular situation. With the increased specialization and complexity in the field of investments, no one individual has the expertise to be fully competent in all areas. Where that expertise is missing, there is the duty to consult with someone who has that expertise.

Duty to Diagnose

The duty to diagnose covers the obligations to "know your customer" and to investigate the suitability of any products recommended as investments. This ethical duty is supported by formal requirements. NYSE Rule 405 stresses the importance of learning all the essential facts about a client and that client's account. The FINRA suitability rule requires a broker-dealer to have reasonable grounds for believing that a recommended investment is suitable for the particular client—suitable in terms of the client's other security holdings, financial situation, investment goals, risk tolerance level, tax situation, and other individual circumstances.

Duty to Disclose

The duty to disclose involves disclosing all material facts and all conflicts of interest as required by government regulations and professional codes of conduct. Full disclosure on new issues is a requirement of the Securities Act of 1933. The investment professional also is ethically bound to disclose any negative or risk factors involving investments being offered to clients.

Ex. Which one of the following correctly describes the federal gift tax annual exclusion?

The federal gift tax annual exclusion is the maximum amount of present interest gifts allowed per donee per year or the actual amount given to the donee, whichever is less, and that amount of the gift to be free of gift taxes. To qualify for the federal gift tax annual exclusion, a donor must make a completed gift of a present interest, which may be either a whole or partial interest. An example of a partial interest would be the income recipient of an irrevocable trust. A completed gift of a future interest does not qualify for an annual exclusion. This exclusion amount is available regardless of marital status. If the amount given is less than the maximum annual exclusion amount, the donor can only exclude the actual amount given. For example, if the amount given is $8,000, only $8,000 is excluded. The maximum amount is indexed annually for inflation, but only changes in $1,000 increments.

Five-Year Clock for Roth IRA

The five-year "clock" starts on January 1st of the year for which the contribution is made. For example, your client establishes a Roth IRA and makes a deposit on April 15, 20X2, for the 20X1 tax year. The contribution is being made for the 20X1 tax year, so the clock would start on January 1, 20X1. So even though the contribution itself is being made in 20X2, since it is for 20X1 the five-year clock starts at the beginning of 20X1. Any subsequent contributions into Roth IRA accounts would be on this initial clock—there is not a new "clock" for each contribution.

Roles that Trusts Play in Estate Planning

The following are some of the roles that trusts can play in estate planning: They can provide management of property for the grantor's convenience, or for legally, mentally, or financially incapacitated beneficiaries. They can provide asset protection from the claims of creditors of the grantor and beneficiaries. They can accumulate income for later distribution to a beneficiary. They can enable the grantor to provide one person (such as a surviving spouse) with lifetime benefits, while ensuring that the remainder will go to another person (such as a child from a prior marriage) at the life beneficiary's death. They can provide income, gift, and estate tax savings. They can provide management of assets located in several different states. Since trusts are independent and separate legal entities, they can eliminate the need to have property pass through probate at the death of the grantor. They can provide privacy. Except in the case of so-called pourover trusts, whose assets come (in part) from a publicly disclosed will, the trust, its property, and the beneficiaries are not a matter of public record.

Ex. The lower the coupon rate,

The greater the price volatility of the bond.

Ladder Strategy

The ladder strategy, also known as the staggered maturity strategy, spreads equal amounts of the bond holdings along different maturities; this strategy avoids large commitments at one maturity, and is intended to help offset interest rate risk.

Ex. Which one of the following describes the taxability of tax-exempt market discount bonds?

The market discount is taxed as ordinary income upon the sale or redemption of the bond. Any market discount is taxed as ordinary income upon the sale or redemption of the bond.

Ex. Frank is age 54 and married to Helen. Their daughter Meredith is attending college. Frank has been making salary reduction contributions to his employer-sponsored 401(k) plan for the past four years, and is considered a highly compensated employee. The current balance of his 401(k) account (nonforfeitable accrued benefit) is $21,500, which includes $3,500 of account earnings. The plan provides for both hardship withdrawals and plan loans, and loans are available to all plan participants on an equal basis. Frank needs to use some of his plan assets to pay college tuition. Which of the following is a correct statement about how Frank could meet Meredith's college expenses?

The maximum plan loan Frank could take is $10,750. Frank can borrow up to 50% of the nonforfeitable accrued benefit of $21,500-i.e., $10,750. As long as loans are available to all plan participants on an equal basis, highly compensated employees may take loans. A hardship distribution from a 401(k) plan for education expenses would be subject to the 10% premature distribution penalty.

Exceptions to the 10% Penalty Roth IRA

The same exceptions to the 10% penalty that apply to traditional IRAs also apply to Roth IRAs. These include qualified higher education expenses, medical expenses in excess of 10%, and substantially equal periodic payments.

Six Steps of Retirement Planning Process

The six steps of the retirement planning process are as follows: establish and define the client-counselor relationship gather client data and determine goals and expectations determine the client's financial status by analyzing and evaluating develop and present the retirement plan implement the plan monitor the plan

Rollover of a Lump Sum

The tax benefit of a rollover is that, if properly executed, it defers taxation of the lump sum until such time as it is distributed from the IRA or other retirement plan into which it was rolled. The negative aspect of the rollover (except in the case of a conduit IRA) is that it may eliminate the opportunity for forward averaging.

RMD Values

The tax code has specific rules about how much must be distributed, or the RMD. They are: the amounts in the plan must be taken over a period of time that does not exceed the participant's life expectancy under the Uniform Table (Table III) the amounts in the plan must be taken over a period of time that does not exceed the joint life expectancy of the plan participant and the spouse using the Joint and Last Survivor Table if the spouse is 11 or more years younger than the participant Life expectancy is based on an IRS table. The formula for determining the RMD is: Account balance on 12/31 / life expectancy based on Uniform Table

Ex. Which of the following is correct regarding the additional payroll tax for high wage earners that was brought about by the Affordable Care Act?

The tax was designed to provide additional funding for Medicare. This tax is an additional Medicare tax. The 0.9% tax is employee paid and applies to high earners only (AGI in excess of $250,000 for joint filers and $200,000 for single filers, not indexed).

Medigap

The term Medigap describes the costs not covered by either Part A or Part B of Medicare. These costs include deductibles, the cost of hospital stays that exceed the number of days covered by Part A, coinsurance payments, any costs that exceed Medicare-approved charges, the cost of most nonhospital prescription drugs, and the cost of nursing homes.

Statement of Financial Position

The three key components of a statement of financial position are: Assets. Assets are what the client owns: cash, securities, property, and other resources. Liabilities. Liabilities are what the client owes: credit card debts, mortgages, auto note balances, etc. Net worth. Net worth is defined as assets minus liabilities. It represents what the client would have left over if he liquidated all assets at fair market value and used the proceeds to pay off all liabilities.

Mutual Funds

The typical investment company acts as a conduit, or a pipeline, distributing 98% or more of its realized income to shareholders. This conduit status allows the investment company to avoid paying corporate income tax on its earnings. However, mutual fund distributions are taxable to investors, who need to understand the applicable tax treatment. LT Cap Gains are taxed at the cap gains rates, usually lower than income taxes. ST Cap Gains are taxed as ordinary income. Qualified dividends are taxed at LT Cap Gains rates. Interest income or nonqualified dividends are taxable at ordinary income tax rates.

Ex. This year, your 63-year-old client had $17,025 of earned income and $30,000 of investment income. He was also drawing Social Security benefits. Which one of the following correctly describes the impact on his Social Security benefits?

There is no reduction to his benefit. The client's earnings (earned income) are below the allowable limit for the current year ($18,960 for 2021). Remember that according to the work penalty rule, only earned income is counted toward the "allowable limit."

Ex. Which of the following is not a characteristic of transfer on death (T.O.D.) accounts?

They are used mainly in connection with bank accounts. T.O.D. accounts are used mainly in connection with securities. The beneficiary of the T.O.D. account has no control over account assets until the owner's death and the owner has the ability to change the beneficiary designation until death. Payable on death (P.O.D.) accounts are used mainly in connection with bank accounts. One of the main points of a T.O.D. account is to escape probate.

The Securities Act of 1933

This act applies to most new, publicly issued securities. Its purpose is to require the "registration" of securities with the Securities and Exchange Commission (SEC) by providing full disclosure in the registration statement of the securities that the issuer or vendor was about to issue. If the SEC finds misleading, incomplete, or inaccurate information, it will delay the offering until the registration statement is corrected. All new issues must be accompanied by a prospectus.

Securities Acts Amendments of 1975 and May Day

This act directed the SEC to supervise the development of a national securities market. The assumption behind this act was that any national market would extensively use computers and electronic communications. It also prohibited fixed commissions on public transactions, which fosters greater competition and more efficient prices. May Day is the name given the to the day in 1975 when commission rates were no longer set by the NYSE and firms were free to set their own commission rates.

Securities Investor Protection Act of 1970

This act established the Securities Investor Protection Corporation (SIPC) to oversee the liquidation of brokerage firms and to insure investors' accounts up to a maximum value of $500,000 (of which only up to $250,000 can be cash balances) in the case of bankruptcy of a brokerage firm. This corporation was set up in response to the problems encountered by brokerage firms in the late 1960s, when high volume caused a back-office paper crunch leading to bankruptcies and subsequent investor losses. While the SIPC insures brokerage accounts, it does not cover market losses suffered while waiting to get securities from a bankrupt brokerage firm. It also does not cover losses due to investment fraud and should not be thought of as the securities world equivalent of the Federal Deposit Insurance Corporation. The cost of this insurance is paid by members of SIPC. All brokers and dealers that are registered with the SEC and all members of national securities exchanges must be members of SIPC.

Gramm-Leach-Bliley Act of 1999

This act is also known as the Financial Services Modernization Act, and it dealt with ways that financial institutions handle the private information of individuals. It is best known for repealing part of the Glass-Steagall Act of 1933, which prohibited financial institutions from consolidating and offering any combination of traditional commercial banking, investment banking (brokerage firms), and insurance. Some believe that this ultimately helped to contribute to the subprime mortgage meltdown and market financial crisis in 2008.

USA Patriot Act

This act requires broker-dealers, among others, to have internal policies, procedures, and controls meet the "know your customer" mandate to combat terrorism and money laundering. Broker-dealers, in turn, may well ask their investment advisers to provide more detailed information about their clients. Advisers should look for red flags such as transactions that do not make sense for a client, numerous accounts held in different names or corporations for no apparent reason, and clients' lack of concern about investment objectives, risks, and investment costs. The adviser's requirements in complying with the act are still evolving, but the adviser should be aware of this act and its possible implications, including having formal policies in place to fight money laundering.

Sarbanes-Oxley Act of 2002

This act set up the Public Company Accounting Oversight Board, which consists of five financially literate members, two of whom must be or have been certified public accountants. The board is to establish, or adopt, by rule, "auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers." It also must conduct inspections of accounting firms, conduct investigations and disciplinary proceedings, and impose appropriate sanctions. It requires a company's chief executive officer and chief financial officer each to certify the financial and other information contained in the issuer's quarterly and annual reports. The rules also require these officers to certify that they are responsible for establishing, maintaining, and regularly evaluating the effectiveness of the issuer's quarterly and annual reports about their evaluation and whether there have been significant changes in the issuer's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. This law also makes it generally unlawful to extend credit to any director or executive officer. This act has precipitated the employment of chief compliance officers.

Securities Exchange Act of 1934

This act, which established the Securities and Exchange Commission and gave it enforcement powers for this act, aimed to regulate securities transactions on both organized exchanges and in over-the-counter markets. This act forbids market manipulation, deception, misrepresentation of facts, and fraudulent practices. It requires most broker-dealers and transfer agents, clearing agencies, and self-regulatory organizations (including securities exchanges) to register with the SEC. In this way, the SEC supervises and regulates many aspects of exchanges. It also requires many issuers of securities to provide ongoing information about their business affairs by filing quarterly financial statements with the SEC, sending annual reports to shareholders, and filing 10-K reports (which have more financial information that the annual reports), with the SEC annually. Further, it made subject to law the trading activities of corporate directors and officers ("insiders"), who were viewed as principal villains in the market debacle of 1929. In the last two decades, the SEC has widened the interpretation of an insider to include anyone having information that was not public knowledge. This act also gave the Federal Reserve Board of Governors responsibility for setting margin requirements when buying securities.

Examples

Traditional IRA Phaseouts; Single: $66-76k Married: $105-125k a. Susan Jones, 39, is single and an active participant in her employer's qualified plan. Her adjusted gross income (AGI) for this year is $67,000, and she will contribute $6,000 to her IRA for this tax year (2021). What amount is deductible? $76,000 - $67,000 = $9,000 $9,000 ÷ $10,000 = .9 $6,000 x .9 = $5,400 $5,400 is deductible. Return to question. b. If Susan's AGI for this year (2021) is $72,000 instead, what amount of her $6,000 IRA contribution is then deductible? $76,000 - $72,000 = $4,000 $4,000 ÷ $10,000 = .4 $6,000 x .4 = $2,400 $2,400 is deductible. Return to question. c. Mark Smith and his wife, Betty, both work, and they file a joint return. He is an active participant in his employer's qualified plan. She is not an active participant in her employer's qualified plan. Their AGI for this year is $106,000, and they will make a $12,000 IRA contribution for this year (2021). What amount is deductible? They are both 39. $125,000 - 106,000 = $19,000 $19,000 ÷ 20,000 = .95 $6,000 x .95 = $5,700 $5,700 is deductible for Mark. The full amount, $6,000, is deductible for Betty. Their total deduction is $11,700. Return to question. d. Bobby Brinson and his unemployed wife, Laura, file a joint return. He is an active participant in his employer's qualified plan. Laura is not an active participant, and both are under age 50. Their AGI is $140,000, and they will contribute $12,000 to their IRAs for this year (2021). What amount is deductible? $140,000 > $125,000; therefore, Bobby has no deduction, but he could contribute to a Roth IRA because their AGI is less than the start of the phaseout range for Roth IRAs. Laura can deduct $6,000 as a spousal IRA contribution. Their total deduction is $6,000. Notice it is best to determine a couple's AGI, and then deal with each spouse's contribution separately. Combine the results for the total.

Ex. On December 31 of last year (year 1), Samuel had $360,000 in his IRA. He has named Tully, his wife, as beneficiary. In year 2, Samuel turned 72 on October 17, and Tully turned 56 on January 8. Assume that it is now year 4 and that Samuel dies on April 15. Tully wants you to determine her distribution alternatives. Which one of the statements below correctly describes one of the choices available to Tully?

Tully may roll the entire amount into an IRA in her name and defer RMD until she reaches age 72. Tully is not required to take a lump sum distribution, receive all distributions by the end of the fifth year following Samuel's death, or even continue distributions-although these are all options available to her. As a spouse, she would have the option to roll over the remaining balance to an IRA in her name and defer RMD until she reaches age 72.

Social Security Penalties for Working After FRA

Until a person reaches his or her Social Security full retirement age, Social Security benefits are reduced if the recipient's earnings exceed a certain allowable limit. The allowable limit is raised each year. In applying the earnings test for the calendar year, only earnings before the month of attainment of full retirement age are considered. In 2021, a person under the full retirement age (age 66-67 for persons born in 1943 and later, based on birth year) loses $1 in Social Security benefits for every $2 earned above the allowable limit of $18,960. The rules for calculating the work penalty are different for the year in which an individual attains full retirement age. $1 in benefits will be deducted for each $3 an individual earns above the $ 50,520 limit for 2021, but only counting earnings before the month in which an individual reaches his or her full retirement age. For example, if an individual earns $60,520 during the months before the month in which he or she reaches full retirement age, $3,333 (33% of $10,000) in Social Security benefits will be lost because of the work penalty. A person who attains his or her Social Security full retirement age can earn as much as he or she wishes without a benefit reduction.

RMD for Subsequent / Remainder Beneficiary

Upon inheriting an IRA, subsequent beneficiaries can be named. If the beneficiary dies before the assets are fully distributed, the subsequent beneficiary may take a lump sum distribution of the remaining assets or the distribution must be taken under the 10-year rule. For example, assume an eligible designated beneficiary is taking RMDs over their life expectancy of 34 years but passes away after 12 years. The subsequent beneficiary can take distributions over the 10-year rule. This is another major change under the SECURE Act.

Pension Maximization

Using the pension maximization strategy, the employee would select the single life payout from their annuity or pension and use the "savings" over the joint life option to purchase a permanent life insurance policy on himself, naming the spouse as the beneficiary. When the employee dies, the pension payout will cease. The spouse, however, will receive a tax-free death benefit from the life insurance to generate tax-free income. (If the spouse dies first, the employee would cancel the insurance policy and continue receiving the higher pension payout.)

Sales of Shares & Their Methods

When selling shares in a mutual fund, you must report this sale on tax return; two questions: Which shares have been redeemed and what is the cost basis of those shares, are the shares short term or long term? There are three methods that the IRS allows: FIFO, Average Cost, Specific Identification. FIFO: this is the default. This method is important if the first shares have experienced the most appreciation but does not have the advantage of being able to time your gains and losses Average Cost: what it sounds like; most straightforward. Does not offer timing abilities. Specific Identification: If you want to take a loss, here you go. You can determine the cost basis and ST or LT results, therefore picking what shares were sold for investment-related taxes.

4% Rule

William Bengen developed the so-called "4% rule" in the early 1990s. Using historical data and a 50/50 stock/bond allocation, he argued that if the initial withdrawal rate were set at 4% of savings, and the dollar amount of subsequent withdrawals increased with inflation, just about all well-constructed portfolios would be able to last throughout retirement (at least for 30 years). Other researchers set the sustainable withdrawal rate higher, but in today's environment of sustained low interest rates, most agree that the rate needs to be lower in order to be sustainable throughout retirement.

Challenges of Shifting from Defined Benefit to Defined Contribution Plans

With defined contribution plans, risks are borne by plan participants/employees rather than by plan sponsors/employers (as with defined benefit plans). Many of these employees have little or no financial expertise.

Buying the Dividend

Year-end fund distributions apply to all shareholders equally, so even if shares are purchased in a fund just prior to a distribution, the shareholder will pay tax on any gains incurred by shares throughout the entire year. This can potentially result in a big tax hit. Therefore, clients who are considering a purchase around the time of a distribution—so-called "buying-the-dividend"—will want to consider its size relative to the size of the expected investment and how the transaction may fit in their overall tax strategy. Working with a tax adviser is advisable. Example. Lynn purchased $10,000 worth of EFG stock mutual fund on December 1 for $9,500. Several weeks later, she received a distribution check that included a capital gains distribution for shareholders of record as of December 15. Though she had owned these shares for just a few days, she received the distribution as a long-term capital gain. She could have set up her account to reinvest the capital gains, but the distribution would still be a taxable event. As is typically the case, the value of EFG decreased by the amount of the dividend paid.

Gathering Data

You need both quantitative and qualitative date in understanding the client. The data needed is:-family and dependent data-names, addresses, telephone numbers of other advisers they work with -assets, liabilities, net worth -income data -insurance and tax situation -employee financial benefits including stock options -investment experience, holdings, and outlook -retirement planning data -client owned business information-time horizons-anticipated educational, gifting, or other financial requirements -client and family health status -interests -occupation and employment expectations -risk tolerance -changes in lifestyle -financial goals

Ex. Howard, age 69, has contributed $100,000 in after-tax dollars to his qualified retirement plan at work. The balance in his account is $400,000. Howard's benefit is payable as a joint and survivor annuity with his 70-year-old wife, Joan. Howard wants to know how much of each monthly annuity payment he receives from the plan will be tax free. Using the table below, how will you calculate the correct amount?

divide $100,000 by 260 Howard and Joan's combined ages at their annuity starting date is 139. Based on their combined ages, they will receive 260 monthly payments over their lifetimes. By dividing $100,000 (after-tax contributions) by the estimated 260 monthly payments they will receive, they will know how much of each monthly annuity payment is a tax-free return of after-tax contributions. The remaining balance of each payment is therefore fully taxable.

Characteristics of Growth Stocks

high profit margins earnings-per-share growth of 15% or more sales and earnings highly independent of the general economy small dividends, if any (as all earnings are used to finance expansion) distinctive products or services above average price-to-earnings ratios (as much as two to four times that of S&P 500 stocks) high price-to-book-value ratios high betas high expectations for continued growth by the investment community

Ex. Many retirees have difficulty dealing with Bengen's (4% Rule) original safe initial withdrawal rate because

it does not provide adequate income. The biggest problem most people have with a 4% initial withdrawal rate is that it doesn't normally represent a lot of income. For example, it takes $300,000 of capital to produce $1,000/month.

Distributions from 401k and 403b Roth Accounts

it must be made after a five-taxable-year period (described below) of participation and one of the following circumstances must apply: the distribution must be received after the participant has reached age 59½ the distribution must be received by the participant on account of their disability the distribution must be paid to a beneficiary on account of the participant's death The way to remember the qualified purposes for employer Roth accounts is "Dad." D - Death A - Age - Age 59 ½. D - Disability Distributions of the following amounts are not treated as qualified distributions and are not eligible rollover distributions: corrective distributions of elective deferrals contributed to a Roth plan account that exceed the Section 415 limits (lesser of $58,000 or 100% of earnings for 2021) corrective distributions of excess deferrals that exceed the Section 402(g) limit ($19,500 in 2021, $26,000 if 50 or older) corrective distributions of excess contributions deemed distributions to a participant on account of a plan loan default

Ex. The advent of advanced technology has

made management of brokerage firms more difficult. With the increased sophistication of technical specialists, managing and controlling them has become more difficult for managers at brokerage firms.

Ex. John was killed in a car accident at age 45. His wife Lottie, age 40, is the primary beneficiary of his retirement account at work and his IRA. Thanks to you, John had sufficient life insurance, so there does not seem to be any immediate need for Lottie to take withdrawals from John's retirement assets. You and Lottie discuss her options for titling her inherited retirement accounts. Which of the following would give Lottie the most flexibility for tax-efficient distributions from John's retirement assets?

move some of John's money into Lottie's current IRA and place the rest into an inherited IRA titled John Q. Jones (deceased July 4, 2021) FBO Lottie S. Jones. One advantage of placing retirement assets into an inherited IRA is that no withdrawal for any reason would ever be subject to the 10% early withdrawal penalty (EWP) because it would always be coded as a withdrawal due to a death. That means Lottie would have access to this money without the 10% EWP but she would have to start RMDs when John would have been 72. A potential advantage of moving retirement money inherited from a spouse into the surviving spouse's own name is that the surviving spouse would be treated as the original owner for the start of RMDs. In this case, Lottie is five years younger than John. Thus, moving money into her name would give her five more years before facing RMDs. If this IRA was worth $250,000 when John would have been 72 and it grew at 6% for five years, it would be worth about $335,000 when Lottie reached 72. However, withdrawals from an account in her own name would be subject to the 10% EWP until Lottie reached 59½ unless the withdrawal met another exception. Thus, the most flexibility for Lottie would be moving some into each type of IRA. The more access she might need, the more would go into the inherited account. The more she wanted to delay RMDs, the more would come under her name.

Ex. You have a client, age 56, who has decided to take early retirement. She would like to maximize distributions from her IRA without having to pay the 10% penalty tax on premature distributions. Which, if any, of the following words of advice should you give her? At age 59½, she can stop taking substantially equal periodic payments until age 72, if she wishes. Use of the fixed annuitization method or the required distribution method will maximize the amount of substantially equal periodic payments she receives.

neither I nor II. The client must take a series of substantially equal payments for the longer of five years (until age 61) or until she reaches age 59½, after which she can stop taking substantially equal periodic payments until age 72 (RMD age) if she wishes. Of the three methods that may be used to calculate substantially equal periodic payments, use of the fixed amortization or fixed annuitization methods will maximize payments to your client. In contrast, use of the required distribution method will minimize payments to your client.

Ex. During retirement, John wants to receive $50,000 at the end of each year for the rest of his life. To calculate the amount that he will need to save, you need to solve for

ordinary annuity-set calculator at end. You do need to set the calculator in END mode and solve for ordinary annuity. If this were asking you to solve for an annuity due (where payments occur at the beginning of the period), you would set calculator for BEG.

All of the following are correct statements regarding longevity annuities except A) payments from longevity annuities are larger than those received from a regular annuity due to the delay in receipt of the annuity payments. B) accumulations in these annuities are exempt from minimum distribution rules at age 72 in 2021 and beyond. C) owners can put no more than 25% of their retirement plan money into a longevity annuity with an overall cap of $135,000 in 2021. D) owners must begin receiving income by age 75.

owners must begin receiving income by age 75. Owners must begin receiving income from a longevity annuity by age 85. All of the other statements are correct.

Qualified Preretirement Survivor Annuity (QPSA)

provides a lifetime annuity for the surviving spouse if the participant dies before receiving any retirement benefits. This differs from a qualified joint survivor annuity (QJSA) as it is mandated in defined benefit plans and continues payments to the surviving spouse of the plan participant who has died after leaving service. The QJSA must be actuarially equivalent to a single life annuity over the life of the participant and at least 50%, but not more than 100%, of the annuity payable during the joint lives of the participant and spouse. In other words, if the QJSA payout is $1,000 per month while both spouses are alive, the survivor's lifetime annuity cannot be less than $500, or more than $1,000 per month. In most cases, the payment to the survivor is 50% of the joint annuity.

Ex. All of the following are reasons reverse mortgages may become more common in the future except

reverse mortgage fees must be rolled into the loan. Fees may be rolled into the reverse mortgage, but that is not required. Until the late 1990s American tax law had strong incentives to purchase ever more expensive homes. This effect lingers on today. Next, people have to live somewhere. Buying a home is a forced savings plan as the mortgage is repaid each month. In addition, increases in home prices over time help accrue wealth. Reverse mortgages have the potential to fight sequence of return risk in several ways. First, reverse mortgage loans can pay off the original mortgage and thus eliminate the need for the original mortgage amount each month. Lowering income needs reduces the monthly need. Reducing the monthly need takes pressure off the portfolio. Also, money from a reverse mortgage is tax free (like all other loans received). Additionally, during a market downturn, monthly payments from a reverse mortgage can be substituted for portfolio withdrawals. In fact, the monthly reverse mortgage amount can be smaller than the normal withdrawal from a non-Roth retirement plan because the amount of income tax required with the retirement plan withdrawal is not needed when the monthly income is coming from a reverse mortgage.

Small-Firm Effect

stocks of small firms have earned abnormal returns, primarily in the month of January. Enables investors to reap returns greater than associated risks explain.

Ex. Social Security began as a program to provide retirement income, but has been expanded to provide all of the following income except

survivor benefits to spouse caring for a child under 19. Survivor benefits are provided to a spouse caring for a child under 16 or disabled. Age sixteen is significant for the spouse caring for the deceased worker's child. If there is more than one child, the youngest child turning 16 would mean the surviving widow providing care would lose benefits.

Ex. Which one of the following is correct about forces changing the financial services industry? A) technical specialists are harder to supervise B) the American public has little trouble differentiating between the various credentials held by people in financial services C) in the 1990s, major investment firms started shifting their capital structure toward the firm's owners taking larger and larger participation in investment losses and gains D) in general, money management firms are getting smaller and more niche

technical specialists are harder to supervise Senior management has experienced a more and more difficult time supervising highly technical specialists who engage in complicated financial engineering strategies. In the 1990s investment firms started moving from partnerships to corporations.

Efficient Market Hypothesis

the theory that asset prices reflect all publicly available information about the value of an asset. The efficient market hypothesis contends that current market prices reflect all the available information about issuers and the future expectations of their investors; therefore, attempting to find mispriced securities in an efficient market is a waste of time.

Ex. Regarding defined contribution plans, it is false that

they promise to pay a particular benefit at retirement. Unlike defined benefit plans, defined contribution plans do not promise to pay a specific benefit at retirement. Instead, benefits are determined by the account balance which is a function of the amount of contributions and the performance of the underlying investments. Defined contribution plans provide a separate account for each participant, and participants are generally given their vested benefit in a lump sum at retirement or termination. Defined contribution plan benefits are not reduced by the same retirement plan mathematical calculations that cause benefit reductions in defined benefit plans.

Ex. All of the following are true regarding Medicare Advantage plans except

to qualify, the beneficiary normally must be covered by Medicare Part A. Coverage for Part B is optional. To qualify, beneficiaries normally must be covered by parts A and B of Medicare and live in the plan's service area. Individuals with ESRD are not eligible for Medicare Advantage Plans; however, ESRD beneficiaries currently in a Medicare health plan can remain in the plan. Individuals enrolled in Part C of Medicare (Medicare Advantage) cannot purchase and do not need Medigap policies.

Ex. When thinking about a tax-diversified overall portfolio, when is the proper time to take distributions from an after-tax investment like a Roth IRA or a taxable brokerage account to fund living expenses in retirement?

when investments were down sharply. Tax diversification can help a client avoid selling portfolio assets at a loss. The point is that a client lives on after-tax income in retirement. Thus, she would have to sell enough shares of a taxable investment to pay the income taxes and also have the money to live on. If she pulled the money out of an after-tax investment like a Roth account or a regular brokerage account that did not have a large gain, the withdrawal amount during poor investment returns is reduced. The lower withdrawals should help the portfolio last longer in retirement.

Ex. At age 56, Frank began taking substantially equal payments from his IRA using the fixed amortization method. Two years later, Frank now wants to take smaller IRA distributions because the value of his account has declined by 40% during the recent bear market. If he switches to the required minimum distribution method, all of the following are true except

he cannot change his distribution method until he is 61. As a general rule, an individual must continue payments using the same distribution method for five years or until age 59 1/2, whichever comes later. If an individual is receiving payments under either the fixed amortization or the fixed annuitization method, he or she may make a one-time change to the required minimum distribution method in a subsequent year (For further details, see IRS revenue ruling 2002-62). Once such a change is made, it must be followed until the above-described time restriction ends. Frank is required to continue the payments for at least five years to avoid triggering the 10% penalty. Switching to the RMD method usually reduces the withdrawal by over 50%.

Ex. Mary is 69 years old. She is receiving $1,800 per month in Social Security. Her husband Ralph, age 67, who has not worked enough quarters outside the home to be covered in his own right, receives 50% of what Mary receives each month ($900). Assume that Mary dies tomorrow. What will Ralph's Social Security benefit be? Assume he has reached his survivor FRA.

$1,800 The $900 spousal benefit stops at Mary's death, and Ralph will begin receiving 100% of Mary's old-age Social Security benefit. The survivor benefit is a two-step calculation. First, the surviving spouse gets whatever check the deceased worker was receiving. The deceased worker might have been receiving a smaller check for starting earlier than the deceased worker's FRA or the deceased worker may have received delayed retirement credits. No matter what, the first step is that the surviving spouse starts by receiving whatever check the worker was receiving or was entitled to receive. The second step is to check if the surviving spouse is starting survivor benefits earlier that the surviving spouse's survivor FRA. The surviving spouse's survivor FRA is a schedule that is two years behind the worker's FRA. If the surviving spouse has not yet achieved the survivor's FRA, then the amount the deceased worker was receiving is reduced 25/36th of 1% for the first 36 months and 5/12th of 1% for all months in excess of 36 months. Note that the surviving spouse having filed early for his or her Social Security benefits does not impact the survivor benefit. For example, if Ralph would have been able to file for Social Security benefits at age 62, but Mary does not die until after Ralph achieved his survivor FRA, then Ralph's early benefits under another aspect of Social Security would not harm his survivor benefits.

Ex. Pa started receiving his Social Security benefits one year after his full retirement age (FRA). His primary insurance amount (PIA) was $1,800, but his delayed retirement credits took his monthly benefit up to $1,944. Ma started her Social Security early based on her work history. Her PIA was $1,200, but she received $840/month because she started her benefits four years early. Ma was one year past her FRA for survivor benefits when Pa died and she started receiving her survivor benefits. How much would she get each month?

$1,944 Survivor benefits are calculated in two steps. First, the surviving spouse gets whatever check the deceased spouse was receiving. In this case, Pa was receiving $1,944/month. The second step is checking to see if the surviving spouse is at her survivor FRA or older. Technically, this is the surviving spouse FRA, which mirrors the worker's FRA, but is increased on a two-year time lag behind the increase in the worker's FRA from 65 to 67. If the surviving spouse is at or older than this survivor FRA, then there is no reduction. If the surviving spouse commences survivor benefits earlier than her survivor FRA, then a reduction is applied based on how how many months survivor benefits start before the survivor would reach his or her survivor FRA. For people born in 1962 (not 1960) and later, the survivor FRA is age 67, the spouse's survivor benefits are reduced by .3393% per month the survivor benefit was begun prior to the applicable survivor FRA. Notice that Ma started her own initial retirement benefits based on her own work history. However, her starting early when Pa was alive was under the rules for when both of the couple are alive. Survivor benefits are a different set of rules. Since Pa lived until Ma reached her survivor FRA, Ma's survivor benefits would not be reduced and she would have received the same $1,944 he was receiving.

Ex. Juan, age 44, contributed $4,000 per year to his Roth IRA since opening it three years ago. Last year he converted $10,000 into his Roth IRA from his traditional IRA. This year he withdrew $25,000 to help his sister. Juan is in the 22% federal tax bracket. How much will he owe the federal government for this distribution?

$1,960 The first $12,000 is allocated to his contributions. This money is neither income taxed nor penalized, ever. Next comes the conversion money. It is not income taxed, but it is subject to the 10% early withdrawal penalty for five years. His distribution does not meet one of the exceptions, so it will be penalized. This is $1,000 of early withdrawal penalty on the converted amount (10% of the $10,000 conversion). The final $3,000 comes from earnings. This money is income taxed and 10% penalized. The earnings are subject to a 32% federal rate and amounts to $960, making the final total tax bill $1,960.

Ex. Chris and Eve Bronson have analyzed their current living expenses and estimated their retirement income need, net of expected Social Security benefits, to be $90,000 in today's dollars. They are confident that they can earn a 7% after-tax return on their investments, and they expect inflation to average 4% over the long term. Determine the lump sum amount the Bronsons will need at the beginning of retirement to fund their retirement income needs, using the worksheet below. (1) Adjust income deficit for inflation over the preretirement period:$ 90,000present value of retirement income deficit25number of periods until retirement4%% inflation rateFuture value of income deficit in first retirement year$239,925(2) Determine retirement fund needed to meet income deficit:$239,925payment (future value of income deficit in first retirement year)30number of periods in retirement The lump sum needed at the beginning of the Bronsons' retirement period is

$4,911,256 This PVAD calculation requires that the calculator be set for beginning-of-period payments. First, the annual retirement income deficit is expressed in retirement-year-one dollars, resulting in a $239,925 income deficit in the first retirement year. This income deficit grows with inflation over the 30-year retirement period, and the retirement fund earns a 7% return. The calculator inputs are $239,925, [PMT]; 30, [N]; 2.8846, [I/YR]. Solve for [PV], to determine the retirement fund that will generate this income stream. If you enter 2.8846 directly into the calculator, you will get $4,911,265. If you use the equation to compute I/YR, and then hit the I/YR button you will get $4,911,256. Either way the answer is clear. The difference is that when you calculate the I/YR, the calculator takes the interest rate out to nine decimal places. If you enter in the 2.8846, then the calculator only takes the interest rate to four decimal places.

Requirements for IRAs

-An individual (taxpayer) must have "compensation" (earned income or alimony from divorce settlements prior to 2019). Before 2020, contributions to a traditional IRA could not be made after age 70 1/2. This rule was deleted by the SECURE Act, allowing a person at any age to contribute as long as there is earned income. -It must be established for the exclusive benefit of an individual and the individual's beneficiaries. -It must be established as a custodial account or a trust set up in the United States. -Documents must be set in writing. -Contributions (other than rollovers) must be made in cash. For example, the IRA owner cannot take shares of stock from their safe deposit box, use them to fund the IRA, and then take a deduction for the value of those shares. -Contributions for 2021 cannot exceed 100% of an individual's earned income up to $6,000 per year per individual (or $12,000 for a married couple filing a joint return). Rollovers can be in excess of $6,000. Individuals who are at least age 50 by the end of the year may also make an additional $1,000 catch-up contribution (discussed below) for 2021. -The law permits a minimum $200 contribution to be made to an IRA in the following situation: If an individual's partially deductible IRA contribution is limited to an amount less than $200 (because of their active participant status, discussed later in this chapter), then a $200 de minimus contribution is allowed. -IRA contributions for a given tax year must be made by the income tax-filing deadline for that year, which is April 15th. Extensions are not included. -Individuals are immediately and fully vested in their contributions; IRA owners always have full control of their accounts and the assets in them. -Funds cannot be invested in life insurance policies or in collectibles—with the exception of certain coins and bullion—and shares of a publicly traded, stock exchange listed investment trust invested in gold or silver bullion. An investment in life insurance would result in the account losing its tax-deferred status as an IRA. -Prohibited transactions between an IRA and its owner will result in the income taxation of the entire fair market value of an IRA. In addition, penalties will be imposed for engaging in a prohibited transaction. An example of a prohibited transaction includes borrowing money from an IRA and using it as security for a loan. -Distribution of IRA accumulations must begin by April 1 of the year following the year in which the owner reaches age 72 in 2020 and later, regardless of the owner's employment status. -If an excess contribution is made to an IRA, then a 6% penalty tax will apply unless excess contribution and any earnings are withdrawn by the tax return filing due date (including extensions).

Planning for Retirement 5 Years Out

-Consider any big-ticket financial commitments you anticipate in the next 10 years and how these items might affect your retirement timeline. -Review your estate documents to ensure the language is up to date. Your estate documents should include items such as a will, a power of attorney, a living will, a health care proxy, and possibly a revocable trust. -Reallocate your investment portfolio based on your earnings timeline, focusing on performance, risk, and expenses.

Planning for Retirement 20 Years Out

-Create an emergency fund of three to six months of living expenses to avoid tapping into your 401(k) or home equity in the event of an emergency. -Boost your earning potential and benefits package by contributing the maximum annual amount to your 401(k), or at least enough to receive any available employer match. -Ensure you have a diversified investment portfolio so that you are invested for inflation-fighting growth and your assets are distributed across taxable, tax-deferred, and tax-free sources. Consider consolidating multiple retirement or brokerage accounts to simplify record keeping and possibly reduce expenses.

Advantages of HSAs, Business

-Employer contributions to an HSA are deductible for income tax purposes. -Employer contributions to an employee-account owner's HSA are not subject to payroll taxes. -Employee salary reduction contributions may be made to the HSA feature that is part of an employer-sponsored cafeteria plan. Salary reduction contributions made to an HSA are not subject to payroll taxes. -Employers may be able to redesign their existing health plans to take advantage of the HSA rules. For example, an employer might be able to reduce the premiums paid for an existing health plan by increasing the deductible and/or out-of-pocket costs. The reduction in premium costs could be used to fund separate HSAs established for employee-participants of the health plan.

Costs for Retirees

-Many retirees find that they spend less on housing, often because their mortgages are paid off by the time they retire or because they sell their large homes and buy smaller, less expensive houses or condominiums. This may not be the case if a second home is in the plan. Don't forget, though, that even a paid-off home is not expense-free; real estate taxes, utilities, insurance, and repairs will remain. -Retirees also tend to spend less on parking, dry cleaning, apparel, and education than do nonretirees. -Second cars for married couples are less necessary. Eliminating one vehicle reduces insurance expenses, vehicle registration taxes, license fees, and maintenance. -Expenditures for Social Security and retirement plans disappear. -Total income taxes may diminish in step with earned income reduction. Taxation, however, will be impacted by the amount of income coming from a qualified retirement plan, which will be fully taxable upon distribution.

Changes to the Affordable Care Act

Acquiring and Maintaining Coverage prohibits denial of coverage for children under 19 based on preexisting conditions keeps young adults covered until age 26 regardless of tax dependency status prohibits insurance companies from rescinding coverage except in cases of fraud allows individuals to enroll for coverage during open enrollment in marketplaces independent of preexisting conditions, expanding options for early retirees, and other transition events allows states to cover more people on Medicaid increases payments for rural health care providers to encourage increase of care in rural communities strengthens community health centers large employers must provide health insurance or be subject to fines/penalties (currently not being enforced) small employers are encouraged to provide health insurance to employees through the inducement of tax credits individuals need to obtain health insurance or face fines/penalties unless exempt (repealed) Health Care Costs eliminates lifetime limits on insurance coverage requires public justification of rate hikes over a certain percentage by companies guarantees the right to appeal denials of payment mandates percentage of premiums that must be spent on care versus administrative expenses and profits establishes consumer assistance programs in the states mandates certain preventive care coverage eliminates the prescription costs gap in Medicare Part D over time links payment to quality outcomes encourages integrated health systems reduces paperwork and administrative costs employers are encouraged to limit the employee portion of premiums to 9.5% of income to avoid fines purchases with individual or family incomes within a published range are eligible for subsidies that defray part of the cost of premiums premiums can no longer be linked to gender or health issues Changes to Coverage requires essential health benefits from all plans (ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental and substance use disorders, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services and chronic disease management, and pediatric services including oral and vision care) eliminates cost sharing requirements (co-pays) for preventive care Health Insurance Marketplace individuals and small businesses can buy qualified health benefit plans in a transparent and competitive insurance marketplace open enrollment for individuals to increase ease of analysis, levels of coverage are offered: Bronze Silver Gold Platinum Catastrophic coverage

Qualified Plan Loans

As long as a loan complies with the following IRC requirements, it will not be treated as a distribution and will not be subject to income tax or the 10% penalty on premature distributions: The term of the loan must not exceed five years, except if for the purchase of a primary residence, which may be for a longer period. Although there is no legal restriction on how long a retirement plan loan can be when buying a home, many plans choose to limit the repayment to 10 years. Loans must be available to all participants and beneficiaries on a nondiscriminatory basis. Hence, loans must not be available to highly compensated employees in greater proportions (as a percentage of account balance) than to nonhighly compensated employees. Loan repayments must be made at least quarterly on a substantially level amortization basis. Hence, "balloon deductions" are not allowed. Repayments are generally made through payroll, and if not repaid by termination of employment the loan may be considered a taxable distribution. The loan must be evidenced by a legally enforceable loan agreement or note specifying the amount of the loan, the term, and the repayment schedule. The amount of the loan typically may not exceed the lesser of $50,000 or one-half of the vested balance. The exact rules are: If the vested balance is under $10,000, then the entire vested balance is available for a loan. If the vested balance is between $10,000 and $20,000, then the available loan is $10,000 (which is greater than 50% until $20,000). If the vested balance is $20,000-$100,000, then the maximum loan is half the vested balance. The maximum retirement plan loan is usually $50,000, so having a vested balance greater than $100,000 generally does not impact the available loan balance. The exception to $50,000 being the maximum is for a qualified disaster loan. When a retirement account loan is taken due to a federally declared disaster, the $50,000 loan cap is replaced with $100,000. The maximum available loan balance is always reduced by the highest loan balance in the previous 12 months. For example, if a person had a vested balance of $120,000, their maximum loan would be $50,000. However, if they had a retirement plan loan with the highest balance in the last 12 months of $5,000, then the maximum loan available would be $45,000. A plan that offers loans must have a written loan policy in effect so that loans are made in accordance with plan provisions, and the loan policy. When a loan is taken, securities are sold and funds are actually removed from the participant's account. The amount repaid includes a "commercially reasonable interest rate"—typically prime. Interest payable on a loan is considered a personal expense of the borrower and is not deductible for income tax purposes. The SECURE Act bans retirement plan loans from being offered using credit cards or similar arrangements.

Financial Resources to be Considered when Affording Retirement

As they contemplate the affordability of retirement, clients generally look to the following financial resources: Social Security old-age benefits company pensions, IRAs, and tax-deferred annuities other sources of income, such as rental property personal savings in the form of cash value life insurance, mutual funds, bank CDs, etc.

Ex. Which one of the following will generally be the lowest?

Average Tax Rate The average tax rate will be lower than the marginal tax rate for everyone except those in the lowest tax bracket because the average tax bracket incorporates the benefit of the graduated rates. The marginal tax rate highest rate of income tax; it is the tax which is paid on the last dollar on income earned. The kiddie tax rate will be the same as if the parent(s) had received the taxable income above a certain amount.

Ex. Your client, Jake, age 55, is considering taking immediate distributions from his IRA. It was funded exclusively with rollover assets from a qualified pension plan after he decided to take early retirement. Jake would like to avoid any penalties associated with taking early distributions from an IRA. Which of the following are important planning considerations for Jake? Distributions can be part of a series of substantially equal periodic payments made over an individual's life expectancy Distributions can be made to an individual age 55 or older who has terminated employment with his or her employer. Under the required minimum distribution method (also known as the life expectancy method), the resulting annual payments are redetermined each year. Under the fixed annuitization method, the higher the interest rate assumption and the shorter the life expectancy, the greater the payment amount that results from the calculation.

I, III, and IV. The 10% early, premature distribution penalty is not assessed if distributions are part of a series of substantially equal periodic payments made over the plan participant's life expectancy or the joint life expectancy of the participant and spouse (or beneficiary of an IRA). Option I meets these requirements. Option II is incorrect. The ex-worker would have to have been age 55 or older at the end of the year he was terminated. Also, the distribution would have to come from the former employer's retirement plan, not an IRA. Under the required minimum distribution method (life expectancy method, Option III), the annual payment for each year is determined by dividing the account balance for that year by the number from the chosen life expectancy table for that year. Under this method, the account balance, the number from the chosen life expectancy table, and the resulting annual payments are redetermined for each year. Under the fixed annuitization method (Option IV), the higher the interest rate assumption and the shorter the life expectancy, the greater the payment amount resulting from the calculation. Conversely, the lower the interest rate assumption and the longer the life expectancy, the smaller the payment amount resulting from the calculation.

Ex. Your client, Susan, age 60, cannot afford to retire until age 62 when she becomes eligible for Social Security and company pension benefits. Susan no longer feels appreciated by her company and was recently passed over for a promotion. Her husband Brent, age 63, lost his company health care plan and dependent coverage when he retired, but Susan has been able to cover the two of them on her company's plan. If Susan takes early retirement at age 62, her company benefits plan stipulates that her health care coverage will end. Susan's health is excellent, but Brent's health is just fair. Susan should be concerned about which of the following issues regarding retirement? Her wealthy sister, wants her to retire so they can have more time together. Brent won't be eligible for Medicare for almost two more years. Her retirement may impact her spouse and family.

II and III.

Ex. Which of the following personal expenses are likely to decrease following an individual's retirement? travel education utilities income taxes home repairs

II and IV

Ex. Homer and Marge are married. Homer died this year at age 66. Marge is his sole beneficiary for his IRA. What is/are Marge's option(s) for handling the required minimum distributions (RMDs) from his IRA assets? Marge must begin distributions in the year following the year Homer died. Marge can move Homer's account into her previously existing IRA. She will not be subject to RMDs until she reaches age 72. Marge's only requirement is to have the account totally distributed by December 31 of the year with the 10th anniversary of Homer's death. Marge can move Homer's IRA into an inherited IRA. She would have to start RMDs when Homer would have been 72.

II and IV As the sole beneficiary who is a surviving spouse, Marge is an eligible designated beneficiary (EDB). Being a spouse EDB gives her the unique ability to move the decedent's retirement money into a retirement account in her name. This is not only true for an IRA; she could also move the money into her employer retirement account if the plan document allowed. Now she is treated as if the money was always hers. She will face the normal RMD issues when she reaches age 72. The option to move the money under her name is always true for Marge as a surviving spouse EDB no matter when Homer passed away relative to his required beginning date (RBD). Alternatively, since Homer died prior to his RBD, Marge could title the account as an inherited IRA and postpone RMDs until Homer would have been 72. A nonspouse EDB would have to start RMDs in the year following the year of death.

Ex. Henry, a fully insured worker for Social Security purposes, will retire next month at the age of 62. Henry is concerned that he may lose some of his Social Security benefits because of the earnings limitation test. Which of the following sources of Henry's income are counted for purposes of the earnings limitation test? IRA withdrawals self-employment earnings pension annuity payments part-time salary

II and IV. "Earned income" generally includes wages, salary, and self-employment earnings; investment income is not included in this definition. The following non-work sources of income do not count as wages for the earnings test: IRA withdrawals, pension annuity payments, inheritance payments, and dividend income.

Common Riders

Inflation rider, return of premium rider, restoration of benefits rider, qualified long-term care policies, partnership policies, hybrid policies. Inflation Rider: Allows for benefit to increase over time. Percentage of initial benefit amount; increases with inflation Return of Premium Rider: for an additional premium, an amount equal to the premiums paid will be refunded in the event no benefits are paid. Restoration of Benefits Rider: Provides for the total benefit amount available to be restored if the insured recovers from the need for care for a defined period of time. Ex. An insured has been collecting benefits under her policy for eight months after meeting the time frame for the elimination period. The policy provides for a benefit of $5,000 per month for up to five years, which would make her total benefit amount $300,000. Over the eight months, she has been paid $40,000, which reduces her total benefit available for future use to $260,000. If her health improves such that she no longer needs or qualifies for benefits, and then remains healthy for the six-month time period stated in the rider, the rider would then restore the total benefit amount to the original $300,000. Qualified Long-Term Care Policies: Could allow for tax-deductions on Schedule A, Form 1040. To be classified as a qualified policy, cognitive impairment must be covered, it must provide for nonforfeiture options, and it must be guaranteed renewable and conform to the National Association of Insurance Commissioners Model Act. It cannot include a determination of medical necessity by a physician, nor can it include return of premium. Partnership Policies: Protecting assets if they have purchased LTC that is a partnership plan. Individuals who buy these policies then gain dollar-for-dollar protection for their assets and can qualify for Medicaid if the policy runs out. Ex. An individual purchases a long-term care policy that meets his state's partnership plan requirements that provides $250,000 in total benefits payable at $5,000 per month. This person ends up needing care, which exhausts the $250,000 after 50 months, and still needs care after that. He would be able to deduct $250,000 worth of his total assets when he goes through the process of determining eligibility for Medicaid. If everything this person has beyond what Medicaid allows is in a $250,000 investment account, he would be allowed to keep that money and still get Medicaid benefits. Hybrid Policies: Pairs annuity or life insurance with LTC. Ex. Assume an individual deposits $100,000 into a deferred annuity paying 3% compound interest with a 300% long-term care maximum benefit and a five-year benefit period with no inflation rider. The amount available for long-term care expenses would be $300,000. Assuming no withdrawals have been made, in 20 years at 3%, the account value would be $180,611. If this person needs long-term care, then the annuity would have $5,000 per month available ($300,000/60 months) for those expenses. If the insured dies without needing long-term care, the account value would be available for the heirs. If the insured needs some long-term care and then dies, the heirs would receive the account value minus what was paid out for long-term care expenses.

Capital Assets & Acquisition

Inheritance: the cost-basis of the shares receive a step-up from the cost-basis of the decedent to the cost-basis on the day of the decedent's death. The holding period is understood to be LT. As a side note: if property is received, the executor of the decedent's estate may elect to value the property as "alternate valuation date", usually six months after the date of death. The basis of property becomes fair market value on that date. Gifts: The basis of stock is the lesser of the cost-basis from the donor or FMV. In instances where FMV is less, the donor should sell the stock and take an income tax loss before gifting the proceeds. As a side note: If there is a gift of property when the FMV on the date of the gift is less than their adjusted basis, then a gain is measured using their adjusted basis, or a loss is measured using the FMV on the date of the gift. If the property is sold between FMV and donor's adjusted basis, there is no gain or loss reported from the sale. The following example will help to illustrate these rules: Donor's basis $10 FMV on date of gift $5 A sale at $3 generates a $2 loss, as the FMV at the date of the gift must be used. A sale at $14 generates a $4 gain, as the donor's basis must be used. A sale at $7 generates no gain or loss. The basis is equal to the sale price of $7. Any sale between $5 and $10 would generate neither a gain nor loss.

Ex. Barb wants a retirement income of $5,000 at the beginning of each month for 25 years. If she is able to earn a return of 7% on invested assets, she needs $700,000 to fund her income. However, this does not include any inflation adjustment. By incorporating a 3.5% inflation factor, what is Barb's approximate funding requirement increase, stated at the time of retirement, if she wants to maintain the same purchasing power of her $5,000 monthly payment?

Instead of around $700,000, Barb will need slightly more than $1 million to maintain an inflation-adjusted budget with equal purchasing power (using an inflation-adjusted rate of 3.3816 compounded monthly); so the increase is approximately $300,000. Set calculator to BEG mode, 12 payments per year, and C/ALL Keystrokes: 25, shift, N 3.3816 I/YR 5000, +/-, PMT PV Solution: $1,014,389.93

Low P/E (Price to Earnings) Strategy

Low P/Es represent a consensus view that "the earnings of these stocks are not worth much." To the contrarian, that dim consensus might represent a buying opportunity. -- Dreman's advice to the investor is threefold: Select stocks with low P/Es, but only if the companies have solid performances; that is, select those in strong financial positions with favorable operating and financial ratios. Many stocks deserve low P/Es because the companies they represent are truly inferior. Others, however, trade at low P/Es because the companies or industries they represent are currently out of favor. Fad-following investors eventually become disenchanted with their current favorites and turn to others. When the low P/E stocks or industries come back into vogue, their prices are bid up, creating profits. Diversify. A diversified portfolio of low P/E stocks should have an equal weighting in 15-20 different stocks representing 10-12 industries. Only buy shares of medium to larger companies that are listed on the NYSE or AMEX or that are actively traded over the counter. -- Over the years, research on the efficacy of the low P/E approach is generally supportive of the strategy. Studies by Sanjay Basu show that low P/E portfolios outperform the market on a risk-adjusted basis even after transaction costs are considered. Another study by Haim Levy and Zvi Lehrman indicates the same, but it also indicates that transaction costs tend to eliminate the incremental profits of this approach. Dreman himself reported a study of 1,800 listed companies rank ordered into five groups by initial P/E ratios. During the period 1975 to 1985, the highest total returns were associated with the lowest P/E group, and the lowest total performance was earned by the highest P/E group of firms. These performance differences were substantial. A subsequent study by Richard Bernstein of Merrill Lynch shows that, for the period 1987 through 1992, the low P/E approach rewarded investors with a 122.3% return, compared to 79.9% for the S&P 500. In another study, described in his book Contrarian Investment Strategies: The Next Generation, Dreman looked at P/E ratios of 1,500 large U.S. stocks between 1970 and 1996. He divided these stocks into five parts based on these ratios and found that the lower the P/Es, the better the performance. Specifically, returns from the lowest P/E quintile to the highest quintile were 19.0%, 17.4%, 14.6%, 13.1%, and 12.3%. In sorting out these studies, one must remember that the definition of a low P/E stock may differ among studies (so, too, may the approach of the researcher and the time periods observed). Overall, the contrarian low P/E strategy is an intuitively appealing, demonstrably effective, and practical approach to investing by institutional and individual investors alike.

Ex. What is the value of a bond with a 6% coupon payment, a $1,000 par value (principal paid on maturity also called maturity value), and a maturity of 10 years, if the market interest rate (i.e., YTM) is 4%? 6%? 8%?

Make sure that the calculator is set to 2 periods per year: At 4%: 10 SHIFT [n] 4[i] 30[PMT] 1000[FV], then solve for [PV] DISPLAY: -1,163.51 (ignore sign) At 6%: 10 SHIFT [n] 6[i] 30[PMT] 1000[FV], then solve for [PV] DISPLAY: -1,000.00 (ignore sign) At 8%: 10 SHIFT [n] 8[i] 30[PMT] 1000[FV], then solve for [PV] DISPLAY: -864.10 (ignore sign)

Treasury Inflation-Protected Securities (TIPS)

With inflation being a real concern for retirement savers and retirees, one fixed-income security that can be used to counter inflation is the Treasury inflation-protected security, or TIPS. These securities are issued by the U.S. government, so there is no risk of default. They have a fixed interest rate, but, unlike traditional bonds, their principal increases every six months with the Consumer Price Index, thereby keeping up with inflation (in the event of deflation, the principal would decrease). Because of this structure, interest payments would also increase as the fixed rate is applied to the new, higher principal. These bonds are issued in multiples of $100 and with 5-, 10-, and 30-year maturities. At maturity, the investor receives the greater of the inflation-adjusted principal or, in the event of deflation, the face value of the bonds. TIPS are taxed yearly (at the federal level, they are exempt from state and local tax) on not only the interest paid but also on the inflation adjustment, even though that inflation adjustment isn't received until maturity. For this reason, TIPS are best used in a tax-deferred account such as an IRA. TIPS can be a good choice for at least part of the fixed-income component of a portfolio for individuals investing for retirement. For retirees, one strategy with TIPS would be to stagger maturities so bonds would mature yearly, and resulting cash flows could be used to pay the retiree's expenses. This would provide regular cash flow that would also keep up with the Consumer Price Index. It is important to remember that retirees' expenses do not necessarily coincide with the CPI. For example, in recent years health and energy expenses have increased much faster than inflation. While TIPS can be part of the solution to keep up with inflation, stocks over time can provide returns that exceed inflation.

Ex. Dan, age 41, has been contributing $2,000 annually to his IRA for seven years; his contributions have been fully deductible. The most recent year-end account value was $18,100. He also has accumulated $16,800 in his profit sharing plan account at work; the plan permits loans. This year, Dan needs approximately $5,000 to replace the 15-year-old shingles on the roof of his home and is considering either withdrawing this amount from his IRA or borrowing it from his profit sharing plan account. Which one of the following best describes the potential tax liability from these two options?

Withdrawing the funds from his IRA will result in a tax liability. Dan will be subject to ordinary income tax and an early withdrawal penalty on the $5,000 withdrawal amount. The $5,000 IRA withdrawal will be subject to ordinary income tax and to the 10% early withdrawal penalty. Plan loans that meet all legal requirements are not subject to income tax at the time of the loan. If the loan is paid off on schedule there is no income tax or early withdrawal penalty.

Exceptions to the 10% Early Distribution Penalty for IRA

due to the death of an IRA owner (such as distributions that are paid to the deceased owner's estate or beneficiary) due to permanent disability. The IRS's definition of a disabled person is strict. An individual is considered disabled only if they are unable to engage in any substantial gainful activity by reason of a medical impairment that is of indefinite duration or is expected to be long term or to result in death. that are part of a series of substantially equal periodic payments made over the owner's life expectancy or the joint life expectancy of the owner and the beneficiary of the IRA to the extent that they are used to pay unreimbursed medical expenses exceeding 7.5% (2020) of the individual's adjusted gross income to the extent that withdrawals do not exceed the amount paid for medical insurance premiums (for the IRA owner and their spouse and dependents) following the loss of employment. To qualify for this exemption, the IRA owner must have received at least 12 consecutive weeks of unemployment compensation during the current or prior tax year. when the funds are used by a first-time homebuyer. Distributions up to $10,000 taken for qualified first-time homebuyer expenses are not subject to the 10% penalty. To qualify, the amount must be used within 120 days to pay the qualified acquisition costs of the first-time homebuyer. Generally, these are the costs of financing, settlement, or closing related to buying, building, or reconstructing a personal residence. To qualify as a first-time homebuyer, the taxpayer and spouse must not have had an ownership interest in a principal residence for a two-year period prior to the date of purchase or commencement of construction. when the funds are withdrawn from a regular IRA to pay qualifying education expenses (tuition, fees, books, supplies, and equipment) required for enrollment or attendance at postsecondary education institutions, including graduate-level courses (there is no upper limit on these withdrawals). to a spouse or former spouse under the terms of a divorce decree or divorce settlement. Note: A QDRO must be used to award qualified plan assets to a divorcing spouse; in contrast, IRAs are not subject to QDRO requirements. certain distributions to qualified military reservists called to active duty qualified disaster distributions up to a $100,000 cumulative lifetime limit

Exceptions to the 10% Early Distribution Penalty for Qualified Plans

due to the death of the plan participant due to permanent disability. The IRC's definition of a disabled person is strict: An individual is considered disabled only if they are unable to engage in any substantial gainful activity by reason of a medical impairment that is of indefinite duration or is expected to be long term or to result in death. due to separation from service after age 55 part of a series of substantially equal periodic payments made over the participant's life expectancy or the joint life expectancy of the participant and their beneficiary. (This is an important issue for people who take early retirement; see below for details.) related to certain medical expenses not reimbursed by insurance. These must be specified in the plan documents. In any case, the exception applies only to expenses that exceed 7.5% of the participant's adjusted gross income (for 2020). related to a qualified domestic relations order (QDRO). A QDRO is a judgment, decree, or order that assigns part of a participant's benefits to the participant's spouse, former spouse, child, or other dependents. employer stock option plan (ESOP) dividends. An ESOP is a profit sharing defined contribution plan that puts employer shares in the accounts of plan participants. When these shares pay dividends, participants can take the dividends out without incurring an early distribution penalty. taken to correct previous excess contributions or deferrals certain distributions to qualified military reservists called to active duty distributions due to an IRA levy

Ex. Which of the following is not an acceptable strategy for filling gaps between actual costs and Medicare coverage?

enrolling in Medicare Advantage and purchasing a coordinating Medigap policy People who enroll in a Medicare Advantage plan cannot also maintain a Medigap insurance policy. Purchasing Medigap insurance, maintaining coverage through an employer-provided health plan, and qualifying for Medicaid are all plausible strategies to fill gaps between actual costs and Medicare coverage.

Ex. Mark, a financial adviser, has a client who has worked in two positions during his lifetime. The client's first position was a state or local government position that was not covered by Social Security. The client is receiving a pension from that employment. His second position was covered by Social Security and he is eligible for Social Security retirement benefits. Mark should advise his client that

his eligibility for Social Security retirement benefits may be reduced due to the windfall elimination provision (WEP). If you have a client who has worked in a position that was not covered by Social Security, and the client is receiving a pension from that employment, his eligibility for Social Security benefits based on his own work history covered by Social Security may be reduced due to the windfall elimination provision (WEP). The government pension offset provision (GPO) impacts Social Security benefits owed to spouses, ex-spouses, or to survivor benefits. If he has one or more survivors entitled to a benefit, the Social Security Administration recalculates the benefit to omit the WEP, which results in a higher survivor benefit. Reductions due to the WEP are NOT reflected in Social Security benefit estimates. One way to differentiate between the two is focusing on the "W" in WEP. The "W" can remind you of "worker." Thus, the WEP reduces Social Security retirement benefits based on your own work history. That leaves the GPO as the one that reduces a spousal Social Security benefit based on what the spouse is getting from a retirement plan based on employment that did not pay into Social Security (such as public school teachers in several states).

Financial Goals that May Conflict with Retirement Goals

housing education emergency funds care of elderly parents or a disabled child

Ex. All of the following are true regarding Medicare except

if you miss your initial enrollment period you will face a one-time penalty equal to 10% of your premium. If you miss your initial enrollment period, you will face a cumulative penalty equal to 10% of your premium for every 12-month period during which you could have signed up but didn't. All other statements are true.

Ex. All of the following may prompt companies to offer early retirement programs except

increasing profits. Declining profits may prompt companies to offer early retirement programs when reductions in personnel become a condition of business survival. Buyouts and mergers may prompt early retirement programs, as mergers can make certain departments or functions redundant. Outsourcing of company functions may prompt companies to offer early retirement programs, as outsourcing will eliminate many internal positions. Finally, moving a business unit may prompt companies to offer early retirement programs because it is often cheaper to offer such a program than it is to move employees to a new location.