CRPC Damage Control Mod: 7, 8, 9
What will be the amount and character of the capital loss carryover to the subsequent year, if any, if Sally has the following capital transactions during the current year? Long-term capital loss on sale of ABC stock $(6,500) Long-term capital gain on sale of DEF stock $ 2,200 Short-term capital gain on sale of XYZ stock $ 1,000
$300 long-term capital loss carryover Net long-term capital losses ($4,300) reduced by short-term capital gains ($1,000) result in a net long-term capital loss of $3,300. Since only $3,000 of this loss is currently allowed, the excess $300 is carried over as a long-term capital loss. The carryforward loss always retains its character as long- or short-term when moved into the next year.
What was the approximate dollar amount of U.S. retirement assets held in IRA accounts at the end of 2017?
$9 trillion
Over a period of 10 years, Mark Edmunds 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?
$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. (LO 4-2)
What is the estimated annual cost of conflicted advice according to the 2015 White House report?
1.0% The annual cost of conflicted advice is about 1% a year, according to the White House report. Various sources have disputed this amount, but the general consensus is that there are retirement investors paying too much in fees, which can significantly impact the value of their nest egg when they retire.
To remain qualified, pension plans must prohibit in-service withdrawals until employees reach age
62. Pension plans cannot keep qualified status if they permit in-service withdrawals to employees younger than age 62. Once employees reach age 62, pension plans can allow withdrawals.
The "required beginning date" (RBD) for IRA distributions is which one of the following?
April 1 of the year following the year in which age 70½ was attained
Before rolling assets from an employer sponsored plan to an IRA one should consider which of the following? the difference in creditor protection between the two savings vehicles the difference in when the 10% penalty will apply to distributions the difference in RMD rules that apply to the two savings vehicles All of the above.
All of the above. Prior to doing a rollover of assets from an employer plan to IRA there are number of factors need to be considered and compared. These include an examination of fees, services offered, investment options, when penalty free withdrawals are available, when required minimum distributions may be required and protection of assets from creditors.
Which of the following statements is correct about qualified joint survivor annuities? (QJSAs) All defined benefit and defined contribution plans must offer QJSAs. Only defined benefit plans must offer QJSAs. Only profit sharing plans must offer QJSAs. All pension plans must offer QJSAs.
All pension plans must offer QJSAs. All pension plans, which include defined benefit, cash balance, money purchase, and target benefit plans, must offer QJSAs.
The "suitability rule" is one of the key rules of the
FINRA Conduct Rules. The FINRA Conduct Rules require that recommended investments be "suitable" for clients.
Which act repealed a prohibition that had been in place preventing financial institutions from offering a combination of commercial banking, investment banking, and insurance services?
Gramm-Leach-Bliley Act of 1999 The Gramm-Leach-Bliley Act of 1999, also known as the Financial Services Modernization Act, repealed the part of Glass Steagall that had previously prohibited financial institutions from consolidating and offering a combination of commercial banking, investment banking, and insurance services.
. An income-tax-penalty-free distribution cannot be made from a tax-sheltered annuity (TSA) until the employee does which of the following? I. separates from service after attaining age 55 II. attains age 55 III. becomes disabled or dies IV. takes a distribution under most hardship withdrawal rules
I, and III only 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. (LO 7-3)
. Which of the following are correct statements about income replacement percentages? I. Income replacement percentages are typically much higher for those with higher preretirement incomes. II. Income replacement percentages vary between low-income and high-income retirees. III. Income replacement ratios should not be used as the only basis for planning. IV. Income replacement ratios are useful for younger clients as a guide to their long-range planning and investing.
II, III, and IV only The inverse of option I is true—those with a lower preretirement income typically need a much higher income replacement percentage in retirement. (LO 1-4)
Which one of the following statements regarding the uses of life insurance in estate planning is not correct? Insurance can be used to provide estate liquidity. Insurance can be used to pay estate taxes. Insurance can be used to facilitate the transfer of a business. Insurance benefits can be used to reduce a person's taxable estate.
Insurance benefits can be used to reduce a person's taxable estate. Life insurance placed in a properly drafted irrevocable life insurance trust (ILIT) more than three years prior to death will not add to a person's taxable estate; however, it will not reduce it. 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.
The provision that certain mutual fund policies cannot be changed without shareholder approval is addressed in the
Investment Company Act of 1940. The regulation of mutual funds is covered in the Investment Company Act of 1940.
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? Because of medical screening, healthy people without a preexisting condition who want to purchase LTC now but may potentially suffer from Alzheimer's disease in the future cannot obtain a qualified LTC policy. Payments from a qualified LTC policy paying a $330/day charge of an LTC facility will be income-tax-free. Practically all current long-term care policies provide for all levels of care—skilled, intermediate, custodial, and/or home care—if the patient needs assistance with two of the six activities of daily living. Policies issued today generally require an individual to be eligible for Medicare nursing home benefits prior to receiving any insurance policy benefits.
Payments from a qualified LTC policy paying a $330/day charge of 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 $370 (for 2019). 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. (LO 5-7)
Which one of the following statements regarding property held in tenancy in common is not correct? Property held in this form will be included in the probate estate. More than two people can own the same property in this manner. Each tenant has the right to transfer his or her interest without the consent of the other tenants. Property held in this form will pass by right of survivorship.
Property held in this form will pass by right of survivorship. Property held in tenancy in common does not have a right of survivorship feature. It will therefore be a probate asset and will disposed of by will or the laws of intestacy. Any number of persons can take title to the same property as tenants in common and each tenant in common has the legal right to transfer his or her interest without the consent of the other tenants, although it may be difficult to find a buyer for a partial interest.
Which one of the following statements is correct regarding managing a taxable account? Net capital losses of $5,000 may be used in full to reduce taxable income. Taxation on dividends that are reinvested is deferred until ultimate disposition of the stock. Qualified dividends are generally subject to a preferential tax rate of 0%, 15%, or 20%. Active traders need not worry about the timing or taxability of their transactions.
Qualified dividends are generally subject to a preferential tax rate of 0%, 15%, or 20%. Qualified dividends are subject to preferential long-term capital gain rates. Net capital losses of $3,000 per year are deductible and any additional losses can be carried forward to a future year. Dividends are subject to taxation, even if reinvested. In a taxable account, traders certainly do need to take into account the timing and taxability of their security transactions. (LO 8-1)
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. The designated beneficiary must be determined by September 30 of the year following the participant's death in order to avoid having to distribute the full IRA balance under the five-year rule.
Jeffrey died after beginning his required minimum distribution payments. He has named his daughter as the sole beneficiary of his IRA. Which one of the following statements is correct regarding her options for this IRA? She can roll over the proceeds to an IRA in her own name. As a nonspouse beneficiary she must distribute the full account balance within five years. She can calculate her annual minimum distribution requirement using the Uniform Life Expectancy table. She must calculate her annual minimum distribution requirement using the fixed-term method.
She must calculate her annual minimum distribution requirement using the fixed-term method. She must calculate her annual minimum distribution requirement using the fixed-term, or unrecalculated, method. The Uniform Table is only available to the original participant and spouse beneficiaries who choose to roll inherited IRAs to their own name. Non-spouse beneficiaries do not have the option of rolling inherited IRAs to their own name. The requirement that an IRA's balance be distributed within five years of the participant's death does not apply when there is a named beneficiary.
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 could borrow up to $43,750; and since the loan is for his primary residence, it could be for longer than five years. George can borrow up to $50,000, but the term of the loan would be limited to five years. The amount of the loan would be limited to $50,000; and since the loan is for his primary residence, it could be for longer than five years.
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. (LO 7-1)
Which one of the following is a requirement or rule related to the Section 121 exclusion? The taxpayer must have owned and lived in the home five years before the sale. Capital gains on the sale may be excluded for up to $500,000 for all taxpayers. The exclusion may not be used more than once within a two-year period unless an exception applies.
The exclusion may not be used more than once within a two-year period unless an exception applies. Unless the taxpayer moves because of a new job, for health reasons, or due to other unforeseen circumstances, only one exclusion is allowed within any two-year period. The taxpayer must have owned and lived in the home for at least two of the previous five years before the sale. This does not require the taxpayer to have owned the home for five years. Single taxpayers are allowed an exclusion of up to $250,000, while married taxpayers who file jointly are allowed an exclusion of up to $500,000.
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 number of expected payments. The number of expected payments is divided by the investment in the annuity contract. The total expected return is divided by the investment in the annuity contract. The investment in the annuity contract is divided by the total expected return.
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 exclusion ratio for a variable annuity contract is calculated by dividing the investment in the contract by the number of expected payments. (LO 4-5)
Which one of the following describes the taxability of tax-exempt market discount bonds? They are exempt from taxation. The market discount is subject to capital gains upon the sale or redemption of the bond. The market discount is taxed as ordinary income upon the sale or redemption of the bond.
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
Which one of the following is a correct statement about the amount of Social Security retirement benefits available when a fully insured worker's retirement benefit begins at full retirement age (FRA)? The worker will receive 80% of his or her primary insurance amount (PIA). A 63-year-old spouse of the retired worker will receive at least 50% of the worker's PIA. At full retirement age, the worker's spouse will receive at least 50% of the worker's PIA. If the spouse of the worker has attained FRA and is entitled to benefits on their earning record, the benefit is the lesser of 100% of the spouse's own PIA or 50% of the worker's PIA.
The spouse, at their Social Security full retirement age, will receive 50% of the worker's PIA unless the spouse's Social Security benefit is higher based on his or her own earnings. (Note: The FRA began increasing for those workers who reached age 62 in the year 2000.) Answer a. is wrong because at full retirement age the worker will receive 100% of PIA. Answer b. is incorrect because the spousal benefit would be less than 50%. The 50% of PIA is reduced for each month the spouse is under full retirement age when benefits begin. Answer d. is wrong because the spouse would receive the higher of 100% of their own PIA or 50% of the spouse's PIA. (LO 3-4)
Which one of the following statements regarding intestate succession statutes is not correct? They are controlled by state law. They may give some individuals the income or use of property for a specified period of time with title to the property going to another person. If the decedent had a surviving spouse, he or she will receive some part of the intestate estate. They cannot give property to friends of the decedent or to charity.
They may give some individuals the income or use of property for a specified period of time with title to the property going to another person. Property distributed in this manner must be placed in trust. Intestacy laws distribute only outright title to property, with no provisions for trusts. Each state determines its own intestate distribution scheme but all give some property to a surviving spouse to prevent his or her total disinheritance. They cannot give property to friends of the decedent or to charity as there is no way to determine which friends or charities the decedent might have desired to receive his or her property.
The 10% penalty on early distributions from a qualified plan can be avoided if participants elect a fixed period annuity of 5-10 years. the distribution is for a first-time home purchase up to $10,000. the distribution is for certain medical expenses in excess of 20% of AGI. a plan loan is repaid on a timely basis.
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 10% (7.5% if over age 65) of the participant's AGI. The first-time home purchase exclusion applies only to IRAs.
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.
Once selected, beneficiaries of a qualified profit sharing plan can be changed
at any time. Beneficiaries of a qualified profit sharing plan, normally, can be changed at any time.
Which one of the following will generally be the lowest? average tax rate Kiddie Tax Marginal Tax
average tax rate The average tax rate will always be lower than the marginal tax rate, as it 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 a trust or estate had received the taxable income.
The SEC commissioned a RAND study, which found that there was a great deal of confusion for investors as far as understanding the differences between
broker-dealers and investment advisers. The RAND study found that there was a great deal of investor confusion between investment advisers and broker-dealers, including confusion over their duties, the titles they use, the services they offer, and the fees they charge.
In-service withdrawals prior to age 62 are not permitted from which of the following?
cash balance plans In-service withdrawals at any age may be permitted from profit sharing plans (including ESOPs and stock bonus plans), assuming certain other requirements are met. In-service withdrawals prior to age 62 are not permitted from any pension plan, including cash balance plans.
Which of the following is not a step in determining the best plan distribution option? review the distribution options project cash needs and sources of income calculate plan payments and tax implications under each available option compare the options to what the plan may offer in the future
compare the options to what the plan may offer in the future Reviewing the distribution options is the first step in determining the best plan distribution option. In order, the other steps are (2) project cash needs and sources of income, (3) calculate plan payments and tax implications, and (4) determine which option is most suitable. Comparing options that may be available in the future is not one of the steps.
All of the following could stand alone as descriptions of the process of "estate planning" except creating a will. planning for the conservation and distribution of the client's estate during life and at death. considering both tax and non-tax implications of estate transfer transactions.
creating a will. "Creating a will" does not adequately describe the process of estate planning. Estate planning generally focuses on the conservation and distribution of the client's estate during life and at death and requires consideration of both tax and non-tax implications of estate planning transactions.
Dividend reinvestment plans are popular because
dividends can be used for discounted stock purchases. The biggest benefit of a dividend reinvestment plan is the ability to purchase additional shares of stock at a discount. Even though the dividends are reinvested, they are currently taxable. Remember that when determining basis, the taxpayer must keep meticulous records of all stock purchased and reinvested dividends.
You sell your client a GNMA based on your explanation that they are "safe" because they are guaranteed by the U.S. government. In which one of the following ethical duties may you have failed your customer?
duty to disclose The duty to disclose requires an investment professional to explain the risks of investments sold to clients, even those backed by the U.S. government. Even though they are free of default risk, GNMAs are still subject to many other risks, such as interest rate and purchasing power risk.
On "May Day" (May 1, 1975), which of the following events occurred? Glass Steagall was repealed. SIPC insurance fund was established. ERISA was enacted into law. fixed rate commissions were abolished.
fixed rate commissions were abolished. On "May Day," fixed rate commissions were abolished, and the first discount brokers came into existence. Prior to May Day, commission rates had been set by the NYSE.
The optimal withdrawal rate when taking systematic withdrawals depends on all of the following except
historic inflation rates. The optimal withdrawal rate when taking systematic withdrawals depends on the inflation adjustments that will be made going forward, not on historic rates of inflation. It also is impacted by the participant's age, risk tolerance and asset allocation.
Which one of the following techniques will result in tax deferral? reinvesting mutual fund dividends into more shares of the fund investing in high-growth stocks exchanging stocks on a regular basis by selling and reinvesting the proceeds
investing in high-growth stocks Investing in high-growth, low-dividend-paying stock is one form of deferring tax liability. The constant sale and repurchase of stocks will generate a tax liability with each sale, thus not offering any tax deferral.
The increase in value in the shares of stock distributed from a qualified stock bonus plan is known as
net unrealized appreciation. The increase in value in the shares of stock distributed from a qualified stock bonus plan is known as net unrealized appreciation.
The IRS permits hardship withdrawals from 401(k) plans in cases of "immediate and heavy financial need." Which of the following is not considered immediate and heavy? payments to prevent defaulting on a mortgage for a vacation home purchase of a primary residence medical expenses tuition payments
payments to prevent defaulting on a mortgage for a vacation home Although payments to prevent eviction from a primary residence are considered immediate and heavy, payments for a vacation home are not. The other options are considered immediate and heavy expenses.
Which one of the following assets is not held in will substitute form? property held in a revocable inter vivos trust property held as tenants by the entirety joint property with right of survivorship property held as community property
property held as 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.
Which of the following is the most important area of concern that was addressed in the Dodd-Frank Wall Street Reform Act? derivatives trading fiduciary standard hedge fund regulation systemic risk
systemic risk Concern over systemic risk and the need to maintain a stable financial system is the primary issue that Dodd-Frank addressed. The financial system itself almost came to a grinding halt in 2008. Derivatives did contribute to the crisis, but the crisis spread well beyond the derivatives market into areas that no one expected, such as the commercial paper market. Hedge fund regulation was addressed but was not the most important area of concern. Dodd-Frank asked the SEC to look into a uniform fiduciary standard for both broker-dealers and investment advisers.
Which one of the following represents the basis of stock acquired by gift, if the fair market value on the date of gift is less than the donor's basis? donor's basis fair market value at the date of the gift the basis is not known until the stock is sold
the basis is not known until the stock is sold Normally, the basis of an asset acquired by a gift will be the donor's adjusted basis. However, if the fair market value on the date of the gift is less than the donor's basis, it is not possible to know the donor's basis until the asset is sold. If the asset is sold for less than the value on the date of the gift, the loss is determined from the value on the date of the gift and the holding period is determined from the date of the gift. If the asset is sold for a value above the donor's basis, the gain is determined from the donor's basis and the holding period began when the donor purchased the asset. If the asset is sold for a price between the donor's basis and the fair market value on the date of the gift, there is no taxable gain or loss, so the holding period is irrelevant.
Which one of the following is not a possible purpose of probate? the determination that a person has died the determination that a person has died with a valid will the determination that a surviving spouse is entitled to property owned by both spouses as joint tenants the determination that a person has died without a valid will
the determination that a surviving spouse is entitled to property owned by both spouses as joint tenants No court determination of this matter is required since this result is mandated by state statute. In order for the provisions of a will to be effective, it must be determined through the probate process that the testator has died and whether the decedent left a valid will to know whether to enforce the provisions of the will or the laws of intestacy.
All of the following are characteristics of a qualified longevity annuity contracts (QLACs) except receipt of income payments is typically deferred until age 85. the participant can elect either a fixed or variable annuity. up to 25% of a qualified plan (or IRA) balance can be used to purchase a QLAC and be exempted from RMD requirements. they are a means of transferring longevity risk to an insurance company
the participant can elect either a fixed or variable annuity. QLACs must be fixed (not variable) annuities. The other statements are true regarding QLACs
All of the following assets would be included in a decedent's gross estate except life insurance proceeds from a policy on the decedent in which the decedent had assigned all incidents of ownership two years before her death. the proceeds from a life insurance policy on the decedent that was always owned by the decedent's spouse, with the spouse as the named beneficiary an irrevocable trust established by the decedent five years before his death that paid all income to him until death, then the corpus to his children. a residence that was owned by the decedent and his spouse as joint tenants with right of survivorship..
the proceeds from a life insurance policy on the decedent that was always owned by the decedent's spouse, with the spouse as the named beneficiary. Because the decedent never owned this policy, and his estate is not the beneficiary, these proceeds are not included in the decedent's gross estate. The decedent's retained right to income in option c. causes inclusion. The decedent owned an interest in the residence at death, and therefore his interest must be included in his gross estate. In option a., because the decedent assigned incidents of ownership in this policy within three years of death, the proceeds must be included in the decedent's gross estate. (LO 8-8)
