Kaplan CFP Test Review

A simplified employee pension (SEP) plan: 1. Requires employer contributions on a nondiscriminatory basis. 2. Can be integrated with Social Security. 3. Participation cannot be denied on the basis of age to any employee 21 years of age or older. 4. Imposes mandatory employer contributions. A) 1, 2, and 3. B) 3 and 4. C) 1 and 2. D) 1, 2, 3, and 4.

A) 1, 2, and 3. Only statement 4 is incorrect. A SEP plan is a retirement plan that uses an IRA as the receptacle for employer/employee contributions. The SEP plan is often a good choice for very small companies because of its low cost and ease of administration. All employer contributions to a SEP plan are discretionary.

Which of the following issues should a financial planner understand to conduct retirement planning consistent with the unique situations that make up the client's profile? 1. Attitudes toward retirement and saving for retirement 2. Health issues and perception of life expectancy 3. Client investment savvy and stability of marriage A) 1, 2, and 3 B) 1 only C) 3 only D) 1 and 2

A) 1, 2, and 3. Statements 1, 2, and 3 are all issues that a financial planner should understand to prepare a retirement plan consistent with the unique situations that make up the client's profile.

Which of the following are characteristics of property owned as tenants by the entirety? 1. Can only be owned by spouses. 2. Each owner has an equal ownership interest in the property. 3. Transfer of property does not require the consent of the other owner. 4. Includes a right of survivorship. A) 1, 2, and 4. B) 4 only. C) 1 and 3. D) 1, 2, and 3.

A) 1, 2, and 4. Tenants by the entirety can only be owned by spouses. Each spouse holds an equal joint interest in the property. Any transfer of the property requires the approval of both spouses acting as one. Upon the death of one spouse, the property passes to the surviving spouse by right of survivorship.

Based on Markowitz's theory, which of the following portfolios do NOT belong on the efficient frontier? Portfolio Expected Return Standard Deviation 1 10% 12% 2 11% 13% 3 14% 12% 4 17% 17% 5 19% 17% A) 1, 2, and 4 B) 3 and 5 C) 1 and 3 D) 1 and 2

A) 1, 2, and 4. The efficient frontier consists of portfolios with the highest expected return for a given level of risk. Portfolio 3 has a higher expected return and a standard deviation less than or equal to portfolios 1 and 2. Therefore, portfolios 1 and 2 are not on the efficient frontier. Portfolio 5 has a higher expected return and a standard deviation equal to portfolio 4. Therefore, portfolio 4 is not on the efficient frontier.

Which of the following retirement plans can allow in-service withdrawals for all plan participants with vested plan balances? SEP plans. Money purchase pension plans. Profit-sharing plans. Section 403(b) plans. A) 1, 3, and 4. B) 2 and 3. C) 3 only. D) 1 only.

A) 1, 3, and 4. Pension plans only permit in-service withdrawals for employee-participants age 62 or older. All of the other types of plans allow in-service withdrawals if the plan document permits, but such distributions may subject the participant to early withdrawal penalties.

What is the self-employment tax rate applicable to the amount of income less than or equal to the Social Security taxable wage base? A) 15.3% B) 12.4% C) 7.65% D) 6.2%

A) 15.3%. The self-employment tax rate is 15.3% of income that is less than or equal to the Social Security taxable wage base and consists of 12.4% for Old Age and Survivors Disability Insurance tax (OASDI) and a 2.9% Medicare tax. All earnings above the Social Security wage base continue to be subject to the 2.9% Medicare tax.

Tammy doesn't begin her Social Security benefit at FRA (age 66), instead opting to delay while collecting delayed retirement credits. When she reaches age 68, however, she encounters financial difficulty and must file for her benefits. How much will her payment have increased? A) 16% B) 8% C) 5% D) 24%

A) 16%. Tammy will receive two years of delayed retirement credits. Each year she will accrue an 8% payment increase, for a total of a 16% increase. The delayed retirement credit is 8/12th of 1% for each month past FRA until ending when the person reaches 70.

Ron has 3 separate passive activities and has an at-risk amount in excess of $100,000 for each. During the year, the activities produced the following income (losses): First activity ($40,000) Second activity ($20,000) Third activity $15,000 Net passive loss ($45,000) Ron's suspended losses are as follows: A) $0 to activity 1; $0 to activity 2. B) $22,500 to activity 1; $22,500 to activity 2. C) $30,000 to activity 1; $15,000 to activity 2. D) $40,000 to activity 1; $20,000 to activity 2.

C) $30,000 to activity 1; $15,000 to activity 2. ($40,000 ÷ $60,000) × $45,000 = $30,000 to activity 1. ($20,000 ÷ $60,000) × $45,000 = $15,000 to activity 2. Losses are allocated on their percentage of the total loss.

Sharon, single and age 58, retired two years ago and is receiving a $600 monthly pension from her previous employer's qualified pension plan. She recently accepted a position at a small CPA firm that has no pension plan. She will receive $5,000 in annual compensation from the CPA firm and will continue to receive $7,200 in annual pension benefits. What is Sharon's maximum deductible contribution to a traditional IRA for 2022? A) $0 B) $7,000 C) $5,000 D) $6,000

C) $5,000. Sharon is over age 50 and does not participate in an employer-sponsored retirement plan. Therefore, she can contribute the lesser of her earned income ($5,000) or $7,000 to a traditional IRA in 2022.

Tina wants to purchase a home 6 years from today for $150,000. To attain this goal, how much should Tina invest at the end of each 6-month period if she expects to earn a 12% annual rate of return, compounded semiannually, on her investments? A) $18,483.86 B) $8,388.26 C) $8,891.55 D) $16,503.44

C) $8,891.55. END mode FV = 150,000 I/YR = 6 (12 ÷ 2) N = 12 (6 × 2) PV = 0 PMTOA = (8,891.55), or $8,891.55

If the actual deferral percentage (ADP) for nonhighly compensated employees is 9%, what is the maximum deferral percentage for highly compensated employees? A) 11.00% B) 12.50% C) 11.25% D) 18.00%

C) 11.25%. For amounts higher than 8%, the allowable spread between NHCEs and HCEs is 1.25 (125%). So for this question, 9% × 1.25 = 11.25%. Besides the 1.25 times test, the other test is the 200% rule with a maximum difference of 2%. In this case, 200% is 18%, but the maximum difference of 2% brings this test down to 11%. Since 11.25% is higher, that test decides how much highly compensated employees could contribute.

In which of the following retirement plans can forfeitures be reallocated to participants to increase account balances of plan participants? A) Cash balance pension plans B) Traditional defined benefit pension plans C) ESOPs D) SIMPLE IRAs

C) ESOPs. Defined benefit pension plan forfeitures must be used to offset plan costs. Cash balance pension plan forfeitures must be used to offset plan costs. A cash balance pension plan is a type of defined benefit pension plan. ESOPs can use forfeitures to increase the account balances of remaining participants. An ESOP is a type of profit-sharing plan featuring ownership of employer stock. SIMPLE IRAs require 100% immediate vesting.

Which of the following statements regarding a personal statement of financial position is CORRECT? A) Assets + liabilities = net worth. B) Current liabilities are due within two years. C) Personal use assets include cars and furniture. D) Long-term liabilities are due in more than two years.

C) Personal use assets include cars and furniture. Current liabilities are due in less than one year, while long-term liabilities are due in one year or more. Assets - liabilities = net worth.

Which of the following is a characteristic of "negligence per se"? A) The injured party has to prove negligence. B) Under certain situations, liability may be imposed simply because an accident happened. C) The injured party will be awarded damages, even though there was no legal wrongdoing. D) Negligence per se is a situation in which the act itself constitutes negligence.

D) Negligence per se is a situation in which the act itself constitutes negligence. Negligence per se is a situation in which the injured party is relieved of the burden of proving negligence because the act itself (e.g., drunk driving) constitutes negligence. The injured party does not have to prove negligence.

Maurice has a large-cap growth mutual fund. The fund has returned an average of 6.25% over the past five years. During the same period, the S&P 500 Index returned an average of 5.75%. The risk-free rate of return is 1.55%. The fund has a beta of 1.46. Did the fund outperform the benchmark return on a risk-adjusted basis? A) No, the portfolio underperformed the benchmark by 0.50%. B) Yes, the portfolio outperformed the benchmark by 0.75%. C) Yes, the portfolio outperformed the benchmark by 1.30%. D) No, the portfolio underperformed the benchmark by 1.43%.

D) No, the portfolio underperformed the benchmark by 1.43%. Calculate Jensen's alpha to determine if the portfolio outperformed or underperformed the benchmark return. Alpha = 0.0625 - [0.0155 + (0.0575 - 0.0155)1.46] Alpha = 0.0625 - 0.0768 = -0.0143, or -1.43% A negative alpha indicates that the portfolio manager underperformed the benchmark return.

Which of the following items would NOT be included on a statement of financial position? 1. Adjusted tax basis of a real estate investment 2. Investment income 3. Fair market value of automobiles 4. Mortgage payments A) 3 only B) 1 and 2 C) 2 and 4 D) 1, 2, and 4

D) 1, 2, and 4. The adjusted tax basis of a real estate investment would not be included on a statement of financial position. Only the fair market value (FMV) of the real estate investment would be included as an asset. Mortgage principal balances, not mortgage payments, are included on the statement of financial position. Investment income would be reported on a statement of cash flows, not a statement of financial position.

Which of the following plans are allowed to offer Section 401(k) provisions? Profit-sharing plans. Employee stock ownership plans (ESOPs). Traditional defined benefit pension plans. Cash balance pension plans. A) 3 and 4. B) 1, 2, and 4. C) 2 and 3. D) 1, 2, and 3.

D) 1,2,3 Defined contribution plans, such as profit-sharing plans, stock bonus plans, ESOPs, and savings plans are allowed to offer Section 401(k) provisions. A traditional defined pension benefit plan is permitted to accept Section 401(k) pretax employee contributions (DB(k) plans). Cash balance pension plans cannot offer Section 401(k) provisions.

All of the following statements are correct regarding the taxation of capital gains and losses EXCEPT: A) gains only become taxable if and when they are realized. B) short-term gains are taxed as ordinary income, whereas long-term gains are subject to a maximum tax rate of 0%/15%/20%, depending on the taxpayers AGI. C) capital gains and losses arise whenever capital assets, such as stocks and bonds, are bought and sold for different amounts. D) taxable gain equals the purchase price less the sales price.

D) taxable gain equals the purchase price less the sales price. The taxable gain equals the net sales price (minus commissions) less the adjusted basis (i.e., purchase price plus commissions).

As a general rule, the debt-to-income ratio should not exceed what percentage of monthly gross income? A) 28% B) 38% C) 22% D) 36%

As a general rule, the debt-to-income ratio should not exceed 36% of monthly gross income.

Recently, Vance inherited a large amount of one stock from his late Aunt Carol. Vance's basis in the stock is $500,000. He is concerned that the stock may decline in value in the near future. What is the best investment strategy that he could use to protect the stock from substantial downside risk? A) Stock index futures B) Purchase a put option C) Write a call option D) Zero-cost collar

B) Purchase a put option. Vance should purchase a put option to protect his position. His portfolio would be protected from downside risk, and his loss is limited to the amount of premium paid for the put option.

Calculate the maximum benefit that may be funded for in the current year for Winona, who participates in her employer's traditional defined benefit pension plan. Her highest three consecutive years' salaries are shown below. Winona will have more than 10 years of service with the same employer at retirement. Highest Salaries Current year (−2) $ 90,000 Current year (−1) $100,000 Current year $110,000 A) $100,000 B) $90,000 C) $135,000 D) $120,000

A) $100,000. The maximum annual benefit under a traditional defined benefit pension plan is the lesser of $235,000 (2022) or the average of the participant's compensation over the three consecutive highest earning years. In this case, the maximum benefit is $100,000 [($90,000 + $100,000 + $110,000) ÷ 3].

Mary Sue's salaries from 2008-2022 are shown below. What is the maximum annual compensation that may be used to determine Mary Sue's annual benefit under a traditional defined benefit pension plan for 2022? Salaries: 2008-2016 $65,000 2017 $100,000 2018 $120,000 2019 $90,000 2020 $125,000 2021 $110,000 2022 $90,000 A) $111,667 B) $108,333 C) $140,000 D) $96,666

A) $111,667. In a defined benefit pension plan, the maximum annual benefit is limited to the lesser of $245,000 (2022) or the participant's compensation averaged over the three highest consecutive earnings years. In this situation, Mary Sue's highest three consecutive years of compensation are $120,000 + $90,000 + $125,000 = $335,000 ÷ 3 years = $111,667.

Lisa is 40 years old and recently applied for a $20,000 life insurance policy. Unknown by her financial planner, she stated that she was 35 years old on her life insurance application. The premium for a 35 year old is $15 per $1,000, which resulted in an annual premium of $300. Had Lisa not misrepresented her age, the premium would have been $25 per $1,000 resulting in an annual premium of $500 for the same policy. Lisa dies unexpectedly 1 year later at age 41. Assuming the insurance company discovers that she misstated her age on the application, what amount will be paid to Lisa's beneficiary/beneficiaries? A) $12,000 B) $10,000 C) $0 D) $19,800

A) $12,000. Because Lisa misrepresented her age, her beneficiary will only receive the amount of death benefit that the annual $300 premium would purchase at her actual age, 40. The amount of death benefit will be adjusted to reflect the correct cost per $1,000 for age 40. Using the correct cost of $25 per $1,000, the face amount will be adjusted to $12,000 ($300 ÷ $25 × $1,000).

MSA stock has a current annual dividend of $0.76 per share, a market price of $23.73 per share, and a beta of 1.47. The current dividend is expected to grow for 3 years at a rate of 3.5% and then 2% thereafter. Assume an investor has a required return of 7%. What is the intrinsic value of MSA stock? A) $16.17 B) $41.38 C) $29.09 D) $26.01

A) $16.17. Based on the multistage growth dividend discount growth model, the intrinsic value of MSA stock is $16.17. Step 1: Compute the value of each future dividend until the growth rate stabilizes (Years 1-3). D1 = $0.7600 × 1.035 = $0.7866 D2 = $0.7866 × 1.035 = $0.8141 D3 = $0.8141 × 1.035 = $0.8426 Step 2: Use the constant growth dividend discount model to calculate the remaining intrinsic value of the stock at the beginning of the year when the dividend growth rate stabilizes (Year 4). D4 = $0.8426 × 1.02 = $0.8595 V = $0.8595 ÷ (0.07 − 0.02) = $17.1896 Step 3: Use the uneven cash flow method to solve for the net present (intrinsi value of the stock. CF0 = 0 CF1 = 0.7866 CF2 = 0.8141 CF3 = 0.8426 + 17.1896 = 18.0322 I/YR = 7% Solve for NPV = 16.1659, or $16.17 (rounded)

John Hedrick wants to pay one-half of the college costs for his daughter, Ruth. She will be attending a private college with annual costs of $20,000 today. Ruth is 10 years old and will be starting college in eight years. If these costs are expected to increase annually by 8%, how much will Mr. Hedrick need to provide for her first year of college? A) $18,509 B) $27,371 C) $37,019 D) $74,037 E) $23,409

A) $18,509. You are just being asked to arrive at the inflated value of one-half of the first year's tuition payment. As such, this becomes a simple future value calculation with the following keystrokes: 8 N; 8 I; 10,000 PV (1/2 of $20,000); FV = $18,509.

Beth, who is single, had an adjusted gross income of $85,000 in the current year and experienced losses of $30,000 from rental real estate in which she was an active participant. Beth is the sole owner of the property. How much of the real estate loss can she deduct against earned income this year if she otherwise qualifies? A) $25,000. B) $3,000. C) $12,500. D) $15,000.

A) $25,000. Individuals can deduct up to $25,000 of rental real estate losses against active and portfolio income. However, 2 tests must be met to qualify for this exception. One test is active participation in the activity (participates in management decisions). The second test is ownership of 10% or more (in value) of all interests in the activity during the taxable year. In addition, the $25,000 offset allowance is reduced by 50% of AGI in excess of $100,000 with a complete phaseout at $150,000 AGI. Therefore, there is a loss of $1 for every $2 of AGI greater than $100,000. The loss is deducted from the $25,000 maximum available. In this situation, Beth meets both of the qualification tests and her AGI is below $100,000.

Darby is single and has two dependents. His divorce was final in 2021 and financial records show the following were received by Darby in the current year: Gift from a friend $12,000 Cash dividends received from domestic common stock $1,200 Prize won in state lottery $1,000 Salary from employer $35,000 Child support received from ex-spouse $6,000 Alimony received from ex-spouse $12,000 Long term capital loss $5,000 What is Darby's adjusted gross income (AGI) for the current year? A) $34,200. B) $48,200. C) $43,200. D) $44,200.

A) $34,200. Darby's AGI for the current year is $34,200 calculated as follows: cash dividends $1,200 + lottery prize $1,000 + salary $35,000 − LTCL $3,000 (maximum allowed in one tax year). Both the gift from a friend and the child support are excluded from gross income. Alimony received is also excluded from income because the divorced was finalized after December 31st, 2018. Darby having dependents means filing as a head of household rather than filing as single.

Al is a participant in the ANB Money Purchase Pension Plan. Under the plan's integration formula, 5% is contributed for compensation below the integration level which is set at the Social Security taxable wage base and 10% for compensation above the integration level. What amount will ANB contribute for Al, if his salary is $95,000? A) $4,750 B) $4,500 C) $9,500 D) $5,925

A) $4,750. Al's compensation is below the Social Security taxable wage base of $147,000 (2022), so the contribution on his behalf is 5% x $95,000 = $4,750.

A calendar-year taxpayer made the following charitable contributions in the current year: Cash to Church: Basis- $5,000, Fair Market Value- $5,000 Land to City: Basis- $40,000, Fair Market Value- $70,000 The land had been held as an investment and was acquired 5 years ago. Shortly after receipt, the city of Kenner sold the land for $90,000. If the taxpayer's AGI is $120,000, the maximum allowable charitable contribution deduction in the current year is: A) $45,000 if the basis deduction election is made. B) $36,000 if the basis deduction election is not made. C) $75,000 if the basis deduction election is made. D) $25,000 if the basis deduction election is not made.

A) $45,000 if the basis deduction election is made. The maximum allowable charitable deduction for the current year is $45,000 if the basis deduction election is made. The taxpayer has 2 options with respect to the contribution deduction. First, she can deduct the FMV of the land limited to 30% of her AGI. In this case, the total deduction would be $41,000 [$5,000 cash + $36,000 ($70,000 FMV limited to 30% of $120,000)]. The carryover for the next 5 years is $34,000 ($70,000 FMV − $36,000 current year deduction). Alternatively, she can deduct the adjusted basis, limited to 50% of AGI. The total deduction would be $40,000 for the land and $5,000 for the cash (cash contributions to 50% organizations are limited to 60% of AGI, well over the $5,000), for a total of $45,000. There would be no carryover with this option but the deduction for the current year would me maximized.

John, age 55, is divorced and retired. He has the following liquid assets on deposit at Allworld Bank, an FDIC-insured financial institution: Account Ownership Balance Certificate of deposit John $225,000 Savings account Joint with son $70,000 Rollover traditional IRA John $150,000 Checking account John $80,000 What amount is insured by the FDIC? A) $470,000 B) $325,000 C) $250,000 D) $525,000

A) $470,000. The FDIC insures separate legal categories of accounts. As a result, the IRA will be insured for $150,000, but can be insured up to $250,000 as the balance increases. The individual accounts (checking and CD owned by John are aggregated and are insured up to $250,000 in total. The joint account is insured for $70,000.

Randy, age 40 and not a key employee, has employer-provided group term life insurance equal to twice his salary of $75,000. He makes a monthly contribution to pay for the insurance of $5. Randy's wife Pamela is the sole beneficiary. The employer's actual cost for Randy's life insurance protection is $0.25 per month per $1,000 of death benefit, and the uniform premium for group term under the Internal Revenue Code is $0.10 per month per $1,000 of death benefit. What annual amount must Randy report for federal income tax purposes as a result of his group term insurance benefit? A) $60 B) $120 C) $0 D) $204

A) $60. Group term life insurance premiums up to the first $50,000 of face value paid by the employer are tax exempt for the employee. For any amount of group term life insurance coverage greater than $50,000, the scheduled premium per $1,000 per the Uniform Premium Table is included in the employee's W-2 income. Excess coverage (in thousands) 100 IRC cost per thousand × 0.10 Monthly cost of coverage $10 Multiply monthly cost by 12 for annual cost. Annual cost of coverage (12 × $10) = $120 Less: Randy's contribution (12 × $5) = $60 Taxable amount = $60

Justin has an HO-5 homeowners policy. The dwelling is insured for $150,000. He keeps personal property valued at $20,000 in a lake cottage, where he spends his summer weekends. What amount of coverage does Justin have on the personal property he keeps at the lake cottage? A) $7,500 B) $15,000 C) $20,000 D) $10,000

A) $7,500. When personal property is located at another residence of the insured (e.g., a vacation home), the coverage on that property is limited to the greater of $1,000 or 10% of the Coverage C insurance. Because Justin's dwelling is insured for $150,000, his coverage under Coverage C is $75,000 and the personal property at the cottage is insured for $7,500 ($75,000 × 10%).

Which of the following is included in AMTI for calculating the alternative minimum tax for an individual taxpayer? 1. Excess of depletion deduction over the adjusted basis. 2. Excess of fair market value above the exercise price if exercised for freely transferable ISOs. 3. Net appreciation on long-term capital gain property donated to a public charity. A) 1 and 2 B) 2 only C) 1 only D) 1 and 3

A) 1 and 2. Excess of the depletion deduction over the adjusted basis, and excess of the FMV above the exercise price if exercised for freely transferable ISOs are both included in AMTI.

On January 15 of the current year, Kermit transfers property to an irrevocable trust. The trust is to pay Holly 5% of the trust assets valued annually each year for her life, with the remainder to be paid to a qualified charity. On September 1 of the next year, Kermit dies. Which of the following statements is(are) CORRECT? 1. This is a charitable remainder unitrust (CRUT). 2. Kermit receives a charitable income tax deduction equal to the present value of the remainder interest in the current year. 3. The value of the trust assets will be included in Kermit's gross estate. A) 1 and 2. B) 1 and 3. C) 2 and 3. D) 1 only.

A) 1 and 2. This is a charitable remainder unitrust (CRUT) because it pays Kermit a percentage of the trust assets as valued each year. Because the trust is a charitable remainder trust, Kermit receives a charitable income tax deduction in the current year equal to the present value of the remainder interest. The trust assets are not included in Kermit's gross estate because Kermit transferred the assets to the trust before he died and the trust was irrevocable.

Clarence, a CFP® professional, is meeting with his new client, Stephanie, to discuss her financial goals. She brought with the financial documents requested on the data-gathering form Clarence emailed her earlier in the week. Clarence started the meeting by asking Stephanie general background questions, listening carefully to her responses, and taking detailed notes. Then, he asked a series of open-ended questions to elicit additional information about her goals and expectations. Stephanie told him she is an avid reader, volunteers for a local conservation group, and works at the family's lakefront business during the summer. Which of the following represent qualitative data that Clarence obtained during this step of the financial planning process? 1. Stephanie's risk tolerance level. 2. Stephanie's income tax returns from the previous three years. 3. Financial goals and expectations that Stephanie reported to Clarence. 4. Retirement account statements. A) 1 and 3 B) 2 and 4 C) 1, 3, and 4 D) 3 and 4

A) 1 and 3. Qualitative, or subjective, data represent the client's feelings, opinions, and attitudes. Examples include financial goals and risk tolerance level. Conversely, quantitative, or objective, data are measurable or expressed as a quantity or number. Both quantitative and qualitative data are collected during step one of the financial planning process, "Understanding the Client's Personal and Financial Circumstances."

Which of the following pension plans must be covered by Pension Benefit Guarantee Corporation (PBG) insurance? 1. Cash balance pension plan. 2. Money purchase pension plan. 3. Target benefit pension plan. 4. Traditional defined benefit pension plan. A) 1 and 4. B) 1, 2, 3, and 4. C) 3 only. D) 2 and 3.

A) 1 and 4. Only defined benefit pension plans (including cash balance pension plans) are covered by the PBGC.

Which of the following statements regarding an efficient portfolio is(are) CORRECT? Provides the highest return for a given level of risk. Has the greatest risk for a given level of expected return. Shows an investor's willingness to bear risk. Can be created with minimum transaction costs. A) 1 only B) 2 and 3 C) 1, 2, and 3 D) 3 and 4

A) 1 only. An investor should try to assemble an investment portfolio containing the optimum combination of risk and return. An efficient portfolio offers maximum return for a given level of risk. An investor's willingness to bear risk is reflected in indifference curves.

Which of the following statements regarding the skilled nursing facility benefit under Medicare Part A is(are) CORRECT? After 100 days of coverage in a benefit period, the patient must pay the entire cost of remaining in the facility. The skilled nursing facility benefit pays the entire cost of the first 30 days while the patient is in the facility. The skilled nursing facility benefit pays for custodial care received in a nursing home. A) 1 only B) 1 and 3 C) 1, 2, and 3 D) 2 and 3

A) 1 only. Statement 2 is incorrect; the skilled nursing facility pays the entire cost of the patient's stay in a skilled nursing facility for only the first 20 days. Statement 3 is incorrect. The skilled nursing facility benefit provides no coverage for custodial care.

Which of the following is(are) common feature(s) of a tax-sheltered annuity (TSA) plan? 1. The plan is a salary reduction plan. 2. The plan permits investing in mutual funds holding shares of gold-mining stocks. 3. The investment risk is borne by the employee. 4. The plan may permit in-service withdrawals. A) 1, 2, 3, and 4. B) 1 and 3. C) 1, 2, and 3. D) 2 and 4.

A) 1, 2, 3, and 4. All of these statements are correct.

Which of the following statements regarding Social Security integration and defined contribution plans are CORRECT? 1. The integration level can be less than the Social Security taxable wage base. 2. The maximum permitted disparity will depend on whether the integration level is equal to the taxable wage base or below it. 3. Integration can be used to enhance an owner's contribution to the plan if the owner's compensation is in excess of the Social Security wage base. 4. The integration level cannot be greater than the Social Security taxable wage base. A) 1, 2, 3, and 4. B) 1, 2, and 3. C) 1 and 4. D) 2, 3, and 4.

A) 1, 2, 3, and 4. If the integration level is less than the taxable wage base, the permitted disparity amount may be reduced. Integration can enhance an owner's and/or key employees' contribution rate if the compensation is in excess of the Social Security wage base. A defined contribution plan cannot have integration levels greater than the Social Security taxable wage base.

Which of the following statements regarding permitted disparity rules as they relate to qualified retirement plans are CORRECT? 1. A defined benefit pension plan using the permitted disparity rules may be an excess method plan. 2. A defined benefit pension plan using the permitted disparity rules may be an offset method plan. 3. A defined contribution plan using the permitted disparity rules may be an excess method plan. 4. A defined contribution plan using the permitted disparity rules may be an offset method plan. A) 1, 2, and 3. B) 1 and 4. C) 2, 3, and 4. D) 1, 2, 3, and 4.

A) 1, 2, and 3. A defined contribution plan can satisfy the permitted disparity (integration) rules only if it uses an excess method plan integration formula. Therefore, statement 4 is incorrect. Defined contribution plans cannot use an offset method plan formula because they have no promised benefit formula. Defined benefit pension plans can use either an offset or an excess method plan formula for integration.

Humphrey Dental Co. (HDC) sponsors a money purchase pension plan for its employees. Under the plan, the company makes annual contributions equal to 10% of each participant's salary. HDC is considering providing life insurance through its plan. Buddy, an employee earning $80,000 annually, is a participant in the plan. Which of the following statements regarding life insurance in the plan is(are) CORRECT? The death benefit cannot exceed 100 times Buddy's expected monthly benefit under the pension plan. No more than $2,000 of the employer's contribution can be used to purchase universal life insurance for Buddy. Buddy must include the pure protection cost of any life insurance in the plan as currently taxable income. The death benefit paid to a beneficiary from a life insurance policy funded within a qualified plan is subject to income tax. A) 2 and 3. B) 1, 3, and 4. C) 1 and 2. D) 1 only.

A) 2 and 3. Statement 1 is incorrect. This 100-to-1 ratio test applies to defined benefit pension plans only. Statement 2 is correct. No more than 25% of the employer contribution of $8,000 can be used to purchase life insurance other than whole life insurance for Buddy. Statement 3 is correct. The cost that must be included in income is the lesser of the Table 2001 cost or the actual cost. Statement 4 is incorrect. The cash surrender value, less any costs included in income by the decedent during the decedent's lifetime, is subject to income tax.

Which of the following statements regarding the various performance measures are CORRECT? A positive alpha indicates that the manager consistently underperformed the market on a risk-adjusted basis. Jensen's alpha indicates how much the realized return differs from the required return, as per the capital asset pricing model (CAPM). The Sharpe ratio is not useful for evaluating the performance of non-diversified portfolios. The Treynor ratio does not indicate whether a portfolio manager outperformed or underperformed the market portfolio. A) 2 and 4 B) 1 and 2 C) 1 and 3 D) 2, 3, and 4

A) 2 and 4. Statements 1 and 3 are incorrect. A positive alpha indicates that the manager consistently outperformed the market on a risk-adjusted basis. The Sharpe ratio uses total risk, as measured by standard deviation, and is useful for evaluating the performance of both non-diversified and well-diversified portfolios.

Sally, Michael, and Anita use different methods for choosing assets for their investment portfolios. Sally uses technical analysis to determine when to buy and sell the stocks in her portfolio. Michael is committed to a passive investment strategy and a well-diversified portfolio of randomly selected stocks. Anita ignores historical volume and price information but reviews the financial statements of the firms in which she is interested. Which of the following statements best describe Sally, Michael, and Anita? 1. Anita accepts the strong form of the efficient market hypothesis (EMH). 2. Michael accepts the semi-strong form of the EMH. 3. Sally accepts the weak form of the EMH. A) 2 only B) 2 and 3 C) 1 and 3 D) 3 only

A) 2 only.

Jeff and Kay, ages 67 and 65, respectively, filed a joint income tax return for the current year. They provided all of the support for their 18-year-old son, who had $2,200 of gross income. Their 23-year-old daughter was a full-time student until her graduation on June 25 of the current year. Before her graduation, she earned $4,450, which was 40% of her total support for the current year. Her parents provided the balance of her support. Jeff and Kay also provided 100% of the support for Kay's father, who is a lifelong resident and citizen of Colombia. How many dependents may Jeff and Kay list on their income tax return for the current year? A) 2. B) 3. C) 4. D) 5.

A) 2. Jeff and Kay can list 2 dependents: 1 for each child. The 23-year old daughter is included because she was a full-time student for almost 6 months. Kay's father is not included because he is not a U.S. citizen (nor a resident of Canada or Mexico) and therefore, not a qualifying person.

Michael, a Georgia resident, is considering one of the following four bonds for his fixed-income portfolio. He wants an investment grade bond that will provide him with the most income over the next ten years. He is in the 24% marginal federal income bracket. In addition, he is subject to a 6% state income tax. Which of these bonds would be most appropriate for Michael? A) 30-year A rated 6% corporate bond callable in 15 years at 102% of par B) 15-year BB+ rated 8% ABC corporate bond callable in 10 years at 104% of par C) 20-year AAA rated 3.25% State of Georgia municipal bond, noncallable D) 10-year AA rated 5% XYZ corporate bond callable in 7 years at 101% of par

A) 30-year A rated 6% corporate bond callable in 15 years at 102% of par Based on the information provided, the 30-year corporate bond is the best choice for his portfolio. The 20-year municipal bond has a taxable equivalent yield of 4.64% [3.25% ÷ (1 - 0.24 + 0.06)], well below the corporate bond coupon rate. The 15-year bond does not meet Michael's criteria for an investment grade bond. The 10-year bond may be called during his investment time horizon.

What is the minimum number of employees that must be covered in a defined benefit pension plan to conform to ERISA requirements for a company having 200 eligible employees? A) 50. B) 140. C) 40. D) 200.

A) 50. According to the 50/40 rule, defined benefit pension plans must cover the lesser of 50 employees or 40% of all eligible employees.

Four years ago, Janet was granted a nonqualified stock option (NQSO) to purchase 500 shares of employer stock at $30 per share. Janet would like to receive as many shares of stock as she can from the option, but she does not have any cash to pay for the exercise cost of the option. She exercised the option when the fair market value of the stock was $40. Assume Janet's marginal income tax rate is 24%. If Janet opts for a cashless exercise, how many shares of employer stock can she receive (ignoring FICA)? A) 95 B) 405 C) 500 D) 0

A) 95. This is an example of the cashless exercise of an NQSO. Janet will receive 95 shares of the employer stock, calculated as follows: The exercise cost of the option is $15,000; (500 shares × $30 per share). In addition, because the option is a NQSO, Janet will have to pay ordinary income tax of $1,200 on the bargain element: [($40 FMV − $30 exercise price) × 500 shares × 24% tax rate]. Therefore, the total cost of the option is $16,200. To cover the total cost of the option, 405 shares of the stock must be sold; ($16,200 total cost ÷ $40 fair market value (FMV) per share). Thus, 500 − 405 = 95.

Bonnie, age 45, has a Roth IRA she established at age 35 and a qualified tuition plan (QTP) under Section 529. She has previously contributed $8,000 to the Roth IRA. Three years ago, she converted $20,000 from a traditional IRA to a Roth IRA. Her Roth IRAs have a combined balance of $35,000. There is another $35,000 in the QTP. If the entire $70,000 were distributed today to pay for her son's college tuition, which of the following is CORRECT? A) A portion of the Roth distribution is subject to regular income tax but the QTP distribution is tax free. B) A portion of the Roth distribution will incur a 10% early withdrawal penalty. C) The entire distribution of $70,000 will be tax free. D) The QTP distribution is taxable, but no penalty is applied.

A) A portion of the Roth distribution is subject to regular income tax but the QTP distribution is tax free. While Bonnie has satisfied the 5-year holding period requirement, the distribution is nonqualified because the distribution is not attributed to attainment of age 59½, death, disability, or first time home purchase. The portion of the distribution attributable to earnings is subject to regular income tax. None of the Roth distribution will incur a 10% penalty because the funds are being used to pay for higher education for her son. The QTP distribution is tax and penalty free.

Which of the following employers might want to implement a supplemental executive retirement plan (SERP)? A) All of these. B) An employer who wants to provide a higher income replacement ratio for executives than he can afford (or wants) to provide for all employees. C) An employer who wants to exceed the compensation cap used in determining benefits for a qualified plan. D) An employer who wants to decrease benefits under his qualified plan due to increased costs.

A) All of these statements describe employers who may want to implement a SERP.

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)? A) At FRA, the worker's spouse will receive 50% of the worker's primary insurance amount (PIA). B) A 63-year-old spouse of the retired worker will receive 50% of the worker's PIA. C) If the full retirement age (FRA) spouse also is entitled to benefits on his or her earning record, the benefit is the lesser of 100% of the spouse's own PIA or 50% of the worker's PIA. D) The worker will receive 80% of his or her primary insurance amount (PIA).

A) At FRA, the worker's spouse will receive 50% of the worker's primary insurance amount (PIA). The spouse, at his or her FRA, will receive 50% of the worker's PIA unless the spouse's Social Security benefit is higher based on his or her own earnings. At full retirement age the worker will receive 100% of his or her PIA and the worker who retires at age 62 would receive a reduced benefit based on how many months early the Social Security retirement benefits were started. The reduction for workers is 5/9 of 1% for each of the first 36 months and 5/12 of 1% for each month in excess of 36 months prior to FRA. The spousal benefit would be less than 50% for a spouse who is not at FRA when spousal retirement benefits started. The 50% of PIA is reduced by 25/36 of 1% for each of the first 36 months (plus 5/12 of 1% for each month in excess of 36 months prior to FRA) the spouse is under FRA when benefits begin. A spouse who is at FRA and entitled to benefits on his or her own record would receive the higher of 100% of their own PIA or 50% of their spouse's PIA.

Which of the following statements regarding choosing the most appropriate vesting schedule—restrictive vs. liberal—is(are) CORRECT? 1. Two advantages of choosing a restrictive vesting schedule are that it may be able to cut costs attributable to employee turnover and actually help retain employees. 2. Three advantages of choosing a liberal vesting schedule—to have immediate and full vesting—are that it fosters employee morale, keeps the plan competitive in attracting employees, and can meet the designs of the small employer who desires few encumbrances to participation for the employee family. A) Both I and II. B) Neither I nor II. C) II only. D) I only.

A) Both I and II.

For the first time in his working life, Jake is self-employed. He has always had an employer who took care of things such as payment of payroll taxes, but now they are Jake's responsibility. He has come to you, his financial planner, for clarification on what he pays and what his employees pay for payroll taxes. Which of the following statements regarding FICA is correct? A) Both Jake and his employees will pay FICA on his employees' earnings. B) Jake must pay both the employer and the employee portions of the self-employment payroll tax on his income from his business, and can deduct both. C) The employee share of the payroll taxes on his employees' earnings and on his self-employment income are both deductible by Jake. D) Because Jake is self-employed, he can deduct the total self-employment taxes paid on his net self-employment income as an income tax credit.

A) Both Jake and his employees will pay FICA on his employees' earnings. Jake may only deduct the employer share of the FICA taxes, as he does for the FICA he pays on his employees' payroll. The employee share is not deductible by Jake nor his employees. The taxes are taken as an income deduction for adjusted gross income (AGI), not as an income tax credit.

Napoleon Enterprises sponsors a SIMPLE 401(k) for its employees. Under the plan, the company matches employee contributions up to 3% of compensation. Which of the following statements about Napoleon Enterprises' SIMPLE 401(k) is CORRECT? A) Employees cannot make after-tax contributions to the plan. B) Withdrawals made within 2 years of initial participation are subject to a 25% premature distribution penalty tax. C) Napoleon Enterprises can match as little as 1% of compensation for 2 out of 5 years. D) Napoleon Enterprises' contributions must be vested using either a 3-year cliff or 2-to-6-year vesting schedule.

A) Employees cannot make after-tax contributions to the plan. Employee after-tax contributions are not allowed. All the other statements are incorrect: Unlike SIMPLE IRAs, employers that sponsor SIMPLE 401(k)s cannot reduce the matching percentage to below 3%. Employer contributions to a SIMPLE 401(k) are 100% vested. The 25% penalty applies only to SIMPLE IRAs.

In the rating system for automobile coverage, which of the following receives the most favorable rating? A) Farm use B) Pleasure use C) Drive to work more than 15 miles D) Drive to work less than 15 miles

A) Farm use. Farm use receives the most favorable rating because it is generally off-road and away from traffic.

Larry is looking to add a real estate investment to his portfolio that is publicly traded on the exchanges, thereby offering him diversification and marketability. He has decided that a real estate investment trust (REIT) is the best choice and asks his financial planner for information about the REITs available for purchase. Based on Larry's request, the financial planner explained the various investment choices. Which of these was incorrectly stated by his financial planner? A) For the shareholders, income received is considered passive income. B) Equity REITs acquire real estate for the purpose of renting the space to other companies, thereby generating income. C) Hybrid REITs are a combination of equity REITs and mortgage REITs. D) Mortgage REITs finance real estate ventures by making loans to develop property or finance construction.

A) For the shareholders, income received is considered passive income. The answer is for the shareholders, income received is considered passive income. For REIT shareholders, income received is considered investment (not passive) income. Similar to a closed-end investment company, a REIT invests in real estate, short-term construction loans, and mortgages. Some REITs are publicly traded on the exchanges and may sell at a premium or discount to net asset value. As a result, the REIT investor achieves diversification and marketability.

If qualified plan eligibility begins after an employee reaches age 21 and completes two years of service, which of the following vesting schedules would be required? (CFP® Certification Examination, released 12/96) A) Full and immediate B) 2-6 year graded C) 3-year cliff D) 4-40 vesting E) 3-7 year graded

A) Full and immediate. The plan requirement for extending the service requirement to 2 years is full (100%) and immediate vesting.

Which of the following statements regarding secular trusts is CORRECT? A) Funds held in a secular trust cannot be reached by the employer's creditors. B) Because the funds in a secular trust are subject to a substantial risk of forfeiture, the employee will not be taxed until amounts are distributed from the trust. C) A secular trust is a revocable trust. D) The employer receives an income tax deduction equal to the amount of the trust earnings each year.

A) Funds held in a secular trust cannot be reached by the employer's creditors. Creditors of the employer do not have access to the funds in a secular trust. The employer receives a deduction for amounts contributed to the trust each year, not for the trust earnings. A secular trust is an irrevocable trust. Funds in a secular trust are not subject to a substantial risk of forfeiture; therefore, the employee is taxed when the employer makes a contribution to the trust.

Carol, age 47, is a graphic designer and aspiring entrepreneur. She lives in a 3,000 square foot historic Victorian home for which the replacement cost is much greater than the current market value. Carol's income is largely dependent on bonuses which creates inconsistent cash flows. Her main concern is to make sure that her disabled grandchild, Trevor, will be provided financial support and adequate care in the event of her death. Currently, Carol has custody of Trevor because his mother is in a residential recovery program for substance abuse treatment. Carol hopes that George, the CFP® professional at her local bank, can guide her to an informed decision about insurance policies and coverage, given her various needs. Which of the following recommendations for Carol is CORRECT? A) George should recommend a universal life insurance policy to provide financial support for Trevor in the event that Carol dies prematurely because the flexible premiums will work well with her inconsistent cash flows. B) George should recommend a whole life insurance policy to provide financial support for Trevor in the event that Carol dies prematurely because the flexible premiums will work well with her inconsistent cash flows. C) George should verify that Carol has an HO-5 homeowners insurance policy. D) George should not recommend an umbrella liability policy.

A) George should recommend a universal life insurance policy to provide financial support for Trevor in the event that Carol dies prematurely because the flexible premiums will work well with her inconsistent cash flows. A universal life insurance policy would help Carol fulfill her permanent life insurance needs and provide flexibility to vary her future premiums and death benefit. A whole life insurance policy would not provide her with flexibility. George should verify that Carol has an HO-8 policy which is specifically designed for older Victorian homes where the replacement value is greater than the current value. Generally, clients should own an umbrella liability policy.

Which of the following statements regarding the Section 410(b) coverage rule is(are) CORRECT? 1. A retirement plan can cover any portion of the workforce, as long as it satisfies 1 of 3 tests under Section 410(b). 2. The coverage tests under Section 410(b) of the Internal Revenue Code are: the percentage test, the ratio test, or the average contribution percentage test. A) I only. B) Neither I nor II. C) II only. D) Both I and II.

A) I only. Statement II should list the third coverage test as the average benefit percentage test, not the average contribution percentage test.

Which of the following statements regarding the tax characteristics of insurance products is CORRECT? A) If an individual purchased life and 15-year term-certain immediate annuity at age 52, the individual would not incur a 10% early withdrawal penalty. B) Owners of single-payment deferred annuity contracts may always withdraw funds tax-free up to the basis in the contract. C) If the annuity is owned by a corporation, earnings within the contract are tax-deferred. D) In general, an individual can exchange a fixed annuity for a universal life insurance policy without any negative income tax ramifications.

A) If an individual purchased life and 15-year term-certain immediate annuity at age 52, the individual would not incur a 10% early withdrawal penalty. First in, first-out (FIFO) basis recovery applies only to annuities purchased before August 14, 1982. If the annuity is owned by a non-natural person (such as a corporation), earnings within the contract are taxable each year. Exchanging an annuity for a life insurance contract does not qualify for tax-free treatment under Section 1035. An immediate annuity will not be subject to the early withdrawal penalty because it will satisfy the substantially equal periodic payments exception to the IRS 10% early withdrawal penalty.

Janice, age 50, wants an investment that will offer her the opportunity for long-term growth with moderate risk. She wants a customized portfolio based on an asset-based fee structure. Which of the following would be the best choice for Janice? A) Large-cap growth separately managed account. B) Growth and income mutual fund. C) S&P 500 Index exchange-traded fund. D) Balanced mutual fund.

A) Large-cap growth separately managed account. The best choice for Janice is the large-cap growth separately managed account. This type of investment account offers a customized portfolio approach and an asset-based fee structure for portfolio management services.

Megan has a financial planning practice in Atlanta, Georgia. She is meeting with her clients, Mason and Della Sinclair, to present them with a financial plan she has developed for them. Mason and Della had communicated to Megan that one of their goals is to follow their families' southern tradition and throw their pre-teen daughter, Dixie, a very expensive debutante party in four years. Megan, having grown up in the Midwest, does not understand the purpose of these celebrations and believes that paying for the party is financially irresponsible. What is the best way for Megan to proceed with her clients? A) Megan should advise the Sinclairs about the impact this goal will have on their overall financial plan. B) Because this is not a good use of the Sinclairs' money, Megan should not include it in their plan as a goal. C) Megan should offer Mason and Della her opinion regarding the extravagance of the debutante party. D) Megan should offer alternatives that would be less expensive.

A) Megan should advise the Sinclairs about the impact this goal will have on their overall financial plan. In this case, Megan should understand that debutante parties are part of the culture in which Mason and Della were raised, and following the tradition with Dixie is important to them. Megan should neither voice her opinion on the party, nor should she fail to address this goal in their financial plan. Instead, Megan should let Mason and Della know how such a goal would impact their overall financial plan and the plan's recommendations.

Which of the following statements regarding the arbitrage pricing theory (APT) is CORRECT? A) Multiple factors affect the return of a security. B) The risk-free rate of return does not affect the return. C) Beta is a pricing factor. D) Inflation is not a pricing factor.

A) Multiple factors affect the return of a security. These factors might include inflation, growth in GDP, major political upheavals, or changes in interest rates.

On January 10 of the current year, Mark sold stock with an adjusted tax basis of $6,000 to his son Les for $4,000 (fair market value). On July 31 of the next year, Les sold the same stock for $5,000 in a bona fide arms-length transaction to Sara, who is unrelated to Les or Mark. What is the proper tax treatment for these transactions? A) Neither Mark nor Les has a recognized gain or loss in either year. B) Les has a recognized gain of $1,000 in the next year. C) Mark has a recognized loss of $2,000 in the current year. D) Les has a recognized gain of $2,000 in the current year.

A) Neither Mark nor Les has a recognized gain or loss in either year. This is an application of the related party rules. Neither Mark nor Les has a recognized gain or loss in either year. Mark has a $2,000 realized loss in the first year, but cannot recognize it because of the related party rule. Mark forever loses the ability to take a deduction for the loss because it is the result of a related party transaction. Les has a realized gain of $1,000 in the second year. He can reduce his gain by Mark's loss (up to the amount of gain). Les has no gain or loss in the second year. The remaining $1,000 loss is no longer available to either of them.

What, if any, is the primary difference in tax treatment between a general partnership and a limited partnership? A) None of these. B) The limited partners are treated only as capital investors, whereas the active partners receive both ordinary and capital distributions. C) The limited partners only receive capital distributions, while the general partners receive only ordinary income distributions. D) Limited partnerships are taxed as corporations, while general partnerships are taxed as partnerships.

A) None of these. As long as the limited partnership is classified as a partnership (and not a C corporation) for tax purposes, the taxation is no different than it would be if the organization were a general partnership, that is, the partnership issues a K-1 to all of the partners for their distributive share of items of income and loss. Limited partners generally must treat net income or loss from the partnership as passive.

On January 15, of last year, Tim transferred property to a trust, which he retained the right to revoke. The trust pays Amy 5% of the trust assets valued annually for her life, with the remainder to be paid to a qualified charity. What type of arrangement did Tim create? A) None of these. B) CRAT. C) CRUT. D) CLAT.

A) None of these. This trust has some of the features of a charitable remainder unitrust (CRUT), but it does not qualify as a CRUT because it was not irrevocable when it was created.

Ronnie has a personal automobile policy (PAP) with limits of 200/500/50. Which of the following statements regarding Ronnie's coverage is CORRECT? A) Ronnie has liability coverage of up to $200,000 for bodily injury to one person resulting from a single accident. B) Ronnie's lifetime coverage under the policy is limited to a total of $750,000. C) Ronnie has $500,000 of uninsured motorist coverage resulting from a single accident. D) Ronnie has $50,000 in medical payments coverage resulting from a single accident.

A) Ronnie has liability coverage of up to $200,000 for bodily injury to one person resulting from a single accident. A PAP with limits of 200/500/50 provides liability coverage of up to $200,000 for bodily injury to one person, coverage of up to $500,000 total for all persons injured in an accident, and $50,000 for property damage, all based on a single accident.

Jacob's new business has been so successful that he has hired 6 full-time employees. Jacob would like to establish a retirement plan that would allow him to save for his retirement. In addition, he would like for his employees to be able to contribute to the plan on a pretax basis. Jacob is willing to contribute company funds to the employees' retirement plans but would like to minimize the administrative costs of establishing and maintaining the plan. Which plan would be the most appropriate for Jacob's business? A) SIMPLE IRA. B) Traditional defined benefit pension plan. C) Section 401(k) plan. D) Money purchase pension plan.

A) SIMPLE IRA. A money purchase pension plan has higher administrative costs because it is a qualified plan. A traditional defined benefit pension plan is funded exclusively with employer contributions and has higher administrative costs because it requires an actuary and is a qualified plan. A SIMPLE IRA would allow the employees to make salary reduction contributions to their own accounts and also would allow for matching or nonelective contributions by the company. Of the choices provided, the SIMPLE IRA is the least expensive plan to establish and maintain. A Section 401(k) plan, even one meeting the safe harbor rules, requires significant administrative costs.

Sandra moved into a new home 2 months ago that she purchased for $200,000. Because Sandra's employer is closing its office and moving to a different state, she is now selling her home for $220,000. What is Sandra's taxable gain on the sale of her home? A) Sandra has no taxable gain on the sale. B) Because Sandra fails both the ownership and the use tests all of her gain is taxable. C) Sandra fails only part of the ownership test and has taxable gain of $833 at the short-term capital gain rate. D) None of these.

A) Sandra has no taxable gain on the sale. Even though Sandra has lived in her home for only 2 months, she does qualify for a portion of the $250,000 principal residence exclusion because of a change in her place of employment (an exception to the ownership and use tests). The maximum exclusion of $250,000 is multiplied by the ratio of the amount of time Sandra had a qualifying period of ownership and use of the required two-year period. 2 months ÷ 24 months × $250,000 = $20,833 exclusion. The entire $20,000 gain is excluded.

In the current year, Pamela, who is single, had the following capital gains and losses: Short-term capital gains $40,000 Short-term capital losses $32,000 Long-term capital gains $15,000 Long-term capital losses $27,000 What is Pamela's net capital gain or loss for the current year, and how is it treated on her current year's tax return? A) She has a $3,000 deductible long-term capital loss with a $1,000 long-term capital loss carryover. B) She has a net capital loss of $4,000, fully deductible in the current year. C) She has a short-term capital gain of $8,000 and a $12,000 long-term capital loss. D) She has a short-term capital gain of $8,000 and a $3,000 long-term capital loss with a $9,000 carryover.

A) She has a $3,000 deductible long-term capital loss with a $1,000 long-term capital loss carryover. Pamela has a $3,000 deductible LTCL with a $1,000 LTCL carryover. First, net the long term gains and losses: $27,000 LTCL − $15,000 LTCG = $12,000 LTCL. Then, net the short-term gains and losses: $40,000 STCG − $32,000 STCL = $8,000 STCG. Net the $12,000 LTCL and the $8,000 STCG = $4,000 LTCL. Subtract the maximum deductible LTCL of $3,000 from the net $4,000 LTCL = $1,000 carryover.

Ricky was in an accident this year and is now disabled. He is receiving disability benefits from a disability policy that was paid for by his employer. Which of the following statements regarding the disability benefits is CORRECT? A) The entire benefit will be taxable. B) Only the benefit received over $10,000 will be taxable. C) The entire benefit will be tax-free. D) The benefits received from his employer's policy will reduce the amount of Social Security disability benefits that he is eligible to receive.

A) The entire benefit will be taxable. Because the employer paid the premiums, the entire amount of disability benefits received will be taxable to Ricky. Social Security disability benefits will not be reduced by other disability benefits. However, if Ricky is eligible to receive Social Security benefits, the disability benefits from his employer disability policy may be reduced.

Select the parental assets that are excluded from consideration when calculating the expected family contribution (EFC) for federal financial aid. A) The excess of value over the amount owed on a personal residence B) Mutual fund ownership C) Rental real estate property D) Annual contributions to a retirement plan

A) The excess of value over the amount owed on a personal residence. The equity in a personal residence or home is not included in the calculation of the EFC. The accrued benefit or account balance in a retirement plan is an exempt parental asset, not the annual contributions made to that plan.

Life insurance policies typically provide for a return of premium in lieu of a death benefit in which of the following situations? A) The insured commits suicide within two years of policy issue. B) The insured dies of natural causes within two years of the policy issue. C) The insured dies of accidental causes within two years of the policy issue. D) The insured misstated his age on the application.

A) The insured commits suicide within two years of policy issue. If the insured misstated his age on the application, a death benefit will be paid, but the benefit will be adjusted to reflect the amount of insurance the premium would have paid given the insured's correct age. Suicide within two years of issue results in the return of premium in most states.

Your client, Claudia, has come to you seeking advice on selecting the appropriate life insurance product. During your conversation, she asks you about the difference between a universal life insurance policy with an Option A death benefit and a universal life insurance policy with an Option B death benefit. Which of the following statements CORRECTLY describes the differences between these two policy types? A) The net amount at risk to the insurance company remains constant over time with a universal life insurance policy with an Option B death benefit. B) A universal life insurance policy with an Option B death benefit has a level death benefit. C) A universal life insurance policy with an Option A death benefit is more expensive than a universal life insurance policy with an Option B death benefit. D) In a universal life insurance policy with an Option A death benefit, the death benefit is the face amount plus the cash value account.

A) The net amount at risk to the insurance company remains constant over time with a universal life insurance policy with an Option B death benefit.

Craig, a CFP® professional, is working with Mr. and Mrs. Tipp to implement their financial plan. Craig may need to coordinate their plan with all of the following professionals EXCEPT: A) Their individual human resources director. B) Their accountant. C) Their insurance agent. D) Their stockbroker.

A) Their individual human resources director. Other professionals that Craig may coordinate with are an attorney, a real estate agent, and other investment advisers.

Which one of the following reflects the CORRECT sequence of steps in the tax calculation process? A) Total income minus adjustments to income equals AGI. B) Total income minus standard or itemized deduction(s) equals AGI. C) AGI minus adjustments to income equals federal taxable income. D) Calculate federal tax on total income.

A) Total income minus adjustments to income equals AGI. Total (gross) income minus adjustments to income equals adjusted gross income (AGI). AGI minus standard or itemized deduction(s) equals federal taxable income.

Janice has owned her own company for 25 years. She is now 54 and wishes to retire at 64. She currently employs 5 people, all between the ages of 24 and 33. If Janice wanted to establish a retirement plan with the highest benefit for her, assuming the company has adequate cash flow, what is the most appropriate plan? A) Traditional defined benefit pension plan. B) Age-based profit-sharing plan. C) Money purchase pension plan. D) Cash balance pension plan.

A) Traditional defined benefit pension plan. A defined benefit pension plan is the best choice because a traditional defined benefit pension plan favors older participants and would allow the maximum contribution for Janice. This plan is especially appropriate because the company has adequate cash flow. The other plans are incorrect because: A cash balance pension plan does not favor older participants. Janice is age 54 and wants to retire in 10 years. Money purchase pension plans do not favor older participants with larger annual contributions than a similarly compensated younger participant with larger annual contributions than a similarly compensated younger participant. Although an age-based profit-sharing plan will favor older participants, it is still a defined contribution plan and would be subject to annual additions limits. A traditional defined benefit pension plan will allow for a larger contribution for Janice. An age-based profit-sharing plan would only be appropriate if the company had unstable cash flows.

Categorize the following items appearing on a statement of cash flows: Food expenses Clothing expenses Utilities expenses Travel and entertainment expenses A) Variable outflows B) Nondiscretionary expenses C) Discretionary expenses D) Fixed outflows

A) Variable outflows. All of these are variable outflows. Variable outflows are considered as such because there is some variation in occurrence and amount.

Burt, age 63, purchased a commercial real estate property. An office building located on the property is rented by a tenant who makes monthly rent payments to Burt's real estate investment firm. Burt has a wife and two children and personally owns three cars. His business has nine employees. Which of the following statements is CORRECT? A) When Burt purchased his property insurance, he needed to have a financial interest in the property for the policy to be approved by underwriting. B) Burt should purchase at least 70% of the property's replacement cost in the form of the commercial property insurance policy. C) Burt should raise his liability coverage on his personal automobiles and purchase a personal liability umbrella policy in the event one of his employees has an accident. D) Burt's coverage is likely sufficient.

A) When Burt purchased his property insurance, he needed to have a financial interest in the property for the policy to be approved by underwriting. Burt personally owns the vehicles. In order to have employees covered for liability, he would need to have the vehicles placed in the name of the business and purchase a commercial insurance policy. He should purchase 90%, not 70%, of the property's replacement cost in the form of commercial property.

Which of the following statements concerning disability income insurance is CORRECT? A) When a corporation is both the owner and the beneficiary of the disability policy, premium payments are nondeductible by the corporation and the corporation receives the insurance proceeds income tax-free. B) For clients with high incomes, any amount of disability income insurance can be purchased. C) All of the above D) Key employee disability policies pay benefits only to the company when the key employee is disabled.

A) When a corporation is both the owner and the beneficiary of the disability policy, premium payments are nondeductible by the corporation and the corporation receives the insurance proceeds income tax-free. When a corporation is both the owner and the beneficiary of the disability policy, premium payments are nondeductible by the corporation. The corporation receives the insurance proceeds income tax-free. Key employee disability policies may pay benefits to the key employee or the company when the insured key employee is disabled. For clients with high incomes, the maximium amount of disability income insurance the insurer is willing to offer is often limited.

Mary Anne is considering the purchase of Davidson stock. The stock has a market price of $35 and is currently paying an annual dividend of $1.75 per share, which grows by a constant 4% each year. On the basis of the constant growth dividend discount model, is this a good purchase for her portfolio if Mary Anne's required return is 9%? A) Yes. The stock is undervalued by $1.40 per share. B) This is an adequate purchase because the calculated value equals the current market price. C) Yes. The stock is overvalued by $1.40 per share. D) No. The stock is overvalued by $1.40 and, therefore, should not be purchased.

A) Yes. The stock is undervalued by $1.40 per share. According to the constant growth dividend discount model, the stock is undervalued by $1.40 ($36.40 − $35). V=D1/(r-g) 1.75(1+.04)/(.09-.04)=1.82/.05=36.40

If each of the following bond matures in ten years, which one is the most volatile? A) Zero-coupon bond with 6% yield B) Corporate bond priced at par with 6% yield C) Corporate bond priced at par with 8% yield D) Zero-coupon bond with 8% yield

A) Zero-coupon bond with 6% yield. Because the bonds have the same maturity, the zero-coupon bond with 6% yield will be the most volatile. Zero-coupon bonds are more volatile than bonds with coupon payments. Bond yields are inversely related to volatility. The higher a bond's yield, the lower the expected volatility. The most volatile bonds are the bonds with the lowest yield or coupon rate and the longest time to maturity.

Assets with expected returns that lie above the security market line (SML): A) are undervalued B) are valued correctly C) should be sold D) are overvalued

A) are undervalued. Assets that lie above the security market line (SML) are undervalued because their expected returns are higher than the required return represented by the SML.

An 80-year-old widower explains to you that he is risk averse and wishes to find an investment that will provide him with preservation of capital. Which of the following should you recommend? A) bank-insured CDs B) preferred stock C) long-term U.S. government bonds D) S&P 500 index fund

A) bank-insured CDs. Certificates of deposit (CDs) are deposits made with a bank or savings and loan for a specified period, commonly one month to five years. CDs have traditionally been used to provide an income stream to retirees. CDs are FDIC insured, which is often a reason for investors' interest in purchasing CDs.

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? A) deductibles or coinsurance amounts B) Medicare Part D deductibles C) Medicare Part B excess amounts D) 100% of skilled nursing coinsurance

A) 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.

The spendthrift clause in a life insurance policy: A) prevents a beneficiary from assigning his interest in the life insurance policy proceeds to someone else. B) protects policy proceeds after they have been paid in full to the beneficiary. C) requires a beneficiary to be thrifty when spending the proceeds of a life insurance policy. D) allows a beneficiary to assign his interest in the life insurance policy proceeds to someone else.

A) prevents a beneficiary from assigning his interest in the life insurance policy proceeds to someone else. The spendthrift clause is usually included in a life insurance policy to protect the policy proceeds and prevent the beneficiary from assigning his interest in those proceeds to someone else. This clause is often used to protect the proceeds from the beneficiary's creditors. The spendthrift clause is only enforceable while the insurance company holds the policy proceeds.

A client consults a CFP® professional seeking a comprehensive estate plan. One of the client's primary objectives is to avoid probate when she dies. Among her various assets are several insurance policies on her own life and the house she lives in. In helping the client meet the specific goal of avoiding probate, the CFP® professional would consider all of the following information except A) the client's marital status. B) the client's statement of financial position. C) beneficiary designation forms for the client's life insurance policies. D) the deed to the client's house.

A) the client's marital status. The client's statement of financial position will help determine what assets the client owns and whether they are titled in a way that will avoid probate (e.g., as JTWROS). The same applies to the deed to the client's house. The life insurance beneficiary designation forms will determine whether the life insurance proceeds will avoid probate because they are payable to a named beneficiary by contract. The client's marital status has no bearing on whether her estate will avoid probate.

Which of the following statements regarding Section 162 executive bonus plans is correct? A) the employer, corporation, or other entity pays a bonus to the executive for the purpose of purchasing a cash value life insurance policy. B) the executive is not the policy owner, the insured, and the person who designates the beneficiary. C) the plan cannot be discriminatory. D) the employer is not permitted an income tax deduction when the bonus is paid.

A) the employer, corporation, or other entity pays a bonus to the executive for the purpose of purchasing a cash value life insurance policy. A Section 162 executive bonus plan can be discriminatory. The employer is permitted an income tax deduction when the bonus is paid. The executive is the policy owner, the insured, and the person who designates the beneficiary.

Alexander Enterprises, a professional service corporation with 20 accountants as employees, sponsors a traditional defined benefit pension plan with a 5-year cliff vesting schedule. At retirement, the plan provides 50% of participants' average earnings over their careers with the company. Over the last few years, the average age of a new employee participating in the plan has increased and investment returns have not been as high as expected. All of the following statements regarding Alexander Enterprises' defined benefit plan are correct EXCEPT: A) the plan is subject to mandatory insurance coverage by the PBGC. B) plan costs can be expected to rise. C) an employee reaching normal retirement age after three years of participation in the plan will be fully vested. D) the plan is subject to ERISA requirements for qualified plans.

A) the plan is subject to mandatory insurance coverage by the PBGC. If new participants are older and investment returns are lower than expected, additional funding must be made to account for earlier retirements and the shortfall of investment results. A defined benefit pension plan maintained by a professional service employer with 25 or fewer employees does not have to be covered by the PBGC. Professional individuals include accountants, attorneys, architects, engineers, and doctors. All defined benefit plans are subject to ERISA requirements (e.g., participation, funding, and vesting). Employer contributions are 100% vested at normal retirement age, regardless of the number of years the employee has participated in the plan.

Which of the following exchanges is a tax-free exchange under IRC Section 1035? A)Exchanging a variable annuity for a whole life insurance policy B)Exchanging a universal life insurance policy for a variable life insurance policy C)Exchanging a fixed annuity policy for a variable life policy D)Exchanging a variable annuity for a qualified level term policy contract

B) Exchanging a universal life insurance policy for a variable life insurance policy. Exchanging an annuity for a life insurance policy is not a tax-free exchange under Section 1035.

In the current year, Donna, who is single, made the following gifts: -$16,000 in medical bills for her sister Robin, with payment made directly to Robin's health care providers. -$12,000 to her mother for rent, utilities, and food. -$10,000 to her cousin, Pat, so he could start a business. -An interest-free demand loan of $30,000 to her cousin, Pat, on January 1 of the current year; the loan was still outstanding at the end of the year. The applicable federal interest rate for that year remained constant at 2%. Pat had no net investment income during the year of the loan. What is the amount of Donna's taxable gifts in the current year? A) $10,000. B) $0. C) $38,000. D) $22,000.

B) $0. The amount of Donna's taxable gifts in the current year is $0. The $16,000 payment of medical bills for her sister is excluded because it was made directly to the health care providers. The $12,000 gift paid to her mother and the $10,000 gift to her cousin are both less than the annual exclusion amount so neither results in a taxable gift. Because the interest-free loan is less than $100,000, and Pat had no net investment income (less than $1,000), the imputed interest is not a gift.

Ed is employed by ABC Trucking, where he is covered by a health insurance plan, a contributory long-term disability insurance plan, and a pension plan. Ed pays $40 per quarter and ABC pays $60 per quarter for a monthly disability benefit of $1,000 following a 60-day elimination (waiting) period. During the current year, Ed was disabled for 5 months. How much, if any, of the disability insurance benefits are taxable to Ed in the current year? A) $0 B) $1,800 C) $1,200 D) $3,000

B) $1,800. After satisfying a 60-day elimination period, Ed received 3 months of disability insurance benefits of $1,000 per month. Because Ed pays 40% of the premiums and the company pays 60%, Ed is taxed on 60% of the benefits. The taxable portion of the benefits is $1,800 ($3,000 × 60%).

In 2022, Benjamin, age 45, worked for both RST Company and XYZ Enterprises, which are not part of a controlled group. Both companies offer a profit-sharing plan. He earned $240,000 from RST Company and $250,000 from XYZ Enterprises in 2022. Forfeitures allocated to Benjamin under the XYZ Company plan were $5,000 for the year. What are the total additional employer contributions that can be made on behalf of Benjamin in 2022? A) $20,500 B) $117,000 C) $61,000 D) $122,000

B) $117,000. For 2022, the maximum that RST can contribute for Benjamin is $61,000. XYZ can also contribute a maximum additional amount of $56,000 ($61,000 maximum − $5,000 forfeiture). Because the two companies are not part of a controlled group, each company can contribute the maximum annual additions limit. The total additional amount is $117,000. Benjamin, on the other hand, is limited to total retirement plan contributions of $20,500 of pre-tax or Roth elective deferrals with these two companies. If he would have contributed toward either retirement plan, it would have lowered the amount the employer could have contributed such that the total contribution for the employer was $61,000 in 2022.

Melinda owns a vacation home in Florida. She rents the home for 80 days per year and occupies it herself for 20 days per year. Melinda receives gross annual rental income of $15,000. Her other rental expenses total $2,000 per year. The annual real estate mortgage interest is $10,000 and the taxes cost $2,000. How much of a deduction can Melinda take on her tax return as a result of this house rental? A) $14,000. B) $13,600. C) $11,200. D) $12,000.

B) $13,600. Melinda can deduct the cost of renting the home, if she occupies it for no more than 14 days per year or 10% of the number of days the property is rented. Because Melinda occupies the house for 20 days during the year and rents it out for only 80 days, this test is not met. Her gross rental income is $15,000. Because the house is used 20% of the time by Melinda (20 days out of the 100 days), she can only deduct 80% of the expenses, which equals $11,200 [80% × ($12,000 interest and taxes + $2,000 rental expenses). However, Melinda can deduct the remaining mortgage interest and real estate taxes as itemized deductions unrelated to the house rental. Her total allowed deduction is $13,600 ($12,000 interest and taxes + $1,600 other rental expenses). The remaining $400 of rental expense is classified as personal use and disallowed.

Mr. Ortego died on December 29 of last year. The assets in his estate were valued on his date of death and alternate valuation date as follows: Asset Date of Death Valuation Alternate Valuation Residence $750,000 $700,000 Common stock $16,400,000 $16,450,000 Municipal bonds $180,000 $150,000 Patent $80,000 $65,000 The patent had 5 years of life remaining at the time of Mr. Ortego's death. The executor sold the residence on March 1 of this year for $725,000. If Mr. Ortego's executor properly elects to use the alternate valuation date, what is the value of Mr. Ortego's gross estate? A) $17,390,000 B) $17,405,000. C) $17,365,000 D) $17,380,000

B) $17,405,000. The alternate valuation date is 6 months from the date of death. When using the alternate valuation date, the election applies to all assets, with 2 exceptions. One exception is for wasting assets, such as patents, annuities, and installment notes, which must be valued at the date of death. The second exception is for assets disposed of after the date of death, but before the alternate valuation date. These assets are valued as of the date of disposal. Therefore, the calculation would be: residence $725,000 + stock $16,450,000 + bonds $150,000 + patent $80,000 = $17,405,000.

Rusty is the sole proprietor of a shoe factory. During the current year, he sold a packing machine for $2,000 that he had purchased several years ago for $10,000. The packing machine had an adjusted basis of $1,000 after depreciation. He also sold a delivery truck for $2,000 purchased several years ago which had a basis of $500 after depreciation and an original purchase price of $2,500. What is Rusty's net gain or loss on the property and how will it be treated for tax purposes? A) $2,500 gain, treated as a Section 1231 long-term capital gain. B) $2,500 gain, treated as Section 1245 depreciation recapture (ordinary income). C) $1,000 gain, treated as a long-term capital gain. D) $1,000 gain, treated as ordinary income.

B) $2,500 gain, treated as Section 1245 depreciation recapture (ordinary income). The properties in question qualify under Section 1231, which provides special treatment for certain properties used in a trade or business (i.e., machinery and vehicles) if they are held for longer than 1 year. The properties are also subject to Section 1245 depreciation recapture. The total gain is $1,000 on the sale of the machine and $1,500 on the sale of the vehicle. The entire $2,500 is treated as ordinary income for tax purposes because of the Section 1245 depreciation recapture rules.

Jeff is interested in BEC stock. BEC's earnings and dividends are expected to grow at a rate of 6% per year for the foreseeable future. If Jeff's required return is 11%, what is the intrinsic value of BEC stock if it is currently paying a dividend of $1.20? A) $20.00 B) $25.44 C) $24.00 D) $10.91

B) $25.44 Intrinsic value (using the constant growth dividend discount model) = D0(1 + g) ÷ (r − g) = $1.20 (1.06) ÷ (0.11 − 0.06) = $25.44

Sharon Bender, age 52, has been a teacher in the Lammer County School District for 18 years. Recently, she inherited a large sum of money and wants to minimize her income tax. What is her maximum 403(b) deferral in 2022? A) $61,000 B) $30,000 C) $27,000 D) $20,500

B) $30,000. Sharon can defer the basic $20,500 allowed in 2022, plus $6,500 for the age 50 catch-up and $3,000 for the long service catch-up (15 years of service or more).

Dennis participates in a qualified retirement plan maintained by his employer. The retirement plan includes a life insurance policy with a $100,000 death benefit payable to Dennis's son, Bob. The cash value of the policy is $60,000. During his participation in the plan, Dennis included $25,000 in his gross income, representing the cost of insurance. If Dennis dies today and the $100,000 death benefit is paid to Bob, what amount must Bob include in his gross income? A) $0 B) $35,000 C) $60,000 D) $100,000

B) $35,000. When a beneficiary receives the death benefit from a life insurance policy funded within a qualified plan, the taxable portion equals the cash surrender value ($60,000) minus any costs included in the participant's income during the participant's life ($25,000).

Matt gifts Jim securities in the current year. Matt's adjusted basis for the securities is $48,000, and the fair market value is $40,000. Matt pays $2,000 in gift tax. What is Jim's basis for the stock for gain and for loss? A) $40,000 for gain and $40,000 for loss. B) $48,000 for gain and $40,000 for loss. C) $0 for gain and $0 for loss. D) $50,000 for gain and $42,000 for loss.

B) $48,000 for gain and $40,000 for loss. Because the FMV of the property at the time of the gift was less than Matt's adjusted basis, Jim's basis depends on whether he sells the property for a gain or for a loss. His basis for determining gain is Matt's adjusted basis, which is $48,000. His basis for determining loss is the FMV of $40,000. Because this is a gift of loss property, none of the gift tax paid will be added to Jim's basis.

Ray is 72 years old and must take a required minimum distribution from his IRA. The calculation will be based on an account balance of $200,000. His 53-year-old wife, Susie, is his beneficiary. The Table III life expectancy factor for someone 72 is 26.5 The Table II life expectancy for a 72- and 53-year-old married couple is 32.4. What is the lowest amount Ray can receive from his IRA without incurring a penalty (round to the nearest dollar). A) $7,547. B) $6,173. C) $6,780. D) $4,739.

B) $6,173. Based on the required minimum distribution rules, the lowest amount Ray can withdraw without incurring a penalty is $6,173. The minimum distribution rules automatically factor in a 10-year age difference for the single life expectancy table; however, when the beneficiary is a spouse who is more than 10 years younger, the joint life expectancy factor from Table II may be used. Therefore, Ray can use the 32.4 factor ($200,000 divided by 32.4 equals $6,173).

Jenny incurred investment interest expense of $10,000 this year. The investment income she received, as a result, was $40,000, of which $5,000 was tax-free interest income on bonds. How much of her investment expenses will be deductible for this year? A) $10,000. B) $8,750. C) The amount cannot be determined from the information given. D) $7,500.

B) $8,750. Interest expense generated by a source that creates tax-exempt income are not deductible. Because 12.5% ($5,000 ÷ $40,000) of her income was tax-exempt, the same proportion of her interest expense is not tax deductible. In other words, because 87.5% of her income was taxable, 87.5% of her interest expenses were tax deductible ($8,750).

A simplified employee pension (SEP) plan: 1. uses an IRA as a funding vehicle. 2. must follow the rule regarding non-discriminatory contributions. 3. may include a loan provision. 4. requires a specific employer contribution each year. A) 4 only. B) 1 and 2. C) 1, 2, and 3. D) 2, 3, and 4.

B) 1 and 2. A SEP uses an IRA as a funding vehicle. Employer contributions are discretionary, but any contributions that are made must be nondiscriminatory. Because SEPs are funded with IRAs, loan provisions are not permitted.

Which of the following employee(s) is(are) highly compensated for qualified plan nondiscrimination testing purposes in the current year? 1. Stephen, a 6% owner of an incorporated law firm 2. Franklin, who earned $145,000 last year and he was the top-paid employee 3. Jerome, whose salary was the 10th highest of 50 employees and who earned $75,000 last year 4. Margo, a corporate vice president of marketing and 1% owner of the company, whose salary last year was $68,000 A) 2 only B) 1 and 2 C) 1, 2, and 4 D) 1, 3, and 4

B) 1 and 2. Stephen and Franklin are highly compensated for qualified plan purposes in the current year. A highly compensated employee is one who was a greater than 5% owner of the employer at any time during the current year or preceding year, or for the preceding year, had compensation greater than $135,000 (2022).

Generally speaking, which of the following property is subject to probate? 1. Property owned outright in one's own name at the time of death (fee simple). 2. An interest in property held as tenants in common. 3. Life insurance and other death proceeds payable to the decedent's estate. 4. The decedent's half of any community property. A) 2 and 4 B) 1, 2, 3, and 4 C) 1 and 2 D) 3 and 4

B) 1, 2, 3, and 4. The probate estate includes all property that passes by testate or intestate succession. This includes property in the decedent's name alone, the decedent's interest in property held as tenants in common, and insurance proceeds payable to the estate. The probate estate also includes the decedent's half of any community property.

The Severn Partnership has 4 partners. The partners have entered into a binding buy-sell agreement that requires the surviving partners to purchase the partnership interest of the first partner to die. The partners used a cross-purchase agreement, but the agreement remains unfunded. If the partners decide to use life insurance as a funding vehicle, how many policies will be required? A) 4. B) 12. C) 1. D) 16.

B) 12. With a cross-purchase buy-sell agreement, each partner purchases an insurance policy on the other partners. Each of the 4 partners purchases an insurance policy on the other 3 partners (4 × 3) for a total of 12 policies.

In a defined contribution plan, if the integration level is the Social Security taxable wage base for retirement, and the base contribution percentage is 7%, the excess contribution percentage can be as high as: A) 10.0%. B) 12.7%. C) 13.4%. D) 15.3%.

B) 12.7%. The maximum permitted disparity, or the difference between the base contribution percentage and the excess contribution percentage, cannot exceed the lesser of the base contribution percentage or 5.7% (the Social Security tax rate attributable to OASDI). Therefore, 7% + 5.7% equals 12.7%.

DEF Company stock has an average long-term return of 11% and a standard deviation of 4%. What is the probability that the stock will earn a return over 15% (round to the nearest whole number and assume a normal distribution)? A) 33% B) 16% C) 13% D) 19%

B) 16%. Approximately 68% of occurrences will fall within one standard deviation from the mean. Therefore, the probability of a return between 11% and 15% is 34%. Because there is a 50% chance of a return above 11%, the probability of a return in excess of 15% must be 16% (50% − 34%).

Apollo Company sponsors a money purchase pension plan that provides a base contribution of 12.3%. Assuming the integration level equals the Social Security taxable wage base, what is the maximum excess percentage? A) 25.0%. B) 18.0%. C) 5.7%. D) 12.3%.

B) 18.0%. The excess percentage contribution cannot exceed the lesser of 2 times the base level, or the base percentage plus 5.7%. Therefore, the maximum excess percentage equals 18% (12.3% + 5.7%).

Which of the following statements regarding the capital asset pricing model (CAPM) are CORRECT? 1. Standard deviation is used as the measure of risk on the security market line. 2. The capital asset pricing model formula defines the security market line. 3. Superior performance exists if a fund's position is above the capital market line. 4. Both portfolio risk and return decrease when investors substitute risky securities for risk-free assets. A) 1 and 4 B) 2 and 3 C) 2, 3, and 4 D) 1, 2, and 4

B) 2 and 3. Beta is used as the measure of risk on the security market line. If risky securities are added to the portfolio, both risk and return will increase. The capital market line slopes upward indicating that as more risk is undertaken, more return should be achieved.

When conducting an interview with a client, using open-ended questions is important to gather information. Which of the following questions would be considered open-ended? 1. Do you have an IRA? 2. What are your financial goals in terms of retirement? 3. What are your feelings about investing in the stock market? A) 1 only B) 2 and 3 C) 2 only D) 1, 2, and 3

B) 2 and 3. Open-ended questions allow planners to get detailed information not always obtained with closed-ended questions that require only a "yes" or "no" answer. Statement 1 is incorrect because this is a closed-ended question; i.e., it requires only a "yes" or "no" answer. Statements 2 and 3 are correct; these are open-ended questions because they require the client to answer in her own words.

Chuck, age 54, is meeting with his CFP® professional, Rachel. During the meeting, he indicates that he is seeking an investment that provides a fixed annual income and a low risk of default. Which of the following securities could Rachel recommend to best meet his needs? 1. GNMA MBSs 2. State of Texas water and sewer revenue bonds, rated AAA by S&P 3. State of New York general obligation bonds, rated AA by S&P 4. High-yield corporate bonds A) 1, 2, and 3 B) 2 and 3 C) 1, 2, 3, and 4 D) 4 only

B) 2 and 3. Rachel could recommend either the State of Texas water and sewer revenue bonds or the State of New York general obligation bonds. GNMAs do not provide fixed coupon payments. Any prepayments are passed on to the GNMA holders. AA and AAA rated municipals bonds offer fixed coupons and low default risk. High-yield corporate bonds are noninvestment-grade bonds and have a high risk of default.

Vicki, age 62, has a net worth of $540,000. Her home has a fair market value of $250,000. She recently had a stroke and is paralyzed. Vicki has 2 children and 6 grandchildren. As her financial planner, which of the following would you recommend? 1. Transfer the house to an irrevocable trust in an effort to qualify for Medicaid immediately. 2. Transfer both the house and contents to a revocable living trust to avoid probate. 3. Give 1 of the adult children a durable power of attorney for health care. 4. Gifts of the annual exclusion amount to every child and grandchild each year. A) 1, 2, and 4. B) 2 and 3. C) 3 only. D) 3 and 4.

B) 2 and 3. Transferring both the house and contents to a revocable living trust to avoid probate and giving 1 of the adult children a durable power of attorney for health care are good recommendations. Because of the look-back period, transferring the house to an irrevocable trust in an effort to qualify for Medicaid may result in Vickie being subject to a delay before qualifying for Medicaid. Gifts of the annual exclusion amount to every child and grandchild each year would divert resources needed for Vickie's care. With her poor health and low level of assets, it is not advisable for Vickie to reduce her available resources.

Which of the following statements regarding bond portfolio immunization is(are) CORRECT? 1. Immunization allows an investor to ensure that the value of his bond portfolio remains the same, regardless of whether interest rates increase or decrease. 2. Immunization is accomplished by creating a portfolio whose duration is equal to the investor's investment time horizon. 3. Immunization allows investors to earn a current yield that is equal to the yield to maturity. 4. Immunization allows an investor to earn a specific rate of return, regardless of whether interest rates increase or decrease. A) 3 only B) 2 and 4 C) 1 and 2 D) 1, 3, and 4

B) 2 and 4. Immunization attempts to protect the yield of a bond portfolio from changes in interest rates. An immunized portfolio is expected to provide a specific return over the investment time horizon. If interest rates change during the investment period, the capital losses are expected to be offset by the gains on reinvestment income. Immunization is accomplished by creating a portfolio whose duration is equal to the investor's investment time horizon.

Which of the following statements regarding Treasury securities are CORRECT? The federal government sells zero-coupon Treasury bonds on an auction basis. Treasury bills have maturities up to one year and Treasury bonds have maturities up to 30 years. Both Treasury bills and Treasury bonds provide semiannual interest payments. Income from both Treasury bonds and Treasury notes is exempt from state income taxes. A) 2 and 3 B) 2 and 4 C) 1, 3, and 4 D) 1 and 2

B) 2 and 4. Statements 1 and 3 are not correct. The federal government does not sell zero-coupon bonds. Brokerage firms create zero-coupon bonds by selling the interest and principal of Treasury bonds as separate securities. Treasury notes and bonds provide semiannual interest payments. Treasury bills do not pay interest and are sold at a discount.

Which of the following statements regarding Coverdell Education Savings Accounts (CESAs) are CORRECT? Contributions to a CESA are tax-deductible. Distributions from a CESA are tax-free if used for qualified education expenses. The ability to make CESA contributions is phased out at higher levels of modified adjusted gross income (MAGI). Contributions to a CESA are limited to $2,000 per year per child. A) 1 and 4 B) 2, 3, and 4 C) 1, 2, 3, and 4 D) 1 and 3

B) 2, 3, and 4. Contributions to a CESA are not tax-deductible. All others are correct.

William Sanders, age 38, earns $250,000 a year and wants to establish a profit-sharing plan for his business. He has 3 employees, who each earn a salary of $20,000, are between ages 22 and 26, and have been employed with the company for approximately 4 years. Which of the following vesting schedules would be the best choice for the company? A) 3-year cliff. B) 2-to-6-year graded vesting. C) Immediate vesting. D) 5-year cliff.

B) 2-to-6-year graded vesting. The plan is a defined contribution plan and must use one of the 2 accelerated vesting schedules: 3-year cliff or 2-to-6 year graded. The 2-to-6-year graded would be better from the employer's perspective because of the possibility of termination of some employees and reallocated forfeitures.

Arrange the following steps to prepare a budget into the correct order. 1. Forecast next year's income on a monthly basis. 2. Calculate each expenditure as a percentage of gross income. 3. Create a spreadsheet of the client's expenditures. 4. Determine the timing and amount of expenditures. A) 1, 2, 4, 3 B) 3, 2, 1, 4 C) 2, 3, 4, 1 D) 4, 2, 1, 3

B) 3, 2, 1, 4. The proper order in creating a budget include: compiling financial documents, calculate each expenditure as a percent of gross income, identify which expenditures are subject to inflationary pressure, forecast next year's income on a monthly, basis, determine the timing of expenditures, project the budget for the next two months, compare actual to expected expenditures, continue to analyze budget for adjustments.

An investor invests $1,000 into the shares of the Stratford Growth and Income Fund, an open-end investment company registered under the Investment Company Act of 1940. On the purchase application, the investor checked the boxes signifying that dividends were to be paid out in cash and capital gains were to be reinvested. During year, the fund pays dividends of $20 and distributes a $250 capital gain. At the end of the year, the fund's value is $1,300. The total return to this investor was A) 27% B) 32% C) 25% D) 30%

B) 32%. Total return includes the income from dividends or interest plus any capital appreciation over a given time period, usually one year. For this question, the ending balance of $1,300 includes the capital gain distribution of $250. As a result, only add $20 to the ending balance of $1,300 and subtract $1,000 from this sum to arrive at the total gain of $320. Finally, divide $320 by the beginning value of $1,000 to find the total return of 32%.

Jason is considering purchasing an equity-indexed annuity. He has a high risk tolerance, is bullish on the economy, and expects the underlying equity index to increase at an annual rate of 10% for the foreseeable future. The annuity is appealing to Jason because, despite his risk tolerance, he is seeking built-in guarantees. Which of the following set of features would be most advantageous to Jason, given his risk tolerance, needs, and expectations regarding the economy? Floor Participation rate Cap rate A) 3% 80% 10% B) 4% 90% 10% C) 4% 80% 11% D) 2% 90% 11%

B) 4%90%10%. If the underlying index increases by 10%, either of the annuities with a participation rate of 90% will result in 9% being credited to the annuity. The annuity with the 4% floor will provide a higher floor than the annuity with the 2% floor if the index performs worse than Jason expects. By design, equity-indexed annuities provide market participation and guarantees, in the event of market returns below expectations. Here we need to find the best combination of these two needs. The answer option with the 4% floor, 90% participation rate, and 10% cap offers the desired potential for gain, combined with a higher guarantee.

Margo is considering selling property she inherited from her mother's estate. She has been living in the home she inherited for the last three years. She also has inherited personal property that she wants to sell, some of which has increased in value while other items have lost value. She has questions about the income she will realize on the sale of these assets and has come to her CFP® professional, Paul, for answers. Which of the following statements that Paul makes to Margo regarding realized gain is correct? A) An individual taxpayer who uses the cash basis method of tax accounting is not taxed on income until the income is actually or constructively accrued. B) A gain is generally not recognized from property transactions until there is a disposition of the property. C) Realized and recognized gain are interchangeable terms that equate to the same tax consequences. D) A realized gain is always taxable.

B) A gain is generally not recognized from property transactions until there is a disposition of the property. Realized gain on the disposition of property is not always taxable. Recognized gain is the amount of the realized gain that is taxable. There are exclusions and deferrals in the Tax Code that may prevent recognition of all or part of the realized gain includable in gross income (such as a Section 121 exclusion of a certain amount of the gain on the sale of a personal residence). Cash basis taxpayers incur income when it is actually or constructively received, not accrued.

Jim is a paper maker who purchases lumber from tree farmers around his state. Which of these hedge positions should Jim consider if he is concerned with rising lumber prices? A) A short hedge; Jim should buy lumber futures contracts to protect against rising lumber prices. B) A long hedge; Jim should buy lumber futures contracts to protect against rising lumber prices. C) A short hedge; Jim should sell lumber futures contracts to protect against rising lumber prices. D) A long hedge; Jim should sell lumber futures contracts to protect against rising lumber prices.

B) A long hedge; Jim should buy lumber futures contracts to protect against rising lumber prices. A long hedge uses a long futures position to hedge a short position (purchasing lumber).

Your client, CJ, is terminally ill and has been given only 18 months to live. He had a life insurance policy with a face value of $250,000 and a cash value of $20,000. Recently, he received a $150,000 viatical settlement based on the value of the policy and his life expectancy. Which of the following statements regarding CJ's situation is CORRECT? A) The proceeds from a viatical settlement in excess of the cash value are taxable as ordinary income. B) A physician must certify that the insured is expected to die within 24 months. C) The proceeds from a viatical settlement in excess of the cash value are taxable as capital gain income. D) For CJ to receive favorable tax treatment for his viatical settlement, he must have certification by a physician that he is expected to die within 36 months.

B) A physician must certify that the insured is expected to die within 24 months. For an insured to receive favorable tax treatment on the insurance proceeds, a physician must certify that the insured is expected to die within 24 months. The proceeds under a viatical settlement are tax-exempt.

ABC Inc., a C corporation, has 3 employees: Nick (age 50), Gail (age 25), and Julie (age 25). Nick owns 60% of ABC stock, and Julie and Gail each own 20%. This is a new venture, but cash flows are expected to be relatively stable. The objective of the company is to design a qualified retirement plan that provides a large contribution for Nick with reasonable plan costs and some flexibility in terms of cash commitment. The company expects to contribute approximately $35,000 per year to the retirement plan. Employee Salary Nick $100,000 Julie $30,000 Gail $30,000 Total $160,000 Which of the following plans best meets these objectives? A) Profit-sharing plan B) Age-based profit-sharing plan C) Cash balance pension plan D) Traditional defined benefit pension plan

B) Age-based profit-sharing plan. Either profit-sharing plan can provide funding flexibility, but an age-based profit-sharing plan can provide a larger contribution for Nick, as it favors older employees.

Which of the following qualified plan distributions is subject to the 10% penalty for early withdrawal? A) A death benefit payable to a beneficiary upon the death of an employee age 52. B) An in-service hardship distribution from a Section 401(k) plan to an employee-participant age 55. C) A lump-sum benefit payable to a disabled employee-participant age 57. D) A lump-sum distribution made to an employee-participant age 63 from a profit-sharing plan after the funds have been in the plan for two years.

B) An in-service hardship distribution from a Section 401(k) plan to an employee-participant age 55. Even if the distribution is a hardship withdrawal, the penalty applies unless the employee-participant has attained the age of 59½ (or one of the other 10% penalty exceptions applies).

A nonowner employee of ABC Corporation turned age 72 on July 30 of Year 1. He continued to work until he retired on February 5 of Year 5. What is his required beginning date for minimum distributions from his qualified plan? A) April 1, Year 3. B) April 1, Year 6. C) April 1, Year 2. D) April 1, Year 5.

B) April 1, Year 6. Because the employee is not a greater than 5% owner of the corporation, he can delay his required beginning date to April 1 of the year following the later of the year in which he turned age 72 or the year he retired, which in this case is April 1 of Year 6. This provision only applies to the plan of the employer with whom he remains employed.

Patrick is covered by a split-dollar life insurance plan using the endorsement method. The plan is funded with a whole life insurance policy with a face amount of $750,000 and a cash value of $200,000. Patrick's employer has paid $150,000 in premiums on the policy. Patrick has named his daughter as residual beneficiary of the policy. Which of the following statements regarding the income tax consequences of this arrangement is CORRECT? A) At Patrick's death, the employer must include its share of the death benefit in gross income. B) At Patrick's death, the entire $750,000 death benefit is received income tax free. C) Patrick's employer has received income tax deductions of $150,000 for the premiums paid to date. D) At Patrick's death, his daughter must include her share of the death benefit in gross income.

B) At Patrick's death, the entire $750,000 death benefit is received income tax free. Both the employer's share and the employee's share of the death benefit under a split-dollar life insurance plan are generally received income tax free. The employer receives no tax deduction for any premium payments under the plan.

Bud is employed by Big Rig Trucking where he is covered by a preferred provider organization (PPO) plan, a contributory disability income insurance plan, and an annuity pension plan. The disability income insurance plan provides long-term disability income coverage for which Bud is paying $40 per quarter and Big Rig is paying $60 per quarter for a monthly benefit of $1,000. During the current year, Bud was disabled for 5 months and collected disability payments of $1,000 per month for 3 months (he had a 60-day elimination period). Which of the following statements regarding Bud's company benefits in the current year is(are) CORRECT? A) Because Bud's medical plan with Big Rig is a PPO, he is able to receive care outside of the network of providers for lower deductibles and coinsurance fees. B) Bud will have to pay taxes on $1,800 of the disability income benefits for the current year. C) Bud will have to pay taxes on $1,200 of the disability income benefits for the current year. D) Bud may cover his adult children until they reach age 21 on Big Rig's medical plan.

B) Bud will have to pay taxes on $1,800 of the disability income benefits for the current year. Because the employer pays 60% of the disability income insurance premiums, 60% of the disability income benefits are taxable ($3,000 × 60% = $1,800). A preferred provider organization (PPO) allows members to receive care outside the network of providers; however, the insured will generally face higher deductibles and/or higher coinsurance. Bud may cover his adult children until they reach age 26 on Big Rig's medical plan.

Which of the following is a defined benefit pension plan that promises a benefit based on a hypothetical account balance versus a traditional defined benefit pension plan, which promises a monthly retirement benefit for life? A) Cross-tested plan. B) Cash balance pension plan. C) Target benefit pension plan. D) Age-weighted plan.

B) Cash balance pension plan. The plan described is a cash balance pension plan. Age-weighted plans allocate contributions to participants in such a way that when contributions are converted to equivalent benefit accruals (stated as a percentage of compensation), each participant receives the same rate of benefit accrual. Cross-tested plans are defined contribution plans that test whether the contribution formula discriminates in favor of the highly compensated employee by converting contributions made for each participant into equivalent benefit accruals. Target benefit pension plans are hybrid retirement plans that use a benefit formula like that of a defined benefit pension plan and the individual accounts like a defined contribution plan.

All of the following statements regarding Coverdell Education Savings Accounts (CESAs) are correct EXCEPT: A) Coverdell Education Savings Accounts (CESAs) can be established for any child under age 18. B) Cash contributions to CESAs are tax-deductible in the year they are made. C) the current annual contribution is limited to $2,000. D) qualified education expenses can be incurred for elementary, secondary, undergraduate, or graduate level education.

B) Cash contributions to CESAs are tax-deductible in the year they are made. The annual cash contributions are not tax-deductible. However, the contributions are allowed to grow tax-free, and money withdrawn for qualified education expenses is tax exempt.

Which of the following are property exclusions under the physical damage coverage (Part D) of the personal auto policy (PAP)? A) Bumping into a steel post B) Damage to CB Radios and radar detectors C) Breaking off a side mirror D) Being rear ended by another driver

B) Damage to CB Radios and radar detectors. There is no coverage for sound systems or other devices that are not permanently installed in the auto.

What is the key to successfully using the snowball technique to eliminate debt? A) Begin with the debt that has the highest interest rate. B) Develop a plan that the client can commit to executing. C) Start with the debt that has the highest account balance. D) Begin with the debt that has the highest payment.

B) Develop a plan that the client can commit to executing. Whether a client starts with the lowest account balance or highest interest rate, the key to the effectiveness of using the snowball technique is developing a plan that the client can commit to and execute. The goal is eliminating debt, and the client needs to agree to the process to make that happen. Beginning a debt reduction plan with the debt that has the highest payment is not a typical debt reduction technique.

George, a financial professional, is scheduled to meet with Tim and Jodi this afternoon for a follow-up meeting. In their first meeting, took steps to understand Tim and Jodi's personal and financial circumstances. At this time, George learned that Tim and Jodi have 3 young children and are currently without life insurance coverage. Tim mentioned that life insurance needs have been on his mind lately due to his lack of adequate coverage and his family history of diabetes and heart disease. In addition, George also discovered that the couple owes a substantial amount on their current mortgage. What should George do next? A) George should recommend a decreasing term life insurance policy for both Tim and Jodi to make sure the mortgage is taken care of if one of them should die prematurely. B) George should spend time analyzing Tim and Jodi's qualitative and quantitative information to assess their personal and financial circumstances. C) George should recommend that they purchase a convertible term life insurance policy for the appropriate face amount of coverage because of Tim's family history. D) Because George has already analyzed Tim and Jodi's current course of action and potential alternative course(s) of action, he is ready to communicate his recommendations to the couple.

B) George should spend time analyzing Tim and Jodi's qualitative and quantitative information to assess their personal and financial circumstances. Although George may ultimately recommend that Tim and Jodi purchase a convertible term life insurance policy to help protect their children's financial future or a decreasing term life insurance policy to cover the mortgage, George has not completed the necessary steps to reach the point of recommending financial solutions. George must analyze Tim and Jodi's financial circumstances, current course of action, and potential alternative course(s) of action before he makes recommendations.

Which of the following statements concerning underwriting is(are) CORRECT? In a firm commitment underwriting agreement, the investment bank is paid a flat fee to sell the new issues and the corporation receives all the benefit from a high market price. In the underwriting process, the investment bank determines the appropriate sales price of the security based on the company's historical earnings, its future prospects and the value of similar businesses. A) I only B) II only C) Both I and II D) Neither I nor II

B) II only. Statement I is incorrect because the investment bank is generally not paid a flat fee. Instead, the underwriter will purchase the shares from the corporation and resell them in the market for a profit.

Which of the following are primary reasons why a financial planner will ask for each family member's date of birth during the information gathering process? 1. To calculate Social Security "blackout period" preretirement benefit amounts for qualifying individuals 2. To calculate insurance policy internal rates of return 3. To help determine funding for the children's education 4. To help determine retirement planning needs A) I and II B) III and IV C) II and III D) I, III, and IV

B) III and IV. A person's birth date has little or nothing to do with preretirement Social Security benefit determination. If they have qualified for benefits, then the amount is determined by the formula independent of their age. However, a person's birth date does have an effect on other potential Social Security benefits. Birthdates also have little to do with calculating an insurance rate of return.

Robert retires on May 31 of the current year and begins to receive a monthly annuity of $1,200 payable for life. His life expectancy at the date of retirement is 10 years. Robert contributed $24,000 to the cost of the annuity and his first annuity payment was received on June 15. Confused about the taxation of this payment, Robert decides to see Frank, his CFP® professional. Which of the following statements provided by Frank about annuity payment taxation is CORRECT? A) For the first 10 years, Robert cannot exclude any amount of his annuity payments from taxes because each payment is fully taxable. B) If Robert lives beyond his 10-year life expectancy, every annuity payment he receives after 10 years will be fully taxable. C) If Robert lives beyond his 10-year life expectancy, every annuity payment received after 10 years will be received tax-free. D) Robert cannot exclude $1,400 of his monthly payments received this year from income tax and $2,400 a year going forward until his 10-year life expectancy is completed.

B) If Robert lives beyond his 10-year life expectancy, every annuity payment he receives after 10 years will be fully taxable. All annuity payments received after his life expectancy will be fully taxable. Because Robert will only receive seven payments the first year, he will only be able to exclude $1,400 of the annuity payments the first year but he will be able to exclude $2,400 per year going forward until year 11. See calculation below: $24,000 ÷ $144,000 = 0.1666 or 1/6 exclusion ratio (1/6 × $1,200 = $200 exclusion amount) Current year: 7 payments × $200 (exclusion amount) = $1,400 Year 2: (12 payments × $1,200) × 0.1666 = $2,400 (rounded) Year 3: (12 payments × $1,200) × 0.1666 = $2,400 (rounded)

Several years ago, Stan purchased a $400,000 whole life insurance policy on his life. He has paid cumulative premiums over the years of $20,000, and has accumulated a cash value of $25,000. This year, he was diagnosed with rare liver disease, and, as a result, his life expectancy is only six months. Because of his large medical costs, he is considering selling his policy to a viatical settlement company. They have offered him $250,000 for the policy. He would also like to explore other ways to generate cash from the policy. Which of the following statements regarding Stan's situation is CORRECT? A) If Stan takes a loan from the policy, some or all of the loan will be subject to capital gain income tax if the policy is classified as a modified endowment contract (MEC). B) If Stan sold the policy to his cousin for $250,000, his cousin would be subject to ordinary income tax on a portion of the life insurance benefit when Stan dies. C) If the viatical company collects the death benefit as a result of Stan's death, the proceeds will be tax-free to the company. D) If Stan sells his policy to the viatical settlement company, he will be taxed on any gain from the sale if he dies more than two years later.

B) If Stan sold the policy to his cousin for $250,000, his cousin would be subject to ordinary income tax on a portion of the life insurance benefit when Stan dies. Because Stan is terminally ill (i.e., expected to die within two years), he will not be taxed on the proceeds received from the viatical settlement company, even if he lives longer than two years. When the viatical settlement company receives the death benefit, part of the death benefit will be taxed at ordinary income tax rates to the company. The sale of the policy to Stan's cousin would be considered a transfer for value. His cousin would be taxed on the death benefit (less any amounts paid) because the transfer-for-value rules cause the death benefit to become taxable. With a modified endowment contract (MEC), loans or distributions from the policy are taxed on a last in, first out (LIFO) basis, meaning that any earnings in the policy are taxed first, at ordinary income rates (not capital gains)

Mark's corporate employer has provided him with a salary reduction nonqualified deferred compensation plan. The company decided to use a rabbi trust to hold the assets for the plan. The plan will provide Mark with 60% of his current salary at retirement. In addition, the plan provides for income to his spouse upon his death. Which of the following statements with regards to the company's plan is CORRECT? A) Mark's benefits will be taxed as capital gain income upon distribution B) Mark's benefits will be taxed as ordinary income upon distribution. C) The funds his employer deposits into the rabbi trust are not subject to the claims of the company's general creditors D) The risk of forfeiture is considered substantial, but there is still current taxation for Mark

B) Mark's benefits will be taxed as ordinary income upon distribution. When Mark defers part of his salary, benefits from the plan are fully taxable as ordinary income upon distribution. The funds in the rabbi trust are still subject to the claims of the company's general creditors. The risk of forfeiture is present, so there is no current taxation for Mark.

Nava had the following transactions for Covington Industries stock: Bought 1,000 shares for $60,000 on January 1, 2021. Sold 500 shares on June 1, 2022, for $20,000. Bought 500 shares on June 20, 2022, for $25,000. Which of the following statements regarding her transactions is CORRECT? A) Nava had a recognized loss of $10,000. B) Nava had a realized loss of $10,000. C) Nava had a total basis in all shares owned on June 21, 2022, of $55,000. D) Nava had a basis in the new shares of $25,000.

B) Nava had a realized loss of $10,000 ($20,000 − $30,000). She had a recognized loss of $0. She will not be able to deduct any loss because of the wash sale rules. The basis in the new shares will be $35,000 ($25,000 + $10,000 for the disallowed loss). The total basis in all shares owned on June 21, 2022, is $65,000 ($30,000 + $35,000).

Joan gives her son property with an adjusted tax basis of $35,000 and a fair market value of $30,000. No gift tax is paid. Joan's son subsequently sells the property for $33,000. What is his recognized gain (or loss)? A) $33,000 gain. B) No gain or loss. C) $2,000 loss. D) $3,000 gain.

B) No gain or loss. Because the fair market value (FMV) on the date of the gift was less than the donor's (Joan's) adjusted tax basis, the double basis rule applies. Under the double basis rule, no gain or loss is recognized if the donee sells the property at a price that is between the donor's adjusted basis and the FMV on the date of the gift.

Unfunded excess benefit plans generally have which of the following Employee Retirement Income Security Act (ERISA) requirements? A) Reporting and disclosure B) None of these C) Vesting D) Funding

B) None of these. Unfunded excess benefit plans are neither required to adhere to any of the ERISA requirements listed, nor do they have participation or fiduciary requirements.

Why would the owners of a business entity prefer that the entity be taxed as a partnership rather than a regular (C) corporation? A) They can shelter personal capital gains in the partnership. B) Partnerships are pass-through entities for income tax purposes. C) Their liability for taxation is limited under a partnership. D) They can shelter personal capital losses in the partnership.

B) Partnerships are pass-through entities for income tax purposes. Partnerships are pass-through entities and all items of income and loss are passed through to the individual partners via the Form K-1 issued by the partnership. Profits earned by a partnership are only taxed once, whereas profits earned by a regular (C) corporation may be subject to double taxation (once to the corporation and then to the shareholders who receive dividends).

Which of the following statements pertaining to qualified annuities and nonqualified annuities is CORRECT? A) Nonqualified annuities are annuities purchased with 100% pre-tax dollars. B) Qualified annuities are derived from a qualified plan and may or may not have a cost basis. C) If the distribution from the nonqualified annuity is not annuitized over the owner/annuitant's life expectancy, the first in, first out (FIFO) tax rule applies. D) Premature distributions on a qualified or nonqualified annuity (before age 59½) are not subject to a 10% penalty.

B) Qualified annuities are derived from a qualified plan and may or may not have a cost basis. If the distribution from the nonqualified annuity is not annuitized over the owner/annuitant's life expectancy, the last-in, first-out (LIFO) tax rule applies. Nonqualified annuities contain post-tax dollars. Premature distributions are subject to a 10% penalty.

Rilee Corporation purchased a $50,000 whole life policy on a key employee, Susan. When Susan terminated employment with the corporation her husband, Ryan purchased the policy from the corporation for $15,000. Ryan designated himself sole beneficiary and had paid premiums of $8,000 by the time his wife died. What are the tax consequences to Ryan upon receipt of the life insurance proceeds? A) Ryan would receive $50,000 tax-free. B) Ryan would receive $23,000 tax-free and $27,000 as ordinary income. C) Ryan would receive $8,000 tax-free and $42,000 as ordinary income. D) Ryan would receive $15,000 tax-free and $35,000 as ordinary income.

B) Ryan would receive $23,000 tax-free and $27,000 as ordinary income. Because Ryan's purchase of the policy falls under the transfer-for-value rule, the death benefit is included in Ryan's gross income to the extent it exceeds his basis in the contract. Ryan has a basis of $23,000, which represents the $15,000 he paid for the policy plus the additional $8,000 he paid after purchase.

After Stacy's husband died, Stacy (age 48) decided to take the $120,000 balance from his defined contribution pension plan in cash. If she did so, which of the following statements is CORRECT? A) Lump-sum distributions are not allowed from pension plans. B) She will receive a check for $96,000, but the distribution will not be subject to the 10% early withdrawal penalty. C) She will receive a check for $120,000, and the distribution will be subject to the 10% early withdrawal penalty. D) She will receive a check for $120,000, but the distribution will not be subject to the 10% early withdrawal penalty.

B) She will receive a check for $96,000, but the distribution will not be subject to the 10% early withdrawal penalty. Because the distribution is not being transferred and the distribution is from a qualified plan, the distribution will be subject to a 20% mandatory withholding requirement. Therefore, Stacy will receive a check in the amount of $96,000 ($120,000 × 80%). The distribution will not be subject to an early withdrawal penalty, because the distribution is due to the participant's death.

Under which of the following life insurance settlement options are installments paid while the beneficiary is alive and cease upon the beneficiary's death? A) Life annuity with period certain B) Single life annuity C) Joint and survivor annuity D) Life annuity with cash refund

B) Single life annuity. This defines the single life annuity option.

Brian would like to expand his portfolio and is comparing two stocks. Stock A offers an expected return of 8%, a standard deviation of 4%, and a beta coefficient of 0.96. Stock B offers an expected return of 10%, a standard deviation of 6%, and a beta coefficient of 1.10. Which stock would be the best choice for Brian? A) Stock B, because it has a higher coefficient of variation B) Stock A, because it has a lower coefficient of variation C) Stock A, because it has a higher coefficient of variation D) Stock B, because it has a lower coefficient of variation

B) Stock A, because it has a lower coefficient of variation. Based on the information provided, the coefficient of variation (CV) for Stock A equals 0.50 (0.04 ÷ 0.08), whereas Stock B has a CV of 0.60 (0.06 ÷ 0.10). Therefore, Stock A has a lower CV and is the better investment based solely on this measure.

Which of the following statements regarding corporate-owned life insurance (COLI) policies is not CORRECT? A) COLI policies provide funds to pay the benefit in the event of the executive's death before retirement. B) The employer is permitted to deduct premiums paid on COLI policies. C) The employer may not deduct interest paid on loans borrowed from COLI policies, except under limited circumstances. D) COLI policies accumulate cash value to pay the promised benefit at retirement.

B) The employer is permitted to deduct premiums paid on COLI policies. The employer is not permitted to deduct premiums paid on corporate-owned life insurance (COLI) policies.

This afternoon, you have a client meeting with Tawni, age 51. She has a nonqualified variable annuity with a considerable amount of unrealized appreciation. Insurance companies are currently offering annuities with numerous investment choices which would provide Tawni with additional portfolio diversification and the potential for greater returns. As a knowledgeable and sophisticated investor, Tawni wants access to these additional investment choices. Based on her research and side-by-side comparisons, she has selected a new variable annuity and wants you to process the paperwork because she is too busy. Tawni also noted her interest in the possibility of moving funds into a variable universal life insurance policy. Based on Tawni's current needs, which of the following statements is CORRECT? A) Tawni delivered clear instructions on processing the transaction, so she does not need to establish and define the client-planner relationship before completing and submitting any paperwork. B) The end result may be helping Tawni complete a Section 1035 exchange from her old variable annuity into a new variable annuity. C) Steps in the financial planning process serve more so as guidelines but can be skipped or expedited to speed up results. D) Steps in the financial planning process should be bypassed to expedite Tawni's request and provide her with the earliest opportunity to implement her investment strategy.

B) The end result may be helping Tawni complete a Section 1035 exchange from her old variable annuity into a new variable annuity. A financial planner should establish the client-planner relationship before going any further with the financial planning process. Tawni would create a taxable event if she attempted to exchange the old variable annuity contract for a variable universal life insurance contract.

Which of the following statements regarding prohibited transactions is NOT correct? A) One category of prohibited transactions involves the investment in the sponsoring employer's stock or real property. B) The lending of money or other extension of credit between the plan and a party in interest is a prohibited transaction exemption. C) One category of prohibited transactions involves the sale, lease, or exchange of any property between the plan and a party in interest. D) One category of prohibited transactions bars a fiduciary from causing the plan to engage in a transaction if the fiduciary knows or should know that such a transaction constitutes a direct or indirect involvement between the plan and the parties in interest.

B) The lending of money or other extension of credit between the plan and a party in interest is a prohibited transaction exemption. Loans between the plan and a party in interest are prohibited transactions.

Julie, a CFP® professional, is meeting with Jack and Amy before the end of the year, to review the year's transactions and discuss any new issues that the couple may have. Jack and Amy have three grandchildren who are all under age five. They want to assist with college funding, but their funds for this use are limited to around $7,000 each year. They have considered either depositing the cash into a passbook savings account for each child and splitting the $7,000 evenly or giving the cash directly to each child's parent. Julie recommends, instead, that Jack and Amy contribute to Coverdell Education Savings Accounts (ESAs) for each child. Which of the following statements Julie makes regarding Coverdell Education Savings Accounts (ESAs) is CORRECT? A) Contributions can only be made for an individual younger than 21. B) The maximum contribution per account beneficiary is $2,000 per year. C) Room and board for a less-than-half-time student is a qualified education expense. D) When distributed for educational expenses, only the interest earned is taxable.

B) The maximum contribution per account beneficiary is $2,000 per year. Statement 1 is correct. The contribution limit to an ESA is $2,000 per account beneficiary annually. Statement 2 is incorrect because the beneficiary must be under age 18. Statement 3 is incorrect because the contribution is nondeductible (but the earnings are tax free if the distribution is used for qualified education expenses). Statement 4 is incorrect. A student must be enrolled at least half time if room and board is to be a qualified expense.

The incidental benefit rule provides that term life insurance in a defined benefit pension plan is generally limited to A) a face value no greater than 100 times the annual employer contribution on behalf of the participant. B) a face value equal to 100 times the monthly retirement benefit. C) a face value no greater than $305,000 (2022). D) a face value equal to the lesser of 100% of the participant's covered compensation, or $61,000 (2022).

B) a face value equal to 100 times the monthly retirement benefit. The incidental benefit rule for term life insurance in a defined benefit pension plan relates to the death benefit or face value, and not to the amount of contribution on the participant's behalf. The maximum limit is 100 times the monthly retirement benefit. Therefore, if the participant's monthly retirement benefit is $1,200, the term life insurance death benefit cannot exceed $120,000 without any restriction on premium.

During a meeting with his financial planner, Jack asks, "Should I be investing in the stock market to meet my savings goals?" The planner answers, "That depends. How do you feel about the possibility that your investment may decline in value?" The planner's answer is an example of A) physical mirroring. B) a leading response. C) emotional intelligence. D) verbal mirroring.

B) a leading response. The answer is a leading response. The planner's answer is a leading response because it guides the client to provide more detail. Physical mirroring is using the client's body language, and verbal mirroring is imitating the client's word use, tone of voice, and communication method. Emotional intelligence is the ability to recognize emotional expressions in oneself and others.

Higher income earners will have an income replacement ratio that is A) higher than low income earners. B) lower than low income earners. C) the same as low income earners. D) none of these.

B) lower than low income earners. Replacement rates, or the amount of one's paycheck that is replaced by Social Security, favor lower earners by replacing about 90% of their (very low) earnings. Higher earners will see only a 26% replacement. In other words, higher earners receive more dollars from Social Security, but lower earners receive higher replacement rates.

The degree to which a client's financial resources can cushion risks is known as A) risk tolerance. B) risk capacity. C) risk perception. D) emotional intelligence.

B) risk capacity. The correct answer is risk capacity. Risk capacity is the degree to which a client's financial resources can cushion risks. A client's assessment of the magnitude of the risks being traded off is known as risk perception. Risk tolerance refers to the trade-offs clients are willing to make between potential risks and rewards. Emotional intelligence is the ability to recognize emotional expressions in oneself and the client and to select socially appropriate responses to both the circumstances and the client's emotions.

Endorsement method split-dollar life insurance is an insurance arrangement in which: A) the employer and the employee share the cost of the life insurance on the employee and the portion of the premium paid by the employer is the value of the term life portion of the policy. B) the employer is the owner of the policy and is also the beneficiary to the extent of the premiums paid by the employer. C) the employee is the owner of the policy and is also the beneficiary to the extent of the cash value of the policy. D) the employer pays the cost of the premium and the employee must name the employer as the beneficiary.

B) the employer is the owner of the policy and is also the beneficiary to the extent of the premiums paid by the employer. Under the endorsement split-dollar method the employer owns the policy and is primarily responsible to the insurance company for paying the entire premium. Should the employee die while the plan is in effect, the split beneficiary designation provides for the employer to receive a portion of the death benefit equal to its premium outlay with the remainder of the death proceeds going to the employee's designated beneficiary.

To evaluate the performance of a portfolio manager, calculate the portfolio's: A) dollar-weighted return B) time-weighted return C) portfolio return D) holding period return

B) time-weighted return. Because the manager has no control over the deposits and withdrawals made by clients, the time-weighted return is a more appropriate measure of performance. From the owner's perspective, the dollar-weighted return is more important.

Gary received an inheritance of $200,000. He wants to withdraw equal periodic payments at the beginning of each month for the next five years. He expects to earn a 12% annual rate of return, compounded monthly on his investments. How much can he receive each month? A) $4,448.89. B) $49,537.45. C) $55,481.95. D) $4,404.84.

BEG mode PV = 200,000 I/YR = 1 (12 ÷ 12) N = 60 (5 × 12) FV = 0 PMTAD = (4,404.84), or $4,404.84

Which of the following statements regarding taxes on Section 401(k) employee elective deferrals are CORRECT? 1. Deferrals are subject to FICA. 2. Deferrals are subject to FUTA. 3. Deferrals are exempt from current income tax. 4. Deferrals are subject to current income tax. A) 1 and 3. B) 2, 3, and 4. C) 1, 2, and 4. D) 1, 2, and 3.

C) 1,2,3

Ken, age 23, a full-time student at a state university, is claimed as a dependent by his parents. He earned $1,600 from a summer job this year (2022). In addition, he received $1,400 of interest income from a savings account established with funds inherited from his grandmother. He had total itemized deductions of $150 in the current year. What is Ken's taxable income this year? A) $3,000. B) $2,850. C) $1,000. D) $0.

C) $1,000. $1,600 earned income + $1,400 interest income = $3,000 − $2,000 (the standard deduction is limited to earned income + $400). Therefore, taxable income is $1,000. The standard deduction for a dependent is limited to the greater of (1) $1,150, or (2) earned income plus $400 (limited to the regular standard deduction). Because Ken's earned income is $1,600, he is entitled to claim a standard deduction of $2,000 ($1,600 + $400).

William is a 17-year-old high school student who has $3,300 of investment income from mutual funds and $5,000 of earnings from a part-time job. His parents claim him as a dependent. How much of William's income is taxed at his parents' marginal tax rate? A) $2,200 B) $0 C) $1,000 D) $3,200

C) $1,000. Under the kiddie tax rules, William's unearned income in excess of $2,300 (2022) will be taxed at his parents' marginal tax rate.

In the current year, Orlando gave $100,000 to his son and $100,000 to his daughter. Orlando's wife also gave $5,000 to his son. No other gifts were made in the current year. Orlando and his wife made the election to split gifts for the year. What is the amount of gifts made by Orlando in the current year? A) $100,000 B) $205,000 C) $102,500 D) $200,000

C) $102,500. Because Orlando and his wife agree to split the gifts, their total gifts are combined and divided by 2 ($205,000 total gifts divided by 2 = $102,500 each).

Given the following data for Daphne Jones: Checking account $1,000 Jewelry $5,000 Mutual funds $60,000 Vested 401(k) $55,000 Mortgage balance $95,000 Auto loan balance $20,000 Money market account $10,000 Personal assets $50,000 Sailboat $7,000 Credit card balance $5,000 Stock portfolio $10,000 90-day CD $2,000 Automobile $35,000 Personal residence $150,000 What is the total value of her investment assets? A) $150,000 B) $157,000 C) $125,000 D) $152,000

C) $125,000. The answer is $125,000. Daphne's investment assets include the following: Mutual funds $60,000 Stock portfolio $10,000 Vested 401(k) $55,000

Bill and Curt have entered into an exchange of real property. Bill gives Curt unimproved land that has an FMV of $15,000. In exchange, Curt forgives a $20,000 debt that Bill owes him. Bill acquired the land in an estate auction for a bargain price of $6,000. What is Bill's realized gain in this transaction? A) $9,000 B) $15,000 C) $14,000 D) $6,000

C) $14,000. The gain realized is the difference between the amount realized and the adjusted basis. Bill had a total cost basis in the land of $6,000. The FMV of the land when he gave it to Curt was $15,000. If Bill had instead sold the land at that time, he would have had a net gain of $9,000. In addition to this gain, he had a $20,000 debt forgiven for the price of the $15,000 unimproved land. In addition to the net gain of $9,000, he also received an additional $5,000 in non-cash consideration (boot) because of the debt forgiveness that was in excess of the FMV of the land, for a total gain of $14,000.

Frances is a family practice doctor who operates as a sole proprietor. She bought an X-ray machine several years ago for $50,000. She used the MACRS 7-year percentages to recover the cost of the machine. Frances sold the machine in the current year for $58,000 and plans to replace it with an MRI machine. She has claimed $14,800 of cost recovery deductions. How much will her Section 1245 recapture be this year? A) $22,800. B) $35,200. C) $14,800. D) $0.

C) $14,800. Frances calculates her Section 1245 recapture as follows: purchase price − depreciation claimed = adjusted basis or $50,000 − 14,800 = $35,200. Next, the adjusted basis is deducted from the amount realized to determine the gain/(loss) realized: $58,000 − 35,200 = $22,800 There is a gain realized and recognized of $22,800. Her Section 1245 recapture recognized as ordinary income is the lesser of the gain realized or cost recovery deductions claimed ($22,800 vs. $14,800). In this case, the Section 1245 recapture as ordinary income is $14,800. There is also a long-term capital gain of $8,000.

Jed deposits $1,500 in American Bank. How much money will he accumulate in five years if the bank pays 6.5% interest compounded monthly? A) $2,250 B) $2,055 C) $2,074 D) $2,112

C) $2,074. This is a future value of a lump sum calculation. PV = (1,500) PMT = 0 I/YR = 0.5417 (6.5 ÷ 12) N = 60 (5 × 12) FV = 2,074.2260, or $2,074

Sally purchased a single premium deferred annuity (SPD in 1990 at a cost of $42,000. Her lifetime annuity distributions of $833.33 per month will begin on September 1st of the current year, at which time her life expectancy will be 21 years. How much must Sally include in her gross income from this SPDA in the current year? (Round to the nearest dollar) A) $8,000 B) $667 C) $2,667 D) $2,000

C) $2,667. Sally must include $2,667 in her gross income in the current year. Before the annuitant reaches the age of projected life expectancy, each payment from a fixed annuity is considered partially a return of basis and partially as taxable income as determined by an exclusion ratio. Therefore, $42,000 (cost basis) divided by $210,000 (total expected benefits over 21 years) equals 20% exclusion ratio. This means 20% of the payments in the current year ($3,333 × 20%), or $667, is excluded from gross income. The remaining 80%, or $2,667, must be included in gross income.

Kurt, who is single and worked as a manager for Review Corp., loaned $4,000 to Review Corp. 2 years ago. Kurt did not own any of Review's stock, and the loan was not a condition of Kurt's employment by Review. This year, Review Corp. declared bankruptcy, and Kurt's note receivable from Review became worthless. What loss can Kurt claim on his income tax return for this year, assuming no other capital gains or losses? A) $4,000 business bad debt. B) $2,000 long-term capital loss. C) $3,000 short-term capital loss. D) $4,000 short-term capital loss.

C) $3,000 short-term capital loss. This is a nonbusiness bad debt (personal bad debt). Regardless of the holding period, it is treated as a short-term capital loss, and the $3,000 limit offset against ordinary income limit applies. Kurt has a carryover short-term capital loss: $4,000 − $3,000 = $1,000. If the loan had been a condition of Kurt's employment, it would have been classified as a business bad debt and would have been an ordinary loss in the year the debt went bad.

Which of the following settlement options offers the greatest flexibility in life insurance policies? A) Life annuity option B) Fixed amount installments option C) Interest only option D) Fixed period installments option

C) Interest only option. The interest only option allows the beneficiary to receive income from the proceeds, while keeping all other settlement options available. Any interest is taxable as ordinary income in the year earned.

During the current year, Mr. Kabel made gifts of the following items to his son: -A bond with an adjusted basis of $12,000 and a fair market value of $40,000. -Stock with an adjusted basis of $22,000 and a fair market value of $33,000. -An auto with an adjusted basis of $12,000 and a fair market value of $14,000. -An interest-free loan of $6,000 for a computer (personal use) on January 1 of the current year; the loan was repaid by the son on December 31 of the current year. Assume the applicable federal rate was 8% per annum. What is the gross amount of gifts includible on Mr. Kabel's gift tax return for the current year? A) $52,000. B) $46,480. C) $87,000. D) $46,000.

C) $87,000. The gross amount of gifts included on Mr. Kabel's gift tax return for the current year is: $40,000 bonds + $33,000 stocks + $14,000 auto = $87,000. Gifts loans of $10,000 or less are not subject to gift tax unless the donee uses the proceeds to purchase income-producing property.

Barbara, a CFP® professional, has been providing comprehensive financial planning services to Lionel for 25 years. During their annual meeting, Lionel discloses to Barbara that he has been sued and may be liable for a substantial judgment that will exceed his insurance coverage. Barbara suggests that Lionel may need to file for Chapter 7 bankruptcy, under which some of his debts will be dischargeable. Which of the following items will be discharged if Lionel files for Chapter 7 bankruptcy? 1. Credit card balances 2. Personal loans 3. Debt due to intentional tort claims 4. Student loans A) 1, 2, and 4 B) 1 only C) 1 and 2 D) 3 and 4

C) 1 and 2. Credit card balances and personal loans can be discharged under Chapter 7 bankruptcy. Debts and obligations that are not dischargeable under Chapter 7 bankruptcy include: intentional tort claims, child support, student loans, government loans, and recent federal income taxes due.

Which of the following statements regarding bonds is(are) CORRECT? 1. Lower coupon bonds are more volatile than higher coupon bonds as interest rates change. 2. Bond prices and changes in interest rates have an inverse relationship. 3. A direct relationship exists between a bond's coupon rate and duration. A) 1 and 3 B) 1, 2, and 3 C) 1 and 2 D) 2 and 3

C) 1 and 2. Lower coupon bonds are more volatile than higher coupon bonds as interest rates change. When interest rates fall, bond prices increase and vice versa. Bond prices and the direction of market interest rates have an inverse relationship. The greater the bond's duration, the greater the price volatility of the bond. The coupon rate and duration of a bond have an inverse relationship.

Which of the following does the Federal Reserve use to control the money supply? 1. Adjusting the discount rate 2. Open market operations 3. Fiscal policy A) 2 and 3 B) 1 only C) 1 and 2 D) 2 only

C) 1 and 2. The Federal Reserve can control the money supply by adjusting the discount rate. For example, a higher discount rate discourages banks from lending money and reduces the amount of money in circulation. The Federal Reserve also uses open market operations to control the money supply. By buying government securities in the open market, for example, the Fed can increase the amount of money in circulation. Fiscal policy is conducted by Congress.

If the efficient market hypothesis is correct: Fundamental analysis cannot be used to beat the market. Technical trading rules can provide above average returns. Technical analysis is not worthwhile. Trading on insider information may be worthwhile. A) 3 only B) 1 and 2 C) 1 and 3 D) 1, 2, and 4

C) 1 and 3. In an efficient market, neither fundamental analysis nor technical analysis enable the investor to obtain above-normal trading profits. Trading based on insider information may earn superior risk-adjusted profits; however, trading in which an insider or a related party trades based on material non-public information is illegal.

Which of the following types of student financial aid is(are) need-based? Subsidized Stafford Loan Unsubsidized Stafford Loan Parent Loan for Undergraduate Students (PLUS) Loan Pell Grant A) 1, 3, and 4 B) 1 only C) 1 and 4 D) 2 and 3

C) 1 and 4. Subsidized Stafford Loans and Pell Grants are need-based types of financial aid.

Which of the following employed individuals may make a deductible contribution to a traditional IRA for 2022? Person/ Tax Filing Status/ MAGI /Covered by an Employer-Sponsored Retirement Plan 1. Julie Single $60,000 Yes 2. Jerry Single $250,000 No 3. Buffy Single $20,000 Yes 4. Marilyn MFJ $100,000 Yes A) 1, 3, and 4 B) 2 and 3 C) 1, 2, 3, and 4 D) 2 only

C) 1, 2, 3, and 4. Each of these individuals may make deductible contributions to a traditional IRA in 2022. For 2022, eligible taxpayers may contribute a maximum of $6,000 for themselves and $6,000 for their spouses (working or nonworking), increased to $7,000 for those age 50 or older. For taxpayers who are not active participants (and whose spouses are not active participants) in a qualified plan, SEP, SARSEP, SIMPLE, or Section 403(b) plan, contributions to a traditional IRA are fully deductible, regardless of the taxpayer's MAGI. For taxpayers who are active participants in a qualified plan, SEP, SARSEP, SIMPLE, or Section 403(b) plan, the deduction for traditional IRA contributions is limited (or eliminated when a taxpayer's adjusted income reaches phaseout levels of $68,000-$78,000 for single and $109,000-$129,000 for married filing jointly in 2022. If one spouse is an active participant in an employer-sponsored plan and one spouse is not an active participant, the active participant spouse is subject to the $109,000−$129,000 phaseout threshold and the non-active participant spouse is subject to a $204,000−$214,000 phaseout threshold (2022).

Which of the following qualified plans can a C corporation implement? 1. Profit-sharing plan. 2. Stock bonus plan. 3. Money purchase pension plan. A) 3 only. B) 1 and 3. C) 1, 2, and 3. D) 1 and 2.

C) 1, 2, and 3. In addition to these plans, employee stock ownership plans (ESOPs), SIMPLEs, target benefit pension, Section 401(k) and defined benefit pension plans can be adopted by C corporations.

Which of the following statements regarding asset pricing models is(are) CORRECT? 1. The capital asset pricing model (CAPM) shows a linear relationship between risk and return. 2. The arbitrage pricing theory (APT) suggests that the relationship between a stock's risk and return is not linear. 3. The arbitrage pricing theory (APT) suggests that a stock's price depends upon two variables: the market return and the volatility of returns of the stock. 4. The capital asset pricing model (CAPM) suggests that the only factor that explains returns is a stock's beta. A) 1 and 2 B) 2 and 3 C) 1, 2, and 4 D) 1, 3, and 4

C) 1, 2, and 4. Only statement 3 is not correct. The arbitrage pricing theory (APT) suggests that a stock's price depends upon variables other than the market return and the volatility of returns of the stock.

Duane, a financial planner, is meeting with Lisa, who wants information regarding how several investment sales she has completed this year will impact her income tax return. Lisa has sold the following properties: -Section 1202 stock, which Lisa purchased on December 12, 2019, for $50,000 and sold on December 15, 2022, for its FMV of $65,000. -A vacation home Lisa inherited from her uncle, who died in 2020 and who had a basis of $95,000 in the home. The home had a FMV of $135,000 in his gross estate. Lisa sold it for $160,000 on July 1, 2022. Lisa has used the vacation home only four weeks since she inherited it; otherwise it was vacant. -Stock Lisa inherited from another uncle, who also died in 2020. His basis in the stock was $20,000 and the FMV in his gross estate was $15,000. Lisa sold it on November 1, 2022, for $17,000. What should Duane tell Lisa? 1. 100% of the gain on the sale of the Section 1202 stock is excluded from Lisa's income for both regular income tax and AMT purposes. 2. Lisa must recognize a $2,000 gain on the sale of the stock she inherited from her uncle. 3. Lisa's gain on the vacation home is all capital gain. 4. Lisa must recognize a total gain of $27,000 on the sale of her investments. A) 2, 3, and 4 B) 1, 2, and 4 C) 2 and 3 D) 1 only

C) 2 and 3. Statement 2 is correct. Lisa's basis in the stock is the FMV of the stock in her uncle's gross estate, $15,000. Statement 3 is correct. All of the gain on the sale of the vacation home is capital gain. Statement 1 is incorrect. Section 1202 stock must be held for five years in order for Lisa to exclude the gain from her taxable income. Statement 4 is incorrect. The total gain Lisa must recognize is $42,000 ($15,000 on the Section 1202 stock + $25,000 on the vacation home sale + $2,000 from the stock sale). Note that the vacation home does NOT qualify for the Section 121 gain exclusion, which applies to the sale of a personal residence only.

Which of the following statements describe basic provisions of a money purchase pension plan? 1. As a defined contribution plan, a money purchase plan is not subject to the minimum funding standard. 2. The employer may deduct for a plan contribution up to a maximum of 25% of covered payroll. 3. The employer contribution generally is allocated based on relative compensation. 4. Forfeitures from nonvested participants' accounts must be applied to reduce the employer contribution. A) 1 and 2 B) 1, 2, and 4 C) 2 and 3 D) 3 and 4

C) 2 and 3. The employer deduction limit for a money purchase plan is 25% of covered payroll, and employer contributions generally are allocated based on relative compensation. A money purchase plan is a "pension" plan and thus is subject to the minimum funding requirements. As in any defined contribution plan, the plan may provide for forfeitures either to be reallocated to remaining participants' accounts or applied to reduce the employer contribution.

Under the Health Insurance Portability and Accountability Act (HIPAA), a chronically ill person is unable to perform _______ activities of daily living (ADLs) for a period of at least ______ days. A) 2, 60 B) 3, 30 C) 2, 90 D) 3, 60

C) 2, 90. Under a qualified long-term care policy, a chronically ill person is expected to be unable to perform, without substantial assistance from another person, 2 ADLs for 90 days.

As a general rule, the housing cost ratio should not exceed what percentage of gross monthly income? A) 22% B) 36% C) 28% D) 20%

C) 28%. As a general rule, the housing cost ratio should not exceed 28% of gross monthly income.

Assume that an investor has earned the following series of returns on an investment: Year Return 1 18.3% 2 0.7% 3 −7.6% 4 11.9% 5 2.5% Which row correctly identifies the investor's arithmetic and geometric mean? Arithmetic Mean Geometric Mean A) 4.77% 8.20% B) 8.20% 8.01% C) 5.16% 4.77% D) 8.01% 5.16%

C) 5.16% 4.77%. Arithmetic mean (18.3% + 0.7% − 7.6% + 11.9% + 2.5%) ÷ 5 = 5.16% Geometric mean (Assume an investment of $1) PV = −1 FV = (1 + 0.183)(1 + 0.007)(1 − 0.076)(1 + 0.119)(1 + 0.025) = 1.2625 N = 5 Solve for I/YR = 4.7727, or 4.77%

Portfolio A has a standard deviation of 12%, and the market has a standard deviation of 16%. The correlation between Portfolio A and the market is 0.5. What percentage of the total risk is unsystematic risk? A) 0% B) 50% C) 75% D) 25%

C) 75%. The coefficient of determination (R-squared) of Portfolio A is 25% (0.25). This is calculated by squaring the correlation coefficient (R) of 0.50 (0.50 × 0.50 = 0.25). Therefore, 25% is the percentage of Portfolio A returns that may be explained by the market (or systematic risk). The remainder of the percentage of returns (movement) of Portfolio A is explained by factors independent of the market (or unsystematic risk). To determine this, subtract the systematic risk from 1.0 (1.0 − 0.25 = 0.75).

Which of the following regarding a SIMPLE is CORRECT? A) The maximum annual elective deferral contribution to a SIMPLE 401(k) is $20,500 (2022) for an employee who has not attained age 50. B) A SIMPLE requires ADP testing of employee elective deferral contributions. C) A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in the SIMPLE IRA plan. D) SIMPLE IRAs are subject to top-heavy rules.

C) A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in the SIMPLE IRA plan. Neither a SIMPLE IRA nor a SIMPLE 401(k) requires ADP testing. A SIMPLE is not subject to top-heavy rules. The early withdrawal penalty is 25% for distributions taken within the first two years of participation in a SIMPLE IRA. The maximum elective deferral to a SIMPLE is $14,000 (2022). Employees who have attained age 50 by the end of the tax year will also be eligible for a catch-up contribution of $3,000.

Joe, age 46, has owned his company for 18 years and wishes to retire at age 70. All of Joe's employees are older than he is and have an average length of service with the company of eight years. Joe would like to adopt a qualified retirement plan that would favor him and reward employees who have rendered long service. Joe has selected a traditional defined benefit pension plan with a unit benefit formula. Which of the following statements regarding Joe's traditional defined benefit pension plan is(are) CORRECT? A) Increased profitability would increase both Joe's and his employees' pension contributions. B) A unit benefit plan formula allows for higher levels of integration than other defined benefit pension plans. C) A traditional defined benefit pension plan will maximize Joe's benefits and reward long-term employees based on length of service. D) A unit benefit plan formula rewards older employees hired in their 50s or 60s more than most flat benefit plans would.

C) A traditional defined benefit pension plan will maximize Joe's benefits and reward long-term employees based on length of service. Contributions to traditional defined benefit pension plans are not dependent on the profitability of a company. A unit benefit plan formula will not allow higher integration levels. A flat percentage formula favors workers with less longevity. For example, a flat benefit plan in which everyone with more than 10 years of service receives 50% of final salary would give a higher benefit to someone hired at age 54 who retires at 65 than a 1.5%/year unit benefit formula.

How are withdrawals or distributions from a traditional IRA taxed if the account is comprised entirely of deductible contributions and attributable earnings? A) All payments are taxed as capital gains. B) A portion of the payment is tax free and a portion is taxed as ordinary income. C) All payments are taxed as ordinary income. D) A participant may be eligible for net unrealized appreciation tax treatment which may reduce the overall income tax due.

C) All payments are taxed as ordinary income. Withdrawals or distributions from a traditional IRA are generally taxed as ordinary income because the contributions were tax deductible and the earnings were tax deferred. If the IRA is comprised of only nondeductible contributions, then a portion of the distribution would be received tax free as a return of basis. Distributions from an IRA are not eligible net unrealized appreciation tax treatment.

Which of the following statements concerning categories of annuities are correct? A) A deferred annuity disburses the first benefit one payment interval after the purchase date. B) A straight life annuity provides periodic (usually monthly) income payments that continue as long as the annuitant and their beneficiary live. C) An annuity may be paid periodically in a fixed amount for a period determined by the insurer. D) A joint-and-last-survivor annuity provides income that ceases upon the first death among the covered lives.

C) An annuity may be paid periodically in a fixed amount for a period determined by the insurer. An immediate annuity disburses the first benefit one payment interval after the date of purchase. Joint-and-last-survivor terminates at the death of the second spouse. Straight life annuity payments end once the annuitant dies.

Which of the following statements regarding incentive stock options (ISOs) and nonqualified stock options (NQSOs) are CORRECT? A) An employee cannot gift an ISO to their child while the employee is still employed by the company. B) A company cannot grant NQSOs to an employee's spouse or dependent. C) An employee may transfer an NQSO to their child during life or at death. D) A company is permitted to grant ISOs to an employee's spouse or dependent.

C) An employee may transfer an NQSO to their child during life or at death. ISOs may be granted only to employees. NQSOs may be granted to employees, independent contractors, family members of the employee or independent contractor, or any other beneficiary. An employee cannot transfer ISOs during the employee's lifetime. ISOs can be transferred only at death. NQSOs may be gifted to an individual or charity during the owner's life or at the death of the owner.

Bob works for the ABC Company. In fact, he owns 4% of ABC. His 401(k) balance was $450,000 as of December 31 of last year. He turns 73 this year and plans on retiring on his birthday. Bob will take $15,000 out of his 401(k) this year on December 31. The life expectancy for someone age 73 is 24.7 years. Which of the following statements regarding Bob's required minimum distributions is CORRECT? A) Bob is not subject to the required minimum distribution rules. B) Bob's distribution of $15,000 is sufficient to meet his required minimum distribution requirement. C) Bob will not have a penalty for the current year, but he will need to withdraw the balance of his required minimum distribution for the current year by April 1 of next year. D) Bob will incur a penalty because he failed to take the required minimum distribution by December 31 of the current year.

C) Bob will not have a penalty for the current year, but he will need to withdraw the balance of his required minimum distribution for the current year by April 1 of next year. Bob is greater than 72 and owns less than 5% of the ABC Company. Thus, he can delay RMDs until April 1 of the year following the year he retires. If he retires this year, his required beginning date (RBD) will be April 1 of next year. Based on his 401(k) of $450,000 and a life expectancy of 24.7 years, the required minimum distribution is $18,219 ($450,000 ÷ 24.7). Bob plans to take a $15,000 distribution this year, but he will not incur a penalty tax unless he fails to withdraw the remaining $3,219 by April 1 of next year.

BCD Corporation is in the process of promoting a new bond issue to a wealthy potential private investor. The bonds will feature a 5.5% coupon, a par value of $1,000, a 30-year maturity, and an A rating. The issue is callable in 10 years for 103. Assuming the bond will be priced at par, which of the following statements is(are) CORRECT? 1. The bond has a yield to call of 5.73%. 2. The bond's call price is $1,030. A) Neither I nor II B) I only C) Both I and II D) II only

C) Both I and II. Both statements I and II are correct. The call price is 103% of $1,000 or $1,030.

One of your major retirement accounts is the Section 401(k) plan at the XYZ Company. It has a 100% match for the first 4%. Matt Jones works for the company making $40,000/year. His wife stays at home with their three children under 10. Matt wants to start saving for retirement. He asks you which option would be the best for him. A) Contribute 4% as a deductible contribution B) Contribute 4% as a Roth elective deferral and ask the company to put the match into the Roth portion of the 401(k) C) Contribute 4% as a Roth elective deferral D) Contribute 2% as a deductible contribution and 2% as a Roth elective deferral

C) Contribute 4% as a Roth elective deferral

Following a seminar, a young, single client approaches a financial planner with $12,000 and states that she would like to develop a financial plan and invest in the stock market. This is her first experience investing and she would like help choosing an appropriate account. What is the financial planner's most appropriate course of action? A) Open a brokerage account B) Recommend suitable investments C) Determine whether the client has any consumer debt D) Open and fund a Roth IRA for the current year

C) Determine whether the client has any consumer debt. Of the answer options provided, reviewing debt is the best course of action. The financial planner needs additional information from the client before taking an action involving increasing client risk, such as opening a brokerage account. Additional information is also needed before making investment recommendations. The financial planner does not have enough information to determine if a Roth IRA is appropriate.

Which of the following SIMPLE IRA options is CORRECT? A) Employers can match 50% of employee contributions up to 3%. B) Employers can match employee contributions dollar-for-dollar up to 5%. C) Employers can contribute up to 2% nonelective contributions for each eligible employee. D) Employers must match employee contributions dollar-for-dollar up to 3%, plus make a 2% nonelective contribution for each employee eligible to participate in the plan.

C) Employers can contribute up to 2% nonelective contributions for each eligible employee. For a SIMPLE IRA, an employer is required to satisfy one of two contribution formulas: 1. match dollar-for-dollar employee contributions up to 3% of employee's income, or 2. contribute at least a 2% nonelective contribution for each eligible employee.

Which of these legal requirements apply to profit sharing plans? 1. Forfeitures must be used to reduce employer contributions or be reallocated to the remaining participants' accounts. 2. Employer contributions are required to be allocated according to compensation. 3. Employer deductions for plan contributions are limited to 25% of the participants' total compensation. 4. Allocations to a participant's account cannot exceed the lesser of 100% of compensation or $24,500 annually. A) Allocations to a participant's account cannot exceed the lesser of 100% of compensation or $24,500 annually. B) Employee contributions are limited to 25% of their total compensation. C) Forfeitures must be used to reduce employer contributions or be reallocated to the remaining participants' accounts. D) Employer contributions are required to be allocated according to compensation.

C) Forfeitures must be used to reduce employer contributions or be reallocated to the remaining participants' accounts. Employees do not contribute to a profit sharing plan, the employer is limited to 25% of total compensation The allocation of employer contributions to a plan may be handled in one of several ways, including a unit, points, or an age-weighted allocation system. IV misstates the 415 limit of the lesser of 100% or $61,000 in 2022.

Which of the following statements regarding the use of the percentage test as a way to determine whether life insurance is an incidental benefit provided by a retirement plan is(are) CORRECT? Under the percentage test, the maximum percentage of total contributions used to pay for life insurance cannot exceed 25%, regardless of the type of life insurance protection is involved. Under the percentage test, if term insurance or universal life is involved, the aggregate premiums paid for the policy cannot exceed 25% of the plan contributions for the participant. If a whole life policy is used, however, the aggregate premiums paid for the whole life policy cannot exceed 50% of the plan contributions for the participant. A) I only. B) Neither I nor II. C) II only. D) Both I and II.

C) II only. Statement I is incorrect because the 25% limit applies when term life insurance or universal life insurance is used, while the limit is 50% when whole life insurance is used.

Jorge received favorable tax treatment on the sale of his shares of stock which he acquired as a result of an exercise of incentive stock options (ISOs). The favorable tax treatment is a direct result of Jorge making sure that he met the ISO holding period requirements. At the time of exercise, Jorge had an AMT adjustment to the extent the FMV of the stock exceeded the option exercise price. Which of the following statements concerning Jorge's ISO transactions is CORRECT? A) The tax basis for regular tax purposes is the exercise price plus appreciation at the exercise date (FMV of stock at time of exercise). B) The expiration date on Jorge's ISOs could not have exceeded 2 years from the date of the grant. C) If Jorge would have sold the shares received through the exercise of his ISOs within 2 years from the date of the grant and 1 year from the date of the exercise, he would have lost the favorable tax treatment. D) The tax basis for AMT purposes is the option exercise price.

C) If Jorge would have sold the shares received through the exercise of his ISOs within 2 years from the date of the grant and 1 year from the date of the exercise, he would have lost the favorable tax treatment. Because Jorge's difference between the FMV at the time of exercise and the exercise price is an AMT adjustment in the year of exercise, his basis for regular income tax purposes will equal the exercise price, whereas the basis for AMT purposes equals the FMV of the stock at the time of exercise. The basis for AMT purposes is the exercise price plus appreciation at the exercise date (FMV of stock at time of exercise) and the basis for regular tax purposes is the option exercise price. Also, the favorable tax treatment for ISOs will result in a long-term capital gain. If the shares received through the exercise of ISOs are sold within 2 years from the date of grant and 1 year from the date of exercise, the favorable tax treatment will be lost. The expiration date cannot exceed 10 years from the date of the grant.

Vicki purchased an annuity for $26,000 in the current year. Under the contract, Vicki will receive $300 each month for the rest of her life starting next month. According to actuarial estimates, Vicki will live to receive 100 payments. In addition, she is expected to receive a 3% return on her original investment. Which of the following statements regarding the taxation of Vicki's annuity income is CORRECT? A) If Vicki collects $3,000 in the current year, the $3,000 is treated as a recovery of basis, and thus is not taxable. B) If Vicki lives to collect more than 100 payments, she must amend her prior years' tax returns to increase her taxable portion of each payment received in the past. C) If Vicki lives to collect more than 100 payments, all amounts received after the 100th payment must be fully included in her gross income. D) If Vicki dies after collecting a total of 50 payments, she has an economic loss that is not tax deductible.

C) If Vicki lives to collect more than 100 payments, all amounts received after the 100th payment must be fully included in her gross income. Payments beyond projected life expectancy are fully taxable, unless the annuity payments began on or before December 31, 1986. If the annuitant dies before life expectancy and has not completely recovered her basis, the unrecovered basis is deductible on the annuitant's final income tax return as a miscellaneous itemized deduction not subject to the 2% of AGI floor. For contracts where annuity payments began after December 31, 1986, the exclusion ratio is only used to the extent of recovering the basis; therefore, the taxpayer will not use the exclusion ratio for payments made after life expectancy and will be taxed on the entire amount.

Which of the following is one of the methods by which an S corporation can be terminated? A) If it earns more than $10 million in gross receipts in any one year B) When it fails to meet at least three requirements of a small business corporation C) If gross income for three years in a row is of a certain type that exceeds a certain share of total income D) All of the shareholders vote to terminate the S corporation

C) If gross income for three years in a row is of a certain type that exceeds a certain share of total income. The only time that earnings can revoke the S status is when more than 25% of gross receipts for three successive years come from certain types of passive income and the corporation has accumulated earnings and profits from its operations prior to the S election. Only a majority vote by shareholders is needed to terminate an S corporation. Failure to meet any requirement of an S corporation can cause termination; there is no minimum number of violations that need to be met.

Which of these characteristics of a personal auto policy (PAP) is true? A) Medical Payments Coverage will not cover funeral expenses of the insured driver regardless of fault. B) It usually does not provide a split liability insuring agreement for bodily injury and property damage. C) It provides medical payments for injuries incurred by a family member of the insured who was a pedestrian struck by an automobile. D) It covers only those persons driving the car who reasonably believe they are entitled to use the vehicle.

C) It provides medical payments for injuries incurred by a family member of the insured who was a pedestrian struck by an automobile. This statement is incorrect because of the word "only." Others besides the driver are covered. The definition of "covered insured" in the PAP includes those individuals in the policy owner's family, even while they are pedestrians. It is common to see a split limits policy for liability. This includes per person/per accident limits for bodily injury and a separate limit for property damage. It is also possible to have a single-limits policy combining the liability together. Medical Payments will pay regardless of who is at fault and does provide some funeral benefits.

Most automobile insurance companies use a classification system to determine premiums. Which of the following individuals would be considered the lowest risk in a classification system? A) Christopher, age 28, who is married B) Vincent, age 16, who is single C) Jennifer, age 28, who is married D) Rebecca, age 16, who is single

C) Jennifer, age 28, who is married. Single drivers are considered higher risk and typically pay higher premiums than married drivers. Males are considered higher risk than females. Drivers under age 25 are typically considered higher risk than drivers over age 25. State laws vary, but all of these factors are used in classification systems.

David began receiving Social Security benefits in June 2022. 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. A) There is no "redo" option. B) December 2022 C) June 2023 D) December 2023

C) June 2023. 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 (repaying all benefits within 12 months of filing) can be employed to increase benefits at any age. There is another strategy that can only be used after attaining FRA: "suspending" benefits. For example, Anita, who is single, started receiving her benefits three years early. Her PIA is $2,000/month. Starting three years early meant a 20% reduction, so her actual benefit is $1,600/month. She will reach her FRA of 67 next month. She has recently taken a new job and does not need her Social Security income. She would like to increase her monthly Social Security benefits down the road when she eventually retires from her new job. She has taken Social Security benefits for more than 12 months so she cannot pay back the benefits received and reset her claiming age. However, if she suspends her benefit starting at her FRA of age 67, she can earn delayed retirement credits. Delayed retirement credits increase PIA by 8/12ths of a percent per month until age 70. If she suspended her Social Security until she was 70, she would earn a delayed credit of 24% of her PIA. Assuming her PIA stayed at $2,000/month, a 24% increase would mean an additional benefit of $480/month. This would be added to her $1,600/month and her final benefit at age 70 would be $2,080/month. Note: If her working from 67 to 70 or older meant she made enough to replace some of her 35 highest inflation-adjusted years of working, then her PIA would also increase due to her higher earnings history.

Ron and his wife Susan, both 61 years of age, ask a CFP® professional to provide a recommendation on whether or not Susan should start to draw Social Security benefits when she first becomes eligible at age 62. Which of these would be the least important to obtain in order to provide a recommendation? A) Family longevity and health history B) Social Security earning statement for each C) Long-term disability coverage D) Other retirement assets or financial needs

C) Long-term disability coverage. Requires consideration of multiple issues such as financial needs, family health history, life expectancy, survivor benefits, and higher wage earner analysis. Disability coverage is not a factor.

Dr. Bennet has established a profit-sharing plan for himself and his employees which is top heavy. He made a 1% of compensation contribution to all participants' accounts this plan year. Which of the following statements is CORRECT? A) He must add another 0.25% to non-key employee accounts. B) He must contribute another 1% to each employee. C) No further contribution is required. D) He must add another 1.25% to non-key employee accounts.

C) No further contribution is required. Dr. Bennett does not have to make any further contributions because both non-key and key employees received the same percentage contribution.

Richard, who is single, has a traditional IRA that contains a portfolio of mutual funds with a current value of $107,000. He is expected to incur approximately $9,600 in medical bills in the next couple of months. Assuming he qualifies to maintain and fund a health savings account (HSA) and he has not made any contributions to the HSA in the current year, could Richard simply transfer the $9,600 from his IRA into an HSA and pay his medical bills with qualified tax-free distributions from his HSA? A) Yes, Richard could make a one-time trustee-to-trustee transfer of $9,600 from his traditional IRA to his HSA. B) No, this type of transfer is not allowed by the Tax Code. C) No. Richard could make a one-time, trustee-to-trustee transfer from his traditional IRA to his HSA, but the estimated medical expenses of $9,600 exceed the maximum allowable contribution for the current year to an HSA for an insured with single coverage; therefore, Richard's transfer is limited to the maximum contribution allowable. D) Yes, Richard could make a one-time trustee-to-trustee transfer of the maximum amount of $15,000 from his traditional IRA to his HSA.

C) No. Richard could make a one-time, trustee-to-trustee transfer from his traditional IRA to his HSA, but the estimated medical expenses of $9,600 exceed the maximum allowable contribution for the current year to an HSA for an insured with single coverage; therefore, Richard's transfer is limited to the maximum contribution allowable. An individual can make a one-time, trustee-to-trustee transfer from a traditional IRA to an HSA. This transfer is not subject to income tax but it is limited to the maximum HSA contribution in the year of transfer ($3,650 for an individual in 2022).

How can passive activity losses from an ongoing nonpublicly traded partnership, such as a RELP, be deductible from other taxable income? A) Passive losses can only be offset by passive gains. B) Passive losses can only be carried forward against future passive gains. C) Passive losses can offset passive gains, and a phased-out $25,000 deduction ($12,500 for MFS) for rental real estate applies. D) Passive activity losses are deductible against portfolio gains.

C) Passive losses can offset passive gains, and a phased-out $25,000 deduction ($12,500 for MFS) for rental real estate applies. Generally, passive activity losses can only be used to offset passive activity income. An exception for the deduction of passive losses is for rental real estate. A phased-out deduction of $25,000 ($12,500 for MFS) of rental real estate losses is allowed against a taxpayer's other non-passive income. If AGI is greater than $100,000 ($50,000 for MFS), however, there is a reduction of 50 cents for each dollar over $100,000 ($50,000 for MFS), which then terminates at $150,000 ($75,000 for MFS) of AGI.

Jack, age 36, is a self-made millionaire and enjoys taking financial risks. He would like to retire by age 60. He has amassed a sizable investment portfolio, but he is concerned the asset allocation is not maximizing growth. He is willing to take risks to achieve higher long-term returns. Which of the following portfolios would be most suitable for Jack to meet his retirement goal? A) Portfolio 2 - 50% Russell 2000 Index Fund, 20% Corporate Bond Fund, 20% Biotechnology Fund, 10% Energy Sector Fund. B) Portfolio 1 - 20% S&P 500 Index Fund, 50% Small-Cap Growth Fund, 25% International Stock Fund. C) Portfolio 4 - 60% S&P 500 Index Fund, 10% Small-Cap Growth Fund, 10% Foreign Stock Fund, 10% Pacific Rim Growth Fund, 10% Corporate Bond Fund. D) Portfolio 3 - 40% Small-Cap Growth Fund, 20% Corporate Bond Fund, 15% Utilities Stock Fund, 15% Foreign Stock Fund, 10% Municipal Bond Fund.

C) Portfolio 4 - 60% S&P 500 Index Fund, 10% Small-Cap Growth Fund, 10% Foreign Stock Fund, 10% Pacific Rim Growth Fund, 10% Corporate Bond Fund. Portfolio 4 is the best choice for Jack based on his age and risk tolerance. A mix of 90% stocks and 10% bonds is appropriate for an investor who is willing to take risks to achieve higher long-term returns.

Which of the following is a disadvantage of real estate investing? A) Nearly all real estate values decline as inflation increases. B) Properties are typically homogeneous, reducing the diversification benefits of investing in real estate. C) Real estate is not easily divisible, making it difficult for investors to purchase real estate investments that match their preferred investment level. D) Real estate returns are highly positively correlated with stock and bond returns.

C) Real estate is not easily divisible, making it difficult for investors to purchase real estate investments that match their preferred investment level. Real estate returns are not highly correlated with stock and bond returns, which is one of the key reasons to include real estate in a portfolio of traditional assets. Also, real estate can act as an inflation hedge, unlike traditional assets. Finally, properties are heterogeneous, not homogeneous, increasing the complexity of real estate risk analysis. Real estate is not easily divisible.

Which of the following is correct related to a nonqualified distribution from a Roth IRA? A) A nonqualified distribution attributable to a conversion within 5 years will be subject to ordinary income tax and an early withdrawal penalty. B) A nonqualified distribution will always incur a penalty. C) Regular contributions will be deemed the first distributed and will never be subject to income tax or an early withdrawal penalty. D) A nonqualified distribution from a Roth IRA held for 5 years will not be subject to ordinary income tax or an early withdrawal penalty because the holding period requirement has been satisfied.

C) Regular contributions will be deemed the first distributed and will never be subject to income tax or an early withdrawal penalty. A distribution from a Roth IRA, qualified or nonqualified, will be attributed as first coming from regular contributions and that amount will never be subject to income tax or an early withdrawal penalty. A nonqualified distribution will only be subject to penalty if the distribution is attributable to earnings or to a conversion within 5 years. A distribution attributed to a conversion within 5 years is subject to an early withdrawal penalty, but is not subject to regular income tax. A distribution from a Roth IRA must meet both the 5-year holding period requirement and one of the other qualified circumstances (death, disability, first-time home purchase, age 59½).

For disability income insurance purposes, _________ means that a proportionate benefit is paid to an insured whose earned income is reduced because of a disability. A) Nonoccupational disability B) Accidental disability C) Residual disability D) Temporary disability

C) Residual disability. This means that if a disabled worker returns to work at lesser pay, the policy will pay the difference between the former pay and the current pay for the benefit period. The benefit is usually payable in proportion to the insured's reduced earnings in a stated range, such as 20-80%. All that is required for benefits to be payable is reduced income. Returning to work full-time does not preclude residual disability benefits.

Mickey owns a manufacturing company with 60 employees. He would like to implement a retirement plan that is easy to administer and permits both employee and employer contributions. What type of plan would you recommend? A) Section 401(k) plan. B) DB(k) plan. C) SIMPLE IRA. D) SEP plan.

C) SIMPLE IRA. A SIMPLE IRA would be easy to administer and would allow contributions by both the employer and employee. The other choices would not be appropriate: A DB(k) would not be easy to administer because it is a qualified plan requiring administration for both the defined benefit element and the Section 401(k) element. A Section 401(k) plan must meet ERISA requirements, such as ADP testing. Therefore, the plan would not be easy to administer. A SEP plan does not permit employee contributions.

Which of the following strategies is consistent with a belief in the efficient market hypothesis? A) Using fundamental analysis to compare the calculated value of a security to the market value of the stock. B) Attempting to predict the overall direction of the securities market. C) Selecting a random set of stocks for a portfolio. D) Searching for undervalued securities.

C) Selecting a random set of stocks for a portfolio. The efficient market hypothesis (EMH) suggests that investors are unable to outperform the market on a consistent basis. The fundamental assumption of this theory is that current stock prices reflect all available information and that stock prices rapidly (or immediately) adjust to reflect any new information. In addition, any new information must be unexpected; therefore, any changes in the stock price resulting from this new information will be random. If prices move in a random fashion, any investment strategies or market techniques designed to take advantage of market inefficiencies are theoretically useless.

Mary is an 18-year-old full-time student at Midwest University. Her parents claim her as a dependent on their tax return. Mary has $20,000 in unearned income this tax year. Her education expenses are as follows: Tuition: $1,000 Books and supplies: $1,000 Room and board: $4,000 Computer required by Midwest University: $1,500 Fees: $650 Transportation: $1,000 What American Opportunity Tax Credits and Lifetime Learning Credits can Mary claim on her personal tax return this year for education expenses? A) She can claim either the $2,000 Lifetime Learning Credit or the $2,500 American Opportunity Tax Credit. B) She can only claim a $2,500 American Opportunity Tax Credit. C) She is not eligible to claim either education tax credit. D) She may claim a $2,000 Lifetime Learning Credit and a $2,500 American Opportunity Tax Credit.

C) She is not eligible to claim either education tax credit. No credit is available for a taxpayer who qualifies as another's dependent, even if the dependent pays the expenses out of her own pocket.

All of the following statements regarding the capital asset pricing model (CAPM) are correct EXCEPT? A) The CAPM is based on a market portfolio containing all possible assets. B) The CAPM assumes capital markets are in constant equilibrium establishing a baseline by which to evaluate the suitability of any investment. C) The CAPM assumes that the only pertinent risks are market risk and unsystematic risk. D) The CAPM can be used to find the required return of an investment.

C) The CAPM assumes that the only pertinent risks are market risk and unsystematic risk. The CAPM assumes that only systematic risk of an asset is relevant. Unsystematic risk is not relevant because rational investors will diversify all unsystematic risk by holding diversified portfolios.

Sherri received enough incentive stock options (ISOs) to purchase 10,000 shares of Dupre Co. stock at $10 per share. One year later, Sherri exercised all of the options when the market price of the stock was $25 per share. Sherri sold the 10,000 shares of Dupre Co. stock for $100 per share two years after exercise. Which of the following statements about these transactions is CORRECT? A) Sherri will have a negative AMT adjustment of $150,000 upon exercise. B) Sherri will pay a capital gains tax of $15 per share at exercise. C) The grant of options is not a taxable event. D) At the sale, Sherri's adjusted tax basis equals $25 per share.

C) The grant of options is not a taxable event. The exercise of ISOs does not incur any regular income tax liability. Sherri has a positive AMT adjustment of $150,000 [($25 − 10) × 10,000] upon exercise of the ISOs. Sherri's adjusted tax basis is equal to the grant price, or $10 per share.

Which of the following statements regarding employee elective deferrals under a Section 401(k) plan is(are) CORRECT? A) These contributions are not subject to federal income tax, FICA, or FUTA. B) The actual deferral percentage (ADP) for highly compensated employees in a Section 401(k) plan cannot be more than the ADP of the nonhighly compensated employees multiplied by 1.50. C) These contributions are subject to FICA and FUTA but not to federal income tax at the time of contribution to the plan. D) These contributions are not subject to payroll taxes but are subject to federal income tax.

C) These contributions are subject to FICA and FUTA but not to federal income tax at the time of contribution to the plan. Employee elective deferrals in Section 401(k) plans are subject to FICA and FUTA but not to federal income tax. These plans are not solely funded by employers. Employee elective deferrals are included.

Jack and Emily are legally separated on December 31 this year. Jack earned $40,000 this year, and Emily earned $80,000. They live in a common law state and have no dependents. They have come to a tax preparer to determine how they must file their income taxes this year. What does the planner tell them? A) They may file as MFJ as they were not legally separated until the end of the year. B) They must file as single, each reporting $60,000 (half of the total of $120,000) in income. C) They must file as single, each one reporting their own income. D) They must file as MFS, each reporting their own income.

C) They must file as single, each one reporting their own income. Single (S) filing status is used by an unmarried, legally separated, or divorced individual who does not qualify for any other filing status.

A client consults a financial professional for help in formulating an estate plan. The client is in poor health and expects to die within the next 3 to 4 years. He has a large estate and would like to begin taking steps to reduce any estate tax that might be due at his death. The client is a widower with 1 adult daughter. The client owns the following property in his name alone: - A life insurance policy insuring his own life, with a death benefit of $5 million - A personal residence with a market value of $6 million - A brokerage fund with a balance of $10 million Which of the following steps should the client implement first to meet his objectives? A) Gift the residence to his daughter. B) Add his daughter's name to the brokerage account as JTWROS. C) Transfer ownership of the life insurance policy to his daughter. D) Transfer his residence to an irrevocable living trust.

C) Transfer ownership of the life insurance policy to his daughter. The proceeds of the life insurance policy will be included in the client's gross estate if the client owns the policy when he dies or if he transferred ownership of the policy within 3 years before his death. Given the client's poor health and short life expectancy, the most urgent step is to transfer ownership of the policy to his daughter. If the client survives for 3 years after the transfer, the $5 million in death benefits will be removed from his gross estate. The 3-year rule would not apply to a gift of the residence to an irrevocable trust or to the daughter directly, so making either of these transfers is less urgent. Adding his daughter's name to the brokerage account as JTWROS would not reduce the client's gross estate because he supplied all of the consideration for the account.

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 to receive the highest amount? A) Now, at FRA B) She should have started earlier C) Two years from now D) Not enough information to determine

C) 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 Ann would need to live until 78½ to "break even." Because she is expecting to live until age 90, she should opt to delay receipt of benefits. Expecting to life longer would make starting earlier a poor choice.

Consider the following modern portfolio theory statistics for the Davis Growth Fund: ABC Index JKL Index XYZ Index R2 0.67 0.56 0.98 Beta 0.95 1.0 1.3 Alpha 1.2 3.25 0.05 Which of these indexes is the most appropriate benchmark for the growth fund? A) ABC Index B) JKL Index C) XYZ Index D) None of these

C) XYZ Index. R-squared indicates the portion of a portfolio's returns that are attributable to an index. The R-squared for XYZ Index equals 0.98, meaning that 98% of the changes in the Davis Growth Fund are attributable to the XYZ Index.

Restricted stock plans A) provide little tax advantages to employees. B) are comprised of phantom stock. C) allow voting rights when stock is awarded. D) allow for the immediate sale of the stock.

C) allow voting rights when stock is awarded. Restricted stock plans are not comprised of phantom stock. They are comprised of corporate stock that is granted to the executive at a discounted price with the restriction that it may not be sold or gifted until some future date.

Target benefit pension plans A) best serve the middle-aged, rank-and-file workers. B) disproportionately benefit the young executive employees in large publicly held corporations. C) are appropriate for a corporation that cannot afford a traditional defined benefit pension plan, and has a substantial group of older (50+) key employees. D) guarantee the targeted benefit will be paid.

C) are appropriate for a corporation that cannot afford a traditional defined benefit pension plan, and has a substantial group of older (50+) key employees. An employer hopes to pay, but does not guarantee, the targeted benefit. Such plans allow proportionately greater employer contributions for older employees, due to age-weighting. The target benefit is not guaranteed, and the plan benefits older participants by making higher allocations to the accounts of the older participants.

Charlie is a 30-year-old CPA with his own tax practice. For most of the year, he works by himself, preparing and reviewing income tax returns. For the last 5 years, he has hired 3 part-time employees to assist him during the busy season. Each of these employees works approximately 200 hours, earning an average salary of $4,000. Charlie would like to establish a retirement plan that would allow him to save for his retirement, without significant administrative costs. Which of the following plans would be best suited for Charlie? A) Simplified employee pension (SEP) plan B) Section 401(k) plan C) SIMPLE IRA D) Cash balance pension plan

C)SIMPLE IRA is the correct answer because a SIMPLE IRA involves very little administrative cost and would allow Charlie to exclude the part-time employees. To be eligible for a SIMPLE, an employee must have earned at least $5,000 in compensation for the employer in any 2 prior years and expect to earn at least $5,000 in compensation in the current year. The other plans are incorrect: A cash balance pension plan is a defined benefit pension plan that would involve actuarial costs, as well as qualified plan filing requirements. All of Charlie's part-time employees would be eligible to receive a contribution to the SEP plan. An employee is eligible for a SEP plan if she has attained age 21, earned at least $650, and has worked for the employer for 3 of the last 5 years. Charlie could not legally exclude any of his part-time employees from the SEP plan. A Section 401(k) plan would involve nondiscrimination testing and annual filing of Form 5500. SIMPLE IRA.

Which of the following are fundamental characteristics of insurance? 1. Probability (possibility and predictability of a loss) 2. Law of large numbers 3. Transfer of risk from individual to group 4. Insurance is a form of speculation A) I, II, III, and IV B) III and IV C) I and II D) I, II, and III

D) I, II, and III. A great many protections have been put into place to keep insurance from being used in a speculative manner. Indemnity and insurable interest are among the concepts developed to ensure that insurance does not equal gambling.

Tom is a financial planner. Several years ago, as part of his financial planning agreement with Grace, a wealthy client, Tom, agreed to calculate and coordinate the required minimum distributions (RMDs) from Grace's 401(k). Grace continued to work because she owns 3.5% of her employer. Last year, she turned 73 and retired. She deferred her initial RMD payment into this year to avoid adding it to her last year of wages. She took her initial RMD on April 1 of this year. Which of the following statements regarding Grace's RMDs is CORRECT? A) If she rolled the 401(k) into an IRA, Grace could elect NUA tax treatment to lower the overall tax due for each RMD if her account holds any former employer securities. B) By deferring the first RMD to April 1, this year, all subsequent RMDs must also be executed by April 1 each year. C) If Grace does not currently need the RMD income on April 1, this year due to her wealth, she may extend the deferral to December 31. D) Tom should advise Grace she will need to execute 2 RMDs this year.

D) Tom should advise Grace she will need to execute 2 RMDs this year. Because Grace deferred her initial RMD to April 1 of this year, she must execute an additional RMD for the current year prior to December 31. RMDs for subsequent years must be taken by December 31 each year, not April 1. The initial RMD may not be deferred any later than April 1 this year. NUA tax treatment is not available for distributions from an IRA.

Three years ago, Carol invested $10,000 in Uncle Sam Mutual Fund, (which only invests in U.S. Treasuries). The fund paid interest of $700 the first year, $900 the second year, and $0 the third year. Interest for all years was not distributed, but instead, immediately reinvested. The value of the account as of January 1 of the current year is $12,000. Assume capital gains are taxed at 15%, her ordinary income is taxed at 32%, and her state tax rate is 4% for ordinary income and capital gains. If she sells her shares today, what is the value of this investment at the end of the holding period after deducting all taxes? A) $11,856 B) $11,924 C) $11,300 D) $11,412

D) $11,412. Because Carol reinvested the interest, she can add the interest to her cost basis when she sells the shares. Carol paid $224 in federal income taxes in year 1 ($700 × 0.32). She paid $288 in income federal taxes in year 2 ($900 × 0.32). Interest from U.S. Treasuries is subject to federal income tax but not state income tax in the year it is earned. This is true regardless of if the interest was actually distributed to the client. Because her broker reinvested the entire interest and did not withhold any tax, her cost basis for the account is $11,600 ($10,000 + $700 + $900). As such, the tax due would have been reported and paid on her Form 1040 for those years. She sold the fund for $12,000. Therefore, she has a capital gain of $400. Treasury interest is exempt from state tax, while capital gains on Treasuries are usually subject to state tax. Therefore, her capital gains tax is ($400 × 0.15) + ($400 × 0.04) = $60 + $16 = $76. Her total taxes paid is $224 + $288 + $76 = $588. The value of her investment for the holding period after taxes is $12,000 − $588 = $11,412.

Rob built a house several years ago in New Orleans. The replacement value has increased to $200,000. Rob originally purchased insurance on the house under a homeowners broad form HO-2 policy in the amount of $150,000. The policy contains an 80% coinsurance clause. The roof of the house has been damaged by fire. Since the home was built, the roof had depreciated by 25%. The cost to replace the roof will be $20,000. How much will Rob collect from his insurance policy? A) $15,000 less the deductible B) $0 C) $20,000 less the deductible D) $18,750 less the deductible

D) $18,750 less the deductible. Rob does not meet the coinsurance requirement so the insurer will pay as follows: 200,000* .8 = 160,000. 150,000/160,000 = 93.75% The loss is $20,000 (replacement value).Insurer pays 93.75% of each partial loss.Rob pays 6.25% of each partial loss.$20,000 × 0.9375 = $18,750 (less the deductible)

Assume you bought 100 shares of XYZ stock for $60 per share with an initial margin of 50% and a 30% maintenance margin. What will be the amount of the margin call if the stock drops to $40 per share? A) $800 B) $1,800 C) $0 D) $200

D) $200 Market value= $4,000 ($40 × 100 shares) Loan= ($3,000) (50% of $6,000) Current equity= $1,000 Required equity= $1,200 Cash required= $200 ($1,200 − $1,000)

Robert has a net worth of $200,000 before any of the following transactions: Paid off credit cards of $10,000 using funds from his savings account. Transferred $4,000 from his checking account to his Roth IRA. Purchased $2,000 of furniture on a store credit card. What is Robert's net worth after these transactions? A) $210,000 B) $202,000 C) $190,000 D) $200,000

D) $200,000. None of these transactions will change Robert's net worth. Payment of the credit cards will reduce debt by $10,000. However, using the savings account to pay off the debt will reduce assets by $10,000. The net effect on net worth is zero. The transfer from the checking account reduces assets by $4,000, and the transfer into the Roth IRA increases assets by $4,000. Thus, the net effect on net worth is zero. The addition of the furniture will increase Robert's assets by $2,000. However, the use of credit will increase his debt by $2,000. Therefore, the net effect on net worth is zero.

In the current year, Heather purchased $500,000 of common stock in ADM Corporation. To purchase the stock, she borrowed the $500,000 from her bank. During this year, she received $25,000 in dividend payments from the stock and paid $35,000 in interest on the loan. How much of an investment interest deduction will Heather be allowed to take on her tax return for this year? A) $10,000. B) $35,000. C) $0. D) $25,000.

D) $25,000. The maximum deduction allowed for interest related to an investment debt is the taxpayer's net investment income. Because Heather received dividend income of $25,000, that is her net investment income; therefore, she can only deduct $25,000 of the interest payment this year. She can carry the excess deduction of $10,000 over to a future year.

Which of the following statements regarding loans from qualified plans is(are) CORRECT? 1. As a general rule, the maximum loan amount cannot exceed $50,000. 2. The limit on the term of a loan is generally 5 years. 3. Designated employee Roth contributions to a Roth 401(k) are not available for loans. 4. Generally, loans to a 100% owner employee are permissible as long as they are not discriminatory. A) 2, 3, and 4. B) 2 only. C) 1 only. D) 1, 2, and 4.

D) 1, 2, and 4. As a general rule, the maximum qualified plan loan amount is $50,000. The maximum term on qualified plan loans is usually 5 years. Loans to a 100% owner are permissible as long as they are not discriminatory. Designated Roth contributions are available for retirement plan loans because they are vested by definition because they come from the worker's salary. A Roth conversion is not vested by definition. Roth conversion money is vested according to the person's years of service. Of course, no type of IRA may offer a loan (traditional IRA, Roth IRA, SEP, or SIMPLE IRA).

You are a CFP® professional and are meeting with your client Brenda to monitor her ongoing financial status. Brenda owns a vacation home in New Mexico. She rented the property to others for the entire year, except for 10 days during the summer when she and her family used it for their vacation. The gross rental income that Brenda received is $65,000. Her rental expenses total $5,000. Brenda would like you to explain how this will change her income tax situation, in particular, how much of the rental expenses are deductible. After reviewing the documents she sent to you prior to the meeting, you have an answer for Brenda. How much of a deduction for rental expenses can Brenda take on her tax return? A) $3,411. B) $4,721. C) $5,000. D) $4,863.

D) $4,863. Brenda can deduct the cost of renting the home if she occupies it for the greater of no more than 14 days per year or for 10% of the number of days the property is rented. Because Brenda occupied the house for only 10 days during the year, this test is satisfied. Even though this rental use exception is allowed, the deductible expenses related to the rental of the house are limited. Specifically, she can only deduct a portion of the actual rental expenses, which equals the number of days during the year that the house is rented to others, divided by the total number of days that the house is used by either tenants or Brenda. Given 365 days per year, Brenda's tenants occupy the house all but 10 days, for a total of 355 days. She is allowed to deduct 97.26% (355 days ÷ 365 days) of the $5,000 rental expenses, which equals $4,863.

Daniel gave Mike securities in the current year. Daniel's adjusted basis for the securities is $48,000, and the fair market value on the date of the gift was $40,000. Gift tax of $2,000 was paid by Daniel. What is Mike's basis for the stock for gain and for loss? A) $50,000 for gain; $42,000 for loss. B) $40,000 for gain; $40,000 for loss. C) $0 for gain; $0 for loss. D) $48,000 for gain; $40,000 for loss.

D) $48,000 for gain; $40,000 for loss. The donee's gain basis for the property received is the same as that of the donor. The donee's loss basis is the lower of the donor's adjusted basis or fair market value on the date of the gift. Basis will be increased for the portion of the gift tax that is attributable to the donor's unrealized appreciation. In this example, there wasn't any unrealized appreciation so there wasn't an increase in basis.

Scott just sold a building for $180,000 that had a basis of $80,000. The property had suspended passive losses of $50,000. Scott manages a portfolio of private activity bonds that paid interest of $25,000. As a high school physics teacher, Scott earns $25,000, of which he contributes $10,000 to his tax-sheltered annuity (TSA). What is Scott's AGI? A) $115,000. B) $40,000. C) $15,000. D) $65,000.

D) $65,000. Capital gain of $100,000 is included in AGI (although it may be taxed at a preferential rate). The passive loss of $50,000 is allowed because of the disposition of the property. Municipal bond interest is not included in AGI, although it could be AMT issue. Scott's salary of $25,000 is included in AGI. The TSA contribution of $10,000 reduces current income because TSAs are tax-deferred retirement savings plans. $100,000 − $50,000 + $25,000 − $10,000 = $65,000.

Mariel owns a house that has a replacement cost of $300,000. The house is insured under an HO-3 homeowners policy; the coverage on the dwelling is $250,000 with a $1,000 deductible. There are construction materials with a replacement cost of $20,000 on the premises which will be used in the construction of a guest room. A fire destroys the construction materials, does $25,000 in damage to the house, and completely destroys a detached garage that has a replacement cost of $30,000. How much will Mariel recover under the policy? A) $70,000 B) $49,000 C) $54,000 D) $69,000

D) $69,000

Michael was divorced after 12 years of marriage. He has 2 dependent children, ages 4 and 6, who are cared for by their mother. He was currently, but not fully, insured under Social Security at the time of his death. The benefits that his survivors are entitled to include: 1. A lump sum death benefit of $255. 2. A children's benefit. 3. A divorced spouse's benefit. 4. A parent's benefit for deceased workers' parents who are over the age of 62. A) 1, 2, and 3. B) 3 and 4. C) 1, 2, 3, and 4. D) 1 and 2.

D) 1 and 2. A lump sum death benefit of $255 is payable to the surviving spouse or children of the deceased worker if he was fully or currently insured. The children's benefit is payable because Michael was either currently or fully insured. The mother of the children would be entitled to a benefit because she is caring for Michael's children who are under the age of 16. However, that is not called the "divorced spouse benefit." It is the "surviving spouse caring for a dependent child" benefit. The parents are not entitled because Michael was not fully insured. Statements 3 and 4 are benefits only available under fully insured status.

For Employee Retirement Income Security Act (ERISA) nondiscrimination purposes, a qualified plan is required to: 1. Meet minimum participation and coverage requirements. 2. Contain provisions for top-heavy plan modifications. 3. Provide for automatic survivor benefits. 4. Meet minimum vesting standards. A) 2 and 3. B) 3 and 4. C) 1, 2, and 3. D) 1 and 2.

D) 1 and 2. Statements 3 and 4 apply to security for employees and beneficiaries, not nondiscrimination. The other nondiscrimination requirement is to provide for contributions or benefits that are not discriminatory and that do not exceed certain limits.

Which of the following persons is a party-in-interest for a qualified plan? 1. An officer of the pension plan. 2. The sponsor company. 3. Bill, who owns 60% of XYZ, the corporate sponsor. 4. Mary, a CFP® professional, the investment adviser to the plan. A) 2, 3, and 4. B) 1 and 3. C) 1 and 4. D) 1, 2, 3, and 4.

D) 1, 2, 3, and 4. All of those listed are parties in interest. The rule for statement 3 is ownership of 50% or more of the corporate sponsor.

Mincher Publications just implemented a safe harbor Section 401(k) plan. Which of the following may be avoided with a safe harbor Section 401(k) plan? 1. ADP test. 2. ACP test. 3. Top-heavy rules. 4. Coverage tests. A) 1 and 2. B) 1, 2, and 4. C) 3 and 4. D) 1, 2, and 3.

D) 1, 2, and 3. Safe harbor Section 401(k) plans are not required to comply with ADP, ACP, or top-heavy rules. However, all plans must meet the general coverage nondiscrimination rules under Section 410(b).

Which of the following retirement plans must provide for both a qualified preretirement survivor annuity and a qualified joint and survivor annuity for a married plan participant? 1. Traditional defined benefit pension plan. 2. Target benefit pension plan. 3. Profit-sharing plan. 4. Cash balance pension plan. A) 1 and 2. B) 1, 2, 3, and 4. C) 3 and 4. D) 1, 2, and 4.

D) 1, 2, and 4. Pension plans must provide for both a qualified preretirement survivor annuity and a qualified joint and survivor annuity for a married participant. Generally, a profit-sharing plan does not provide a QPSA or QJSA.

Mark, a financial professional, has been providing financial planning services to Peter for 25 years. Peter is widowed and has an adult son who lives in the same city. When Mark began his professional relationship with Peter, Peter was 50 years old and mentally sharp. Recently, however, Mark has noticed that Peter sometimes seems confused during their meetings and is unable to remember details about his financial status. Despite his confusion, Peter has asked Mark to update his estate plan and to make major changes to several key provisions of his will. Which of the following actions is(are) appropriate for Mark in this situation? 1. Advise Peter's son of Peter's requests concerning the estate plan and ask him to accompany Peter on any future meetings. 2. Advise Peter on the importance of appointing someone, such as his son or an attorney-in-fact, to assist him in handling his affairs. 3. Refer Peter to other professionals, such as medical providers or eldercare specialists, who may be able to help Peter address his diminished capacity. A) 2 only B) 3 only C) 1, 2, and 3 D) 2 and 3

D) 2 and 3. Statements 2 and 3 are correct. By referring Peter to other professionals to address his capacity issues and counseling him on the importance of appointing someone to assist him in handling his affairs, Mark satisfies his fiduciary duty to act in Peter's best interests. Statement 1 is incorrect. Advising Peter's son of Peter's requests concerning his estate plan and asking him to accompany Peter on future meetings violates confidentiality.

In 2019, Nicole (age 40) converted her traditional IRA ($10,000) to a Roth IRA. She then contributed $2,000 to her Roth IRA for 2020 and $2,000 for 2021. Her total earnings to date in the Roth IRA have been $1,260. In 2022, the following events occurred. 1. In April, Nicole bought a new puppy. She withdrew $3,500 from her Roth IRA to cover this expense. 2. In July, Nicole took the CFP® Certification Examination and passed. To reward herself, she withdrew $4,000 from her Roth IRA to go on vacation in the Bahamas. 3. In September, Nicole decided to go back to school and get her master's degree. She withdrew $7,000 for tuition expenses. 4. In November, Nicole's accountant sent her a letter along with a bill for $50 reminding her that the purpose of her Roth IRA was not to withdraw money but to put money in. Nicole promptly took out $50 from her Roth IRA and paid her accountant's bill in full. In which of these events would the 10% early withdrawal penalty apply to Nicole's Roth IRA withdrawals? A) 1 only B) 4 only C) 2, 3, and 4 D) 2 and 4

D) 2 and 4. None of the distributions is a qualified distribution because the Roth is only in its fourth year in 2022. Thus, the very first test for a qualified distribution, the five-year test, has failed. Distributions from a Roth IRA are ordered as follows: From regular contributions (no tax, no penalty) From conversions, FIFO (no tax, subject to penalty if attributed to conversion within five years) Earnings (subject to income tax and the 10% early withdrawal penalty) The first thing to do is to group the Roth account into three categories: contributions, conversions and earnings. She has $4,000 of contributions, $10,000 of conversions and the remaining $1,260 is earnings. Nicole's first withdrawal of $3,500 is all attributed to regular contributions. This is a tax-free return of contributions. As such, she will not be subject to either income taxes or the early distribution penalty. The puppy withdrawal leaves her with $500 of contributions and the conversion and earnings categories are unchanged. Her second distribution is attributed $500 to her contributions and $3,500 to the conversion from 2019. There are no more contributions remaining and now $6,500 of conversions remain. The $500 of contributions is totally tax-free and without penalty. The $3,500 from the vacation conversion had been subject to income tax in 2019, so it will not be income taxed again. If the conversion would have been at least five years old, there would not be any early distribution penalty either. However. the conversion was not five years old, so the $3,500 is subject to the 10% early distribution penalty of $350. After the vacation withdrawal, she has $6,500 of conversions and $1,260 of earnings left. The third distribution starts out as subject to the penalty because it is within five years of the conversion, however, the funds were distributed to pay for higher education, so an exception to the penalty applies. After the tuition withdrawal she only has earnings left in the Roth account. Her fourth withdrawal is attributed to earnings and is subject to both income tax and the early withdrawal penalty.

Nick, age 38, earns $250,000 per year from a personally owned regular C corporation. He wants to establish a defined contribution plan. His 3 employees, each of whom earn $20,000, are between ages 26 and 30, and have been employed with the company for an average of 4 years. Which of the following vesting schedules would be the most appropriate for Nick's qualified retirement plan from the employer's perspective? A) 3-year cliff. B) 3-7 year graduated vesting. C) 5-year cliff. D) 2-6 year graduated vesting.

D) 2-6 year graduated vesting. Defined contribution plans must vest at least as rapidly as 3-year cliff vesting or 2-6 year graded vesting. However, 3-year cliff vesting must provide 100% vesting after 3 years. Two-six year graduated vesting provides for 20% vesting at 2 years and increases 20% per year to 100% by year 6. Given the average tenure of Nick's employees is 4 years, from an employer's perspective the most advantageous vested schedule is 2-6 year graded.

Which of the following statements most accurately describes the tax treatment of contributions to and distributions from a Roth IRA? Contributions are made with pretax dollars. A withdrawal from the account will not be subject to tax if the account has been established for at least three years and the funds (up to $10,000) are being used for a first time home purchase. Distributions are not taxable if they are attributable to disability and the account has been established for at least 5 years. If the account has been open for at least 5 years and the account owner is age 59½, distributions are penalty free and income tax free. A) 1, 2, and 3. B) 1 only. C) 2, 3, and 4. D) 3 and 4.

D) 3 and 4. Contributions to a Roth IRA are made with after-tax dollars. Distributions from a Roth IRA are income tax and penalty free if the owner has maintained the account for at least 5 years AND the distribution is attributed to one of the following: death disability first-time home purchase ($10,000 lifetime maximum) attainment of age 59½

Louie, a representative for a large pharmaceutical corporation, would like to purchase a home. Up to this point, he has been renting a condo in fear that he may have to relocate. A recent promotion has Louie working out of corporate headquarters and he has received reassurance from senior management that he will not be relocated for at least three to five years. Based on this information, he would like to own a place of his own. If Louie finds the right home, which mortgage should he choose? A) 15-year fixed conventional B) 30-year fixed FHA C) None of these choices are appropriate D) 5-year adjustable rate mortgage

D) 5-year adjustable rate mortgage. If Louie expects to be in the home for a short time, he should consider an adjustable rate mortgage (ARM). Generally, an ARM has a lower interest rate than 30-year conventional mortgages. The downside risk of an ARM is that increases in interest rates may cause the mortgage payment to increase.

To be effective, a qualified disclaimer must be received by the decedent's executor within how long after the later of the date on which the date creating the interest was made or the day on which the person disclaiming the interest reaches age 21? A) 3 months B) 1 year C) 60 days D) 9 months

D) 9 months. To be effective, a qualified disclaimer must be received by the decedent's executor within 9 months after the later of the date on which the date creating the interest was made or the day on which the person disclaiming the interest reaches age 21. Thus, people who are less than 21 originally, have nine months after turning 21 to disclaim assets.

Sylvia purchased several assets for her small business in the first quarter of the year. Which of the listed assets are considered capital expenditures? A) A new laptop to help with business administrative tasks B) Enough inventory (fabrics and thread) to cover three years of manufacturing her product C) A commercial sewing machine that will have to be replaced in nine months D) A lot in the suburbs on which she will build a new warehouse

D) A lot in the suburbs on which she will build a new warehouse. Capital expenditures pertain to the acquisition of assets that will last for more than one year. Capital expenditures are not currently deductible and must be capitalized over the useful life of the asset. Assets, such as land, that do not have a useful life cannot be deducted until they are sold or exchanged, but are capital expenditures. Inventory is also not a capital expenditure, but an asset for the production of income.

Which of the following can be classified as a general rule of agency? A) An agent cannot legally bind the principal. B) An agent has a duty of loyalty to the client. C) An agent's authority must be express. D) A principal must have contractual capacity, but an agent does not need to have contractual capacity to act as an agent.

D) A principal must have contractual capacity, but an agent does not need to have contractual capacity to act as an agent. A principal must have contractual capacity, but an agent does not need to have contractual capacity to act as an agent. An agent has a duty of loyalty to the principal. An agent's authority may be express, implied, or apparent. An agent can legally bind the principal if the agent is acting within the scope of their authority.

Todd and Diana are establishing a college fund for their 14-year-old son, Mike. The couple does not wish to invest aggressively but is willing to take a moderate amount of investment risk. Which of the following investments is most appropriate for the college fund and why? A) A money market checking account jointly owned by Todd and Diana because this account is very safe. B) A small-cap stock mutual fund owned by Mike because it provides the best return at a modest level of risk consistent with the time horizon. C) A variable life insurance policy owned by Mike because it saves taxes and provides a life insurance benefit. D) A series of investment grade zero-coupon corporate bonds owned by Todd because they can provide appropriate funds at the correct times.

D) A series of investment grade zero-coupon corporate bonds owned by Todd because they can provide appropriate funds at the correct times. Small-cap stock mutual funds are too risky of an investment for a short term time horizon. A variable life insurance policy does not match the investment vehicle to the time horizon of the investment. A money market checking account will probably not provide them with a rate of return that will keep up with inflation. The zero-coupon bonds will allow the couple to match the time horizon of the investments to the duration of the bonds and avoid reinvestment rate risk.

Which of the following are examples of information provided by a client to a CFP® professional during the investment planning interview to prepare an investment policy statement? A) Assets must be available in 15 years to fund a child's college education. B) The client's investment objective for this portfolio is to invest funds in a number of low to moderate risk investments. C) The average risk of this portfolio should not be greater than the S&P 500 Index. D) All of these are examples.

D) All of these are examples. All of these are examples of information that may be provided by a client during the investment planning interview.

Which of the following statements regarding traditional IRAs is(are) CORRECT? A) Any person at any age who receives compensation (salary, self-employment earned income, or income deemed to be earnings by the Tax Code) can make a contribution to either a traditional IRA or Roth IRA. B) Generally, a person is an active participant in any type of defined contribution plan if any annual additions contribution for the participant is made for the year. C) Generally, a person is an active participant in a defined benefit plan unless excluded under the eligibility provision for the entire year. D) All of these.

D) All of these. All of these statements describe characteristics of traditional IRAs. Until 2020, there was an age cutoff for contributions to traditional IRAs, but not to Roth IRAs. The SECURE Act removed the age restriction for traditional IRA contributions. Now, anyone with earned income or a spouse with earned income can contribute to a traditional IRA, regardless of age.

Which of the following statements is correct regarding when employees' participation in a retirement plan should begin? A) Any employee who is not excluded from the plan based upon employment classification must become a participant no later than the entry date after the employee meets the age and service requirements of the plan. B) The typical maximum age and service requirements are age 21 and 2 years of service. C) Entry dates can delay participation up to 8 months after the age and service requirements are met. D) An exception to the 21-and-1 rule is the 2-year/100% rule that allows up to a 2-year service requirement if the employee is immediately 100% vested in employer contributions upon becoming a participant.

D) An exception to the 21-and-1 rule is the 2-year/100% rule that allows up to a 2-year service requirement if the employee is immediately 100% vested in employer contributions upon becoming a participant. The exception to the 21-and-one rule is the 2-year/100% rule (not 3 years) that allows up to a 2-year service requirement if the employee is immediately 100% vested in employer contributions upon becoming a participant. Any employee who is not excluded from the plan based upon employment classification must become a participant no later than the first entry date after the employee meets the age and service requirements of the plan. The typical maximum age and service requirement are age 21 and 1 year of service. Entry dates can delay participation up to 6 months after the age and service requirements are met.

Which of the following statements regarding the built-in gains tax is CORRECT? A) The built-in gains tax is paid by the shareholders of the S corporation. B) The tax is calculated by applying the shareholder's income tax rate to the net recognized built-in gain for the tax year. C) The built-in gains tax is applicable to all S corporations. D) Any appreciation of the asset after the date of conversion (from a C corporation to an S corporation) is not subject to the built-in gains tax.

D) Any appreciation of the asset after the date of conversion (from a C corporation to an S corporation) is not subject to the built-in gains tax. The built-in gains tax applies only to S corporations that were formerly C corporations. The built-in gains tax is paid by the S corporation entity and not the shareholders. Corporate tax rates apply to the built-in gains rate, not a shareholder's individual tax rates.

Susan is applying for college financial aid using the Free Application for Federal Student Aid (FAFSA). For purposes of calculating the expected family contribution (EFC), assets titled in whose name are assigned a higher weighting? A) Assets titled in the names of Susan's parents B) Assets are assigned the same weighting without regard to being titled in Susan's or her parents' names C) Assets titled in the names of Susan, her parents, and her grandparents are all given the same weighting D) Assets titled in Susan's name

D) Assets titled in Susan's name. Student assets and income are assigned a higher weighting (20%) in the EFC calculation than parental assets and income (5.64%). Therefore, the titling of assets must be carefully considered when saving for education purposes. The assets of a student's grandparents are not considered when calculating EFC.

Which of the following statements regarding provisions or implications of employee stock purchase plans (ESPPs) is CORRECT? A) An employee who participates in an ESPP will be considered an active participant for purposes of determining deductibility of contributions to a traditional IRA. B) Exercise of options in an ESPP may cause the employee to be liable for the individual alternative minimum tax. C) All workers with over 40 hours of service in a year must be allowed to participate in the ESPP; otherwise, the plan will be deemed discriminatory. D) At the time of the grant, the option price may be as much as 15% lower than the fair market value of the stock.

D) At the time of the grant, the option price may be as much as 15% lower than the fair market value of the stock. At the time of the grant, the option price may be as much as 15% lower than the fair market value of the stock. All the other statements are incorrect: ESPPs do not have any individual alternative minimum tax (AMT) consequences. An ESPP is a nonqualified plan. Employees may participate in ESPPs without being considered an active participant for purposes of IRA deductibility. ESPPs may exclude part-time workers.

Ricardo, age 47 and unmarried, purchased a variable annuity in 2005 and has a modified AGI of $350,000. The annuity is in the accumulation period. Ricardo's basis is $50,000, and the contract has $100,000 in earnings. This year, he withdraws $60,000 from the annuity. Which of the following statements regarding the tax consequences of this withdrawal is CORRECT? A) Ricardo must include $10,000 in gross income and pay a penalty of $1,000. B) The withdrawal is tax-free and penalty-free. C) Ricardo is not required to include the amount of the withdrawal in gross income but must pay a penalty of $1,000. D) Ricardo must include $60,000 in gross income, pay a penalty of $6,000, and the $60,000 is subject to the 3.8% Medicare contribution tax.

D) Because Ricardo purchased the annuity on or after Augst 14, 1982, the withdrawal is subject to last in, first out (LIFO) taxation. Under LIFO, withdrawals are treated as coming from earnings first and are taxed to the extent of earnings. Premature distrubtions (prior to age 59½) are also subject to a 10% penalty. In addition, the $60,000 taxable gain is also subject to the 3.8% Medicare contribution tax that applies to net investment income of single taxpayers with a MAGI exceeding $200,000.

All of the following companies provide group health plans for their employees. Which of them is subject to the COBRA continuation of coverage requirements? A) Company A, with 15 full-time employees B) Company D, with 10 full-time employees C) Company C, with 5 full-time employees and 10 part-time employees D) Company B, with 13 full-time employees and 16 part-time employees

D) Company B, with 13 full-time employees and 16 part-time employees. Employers with group health plans and 20 or more employees are subject to the COBRA requirements. A part-time employee counts as half a full-time employee for purposes of this rule. Company B (13 + 8 = 21) and Company C (10 + 15 = 25) both satisfy the 20-employee rule.

Tom and Samantha have a modified adjusted gross income of $185,000 in 2022 and file a joint tax return. They want to know what combination of available funds and tax benefits they can use to offset their daughter's higher education expenses. Which of these choices is CORRECT? A) American Opportunity Tax Credit and Series EE savings bonds. B) Pell grant, Coverdell Education Savings Account (CESA), and qualified tuition plan account distribution. C) Lifetime Learning Credit, Coverdell Education Savings Account (CESA), and UTMA account distribution. D) Coverdell Education Savings Account (CESA) and Section 529 plan.

D) Coverdell Education Savings Account (CESA) and Section 529 plan. Because of their modified adjusted gross income, Tom and Samantha do not qualify to take the American Opportunity Tax Credit (the MAGI phaseout for joint filers is $160,000−$180,000) or Lifetime Learning Credit for 2022 (the MAGI phaseout for joint filers is $160,000−$180,000). The Pell grant is awarded on a financial need basis, for which the family would not qualify.

David is 20 years old and works part time while attending school full time. How much gross income can David earn so that his parents can still currently claim him as a qualifying child for the purposes of applicable tax credits? A) David's earned income portion of his gross income cannot exceed $2,300. B) David's gross income must be less than $12,950. C) None of these. D) David can earn any amount.

D) David can earn any amount. If the child of the taxpayer is under age 19 or if the child is a full-time student and under age 24, the income test is waived and gross income of the dependent is not an issue.

Ben has the following securities in his portfolio: ABC common stock XYZ common stock PQR mutual fund (small cap) DEZ mutual fund (foreign stocks) 30-year Treasury bond 5-year Treasury note Ben does not need to be concerned with which of the following risks? A) Reinvestment rate risk B) Systematic risk C) Financial risk D) Default risk

D) Default risk. Default risk is the risk that the bond issuer will be unable to service its debt. However, government (Treasury) bonds, unlike corporate and municipal bonds, lack default risk. Investment in common stock is without default risk, because the issuing corporation is not contractually bound to pay dividends. The common stocks and the stock mutual funds in Ben's portfolio fall into this area. All of the other risks apply to the investments in his portfolio.

Bobby has the following securities in his portfolio: ABC common stock, XYZ common stock, PQR mutual fund (domestic small cap), DEZ mutual fund (foreign small cap), 30-year Treasury bond, and 5-year Treasury note. Point out the risk that should be of least concern Bobby. A) Financial risk B) Systematic risk C) Reinvestment rate risk D) Default risk

D) Default risk. Treasuries are considered default risk-free. Financial risk is the uncertainty introduced from the method by which a firm finances its assets (i.e., debt versus equity financing). Reinvestment rate risk is the risk that as cash flows are received they will be reinvested at lower rates of return than the investment that generated the cash flows. Systematic risk is the risk that all securities are subject to and typically cannot be eliminated through diversification.

Rachael, a CFP® certificant, recently took David on as a new financial planning client. After receiving an excessive number of questions from David regarding his financial plan over the course of three weeks, Rachael became desperate and changed her business phone number to an unlisted number. She notified David that he could not have her new phone number and that he must communicate with her via email. Which CFP Board Standard of Conduct embodies rules that require Rachel to provide David with her new phone number? A) Sound and Objective Professional Judgment B) Duties When Communicating With a Client C) Integrity D) Diligence

D) Diligence. According to Standard A.4, Diligence, "A CFP® professional must provide Professional Services, including responding to reasonable Client inquiries, in a timely and thorough manner." By avoiding David's inquiries for three weeks, changing her number, and insisting on email communication only, Rachael did not address "reasonable Client inquiries" in a timely manner.

Which of the following statements regarding the 10% penalty tax for early withdrawal (age 59½) from an IRA is CORRECT? A) Distributions used to pay medical expenses in excess of the 7.5% AGI threshold are not exempt from the penalty. B) Termination of employment at age 55 or older will exempt distributions from the penalty tax. C) Distributions that are part of a series of equal periodic payments paid over the life or life expectancy of the participant are exempt from the penalty, provided the participant has separated from service with the employer. D) Distributions that are part of a series of equal periodic payments paid over the life or life expectancy of the participant are exempt, regardless of the participant's employment status.

D) Distributions that are part of a series of equal periodic payments paid over the life or life expectancy of the participant are exempt, regardless of the participant's employment status. The separation from service after attaining age 55 exception is available only for qualified plans and Section 403(b) plans, not IRAs. The portion of a distribution from an IRA to pay for medical expenses over the 7.5% of AGI floor is not subject to the 10% EWP. Separation from service is not required.

Which of the following statements regarding a simplified employee pension (SEP) plan is CORRECT? A) Distributions from a SEP plan will not be subject to the 10% early withdrawal penalty if the participant leaves the sponsoring company after attaining age 55. B) The plan can exclude all part-time employees working less than 1,000 hours per year. C) Contributions made to a SEP plan by the employer can be used to purchase life insurance. D) Distributions used to fund college education costs for the participant's child are not subject to the 10% early withdrawal penalty.

D) Distributions used to fund college education costs for the participant's child are not subject to the 10% early withdrawal penalty. The exception to the early withdrawal penalty for those who leave the employer after attaining age 55 applies only to qualified plans and Section 403(b) plans. A qualified plan can exclude employees working less than 1,000 hours. With a SEP plan, there is no minimum number of hours worked to accrue a year of service. Contributions to a SEP plan cannot be used to purchase life insurance.

Which of the following statements regarding a nonqualified Roth IRA distribution is NOT correct? A) Conversion amounts may avoid the 10% penalty for the conversion portion. B) A distribution from an inherited Roth IRA could be subject to income tax. C) A distribution that is made before the 5-year period may not be subject to the 10% penalty. D) Earnings will always incur a 10% penalty for that portion of the distribution.

D) Earnings will always incur a 10% penalty for that portion of the distribution. Earnings are not always subject to the 10% penalty. Although the penalty would generally apply, there are exceptions under IRC Section 72(t) that may exclude the distribution from the penalty (such as proceeds used for qualified higher education costs or being older than 59½).

Which of the following statements regarding qualified plan minimum funding rules is(are) CORRECT? A) For profit-sharing plans and employee stock ownership plans (ESOPs), specific annual contributions are required. B) For defined benefit pension plans, the IRS determines the employer's required contribution to meet Employee Retirement Income Security Act (ERISA). C) All of these. D) For money purchase and target benefit pension plans, the employer must meet the annual minimum required contribution.

D) For money purchase and target benefit pension plans, the employer must meet the annual minimum required contribution. No specific annual contribution is required for profit-sharing plans, SEP plans, SIMPLEs, Section 403(b) plans, or ESOPs. The actuary determines the employer's required contribution in defined benefit pension plans.

Mark began studying for his master's degree this year on a half-time basis. He has applied for a Pell Grant, a Federal Supplemental Educational Opportunity Grant (FSEOG), but was not approved for either of these. Why were Mark's applications for a Pell Grant and a FSEOG Grant rejected? A) He did not demonstrate the required financial need. B) He first has to be approved under the PLUS program. C) He is a half-time student. D) He is a graduate student.

D) He is a graduate student. Each is available for half-time students. Pell grants and FSEOGs are not available to graduate students. Pell Grants and FSEOGs are need based, so by qualifying, he demonstrated the financial requirement.

Which of the following statements regarding a health savings account (HSA) is CORRECT? A) Contributions to a health savings account are not subject to an annual limit. B) Health savings accounts are not available for self-employed individuals. C) Distributions from a health savings account that are not used for qualifying medical expenses are subject to income tax and a penalty, regardless of the account holder's age. D) Health savings accounts are used to pay unreimbursed qualified health care expenses of the account holder, the account holder's spouse, or the account holder's dependents.

D) Health savings accounts are used to pay unreimbursed qualified health care expenses of the account holder, the account holder's spouse, or the account holder's dependents. HSAs are available for self-employed individuals. Distributions not used for medical expenses are taxable and subject to a 20% penalty tax, unless they are made after the account beneficiary's death, disability, or attaining age 65.

An active approach to portfolio management is more likely to reward investors in which of the following asset classes? 1. Emerging market equities 2. U.S. large-cap stocks 3. U.S. small-cap stocks 4. European large-cap stocks A) I and II B) I only C) I, III, and IV D) I and III

D) I and III. Investors who follow an active approach to portfolio management will benefit most from a portfolio containing emerging market equities and U.S. small-cap stocks, which tend to be more volatile investments.

Which of the following statements regarding the incidental death benefit test for life insurance inclusion in a qualified plan is(are) CORRECT? 1. For defined contribution plans, no more than 25% of the retirement plan's assets may be in the form of universal life insurance. 2. For defined benefit pension plans, the life insurance death benefit cannot exceed 100 times the expected monthly benefit for an employee. A) Neither I nor II. B) Both I and II. C) I only. D) II only.

D) II only. For defined contribution plans, no more than 25% of the employer contributions (not plan assets) can be used to purchase universal life or term insurance. No more than 50% of the employer contributions in a defined contribution plan can be used to purchase whole life insurance.

What is the significance of an investment in life insurance for an IRA? A) It is not recommended for an IRA owner over age 50 because the cash value of the policy may not build to a sufficient level by the time of the owner's retirement. B) It may be recommended to generate high returns, but cannot represent more than 25% of the total account value. C) It may be recommended to generate high returns, but cannot represent more than 50% of the total account value. D) It is not recommended because an investment in life insurance may be considered a prohibited transaction, resulting in loss of IRA status for the account.

D) IRAs are not permitted to invest in life insurance or loans; such an investment is generally a prohibited transaction and would result in the account losing its IRA status.

Which of the following statements regarding duration is CORRECT? A) Bonds with higher yields to maturity experience more price fluctuation than those with lower yields to maturity (YTMs). B) Zero-coupon bonds experience the least price fluctuation compared to coupon-paying bonds with similar maturities. C) Duration provides an estimate of the percentage price change experienced by a bond when interest rates change by 10 basis points. D) Immunization is used to reduce interest and reinvestment rate risks in a bond portfolio.

D) Immunization is used to reduce interest and reinvestment rate risks in a bond portfolio. Duration, which estimates the percentage price fluctuation with respect to a 100 basis point change (1%) in interest rates, is inversely related to YTM and the size of the coupon.

Identify the CORRECT statement concerning international investing. A) The rates of return on foreign securities have always been less than those available from U.S. markets. B) Foreign markets are usually mature and offer no growth advantages. C) The addition of foreign securities to a portfolio may result in increased portfolio risk due to the different movements of foreign markets and U.S. markets. D) Information is not as readily available on foreign investments.

D) Information is not as readily available on foreign investments. Foreign markets offer economies of scale and growth opportunities. Investors may earn higher returns in foreign markets, particularly if they are less efficient than U.S. markets. Including foreign securities in an investment portfolio may lower risk through greater diversification.

When purchasing a personal automobile policy, which of the following coverages is required? A) Uninsured motorists B) Medical payments C) Comprehensive and collision D) Liability coverage

D) Liability coverage. Liability coverage is the only required coverage.

Under which life insurance settlement option is a life income paid to the beneficiary with a certain number of guaranteed payments? A) Life annuity with refund B) Fixed-period installments C) Joint and survivor annuity D) Life annuity with period certain

D) Life annuity with period certain. Under this option, the payments are guaranteed for a specified period. If the beneficiary dies before the guaranteed number of payments have been made, the remaining payments are paid to a contingent beneficiary.

Which of the following companies might NOT be allowed to have a Keogh (self-employed) plan? A) Limited partnership. B) Partnership. C) Limited liability partnership. D) Limited liability company.

D) Limited liability company. An LLC might not have a Keogh plan if it elects to be taxed as a regular C corporation, rather than some type of flow-through entity.

Dana, CEO of One Last Time Fitness, has a salary of $100,000 and was awarded the following stock options from her company: Stock Option Grant Date Type Exercise Price # Shares A 6/1/18 ISO $7 200 B 1/1/19 ISO $17 100 C 4/1/21 ISO $27 300 D 5/1/18 ISO $37 200 E 1/1/19 ISO $47 200 Consider the following transactions regarding the above stock options: Stock Option Event Date Action # Shares Market Price on Action Date A 1/1/20 Exercised 200 $17 B 4/2/21 Exercised 100 $27 A 9/15/22 Sold 200 $57 D 7/11/22 Exercised 200 $77 B 12/8/22 Sold 100 $37 C 12/15/22 Exercised 300 $47 C 12/15/22 Sold 300 $67 What are the ordinary income, capital gain, and AMT tax consequences resulting from Dana liquidating position B on 12/8/22? A) Ordinary income of $2,000, negative AMT adjustment of $1,000 B) Short-term capital gain of $2,000, positive AMT adjustment of $1,000 C) Long-term capital gain of $1,000, negative AMT adjustment of $1,000 D) Long-term capital gain of $2,000, negative AMT adjustment of $1,000

D) Long-term capital gain of $2,000, negative AMT adjustment of $1,000. Dana satisfied the ISO requirements for receiving favorable tax treatment on the sale of position B on 12/8/2022. If the stock acquired by exercise of the ISO is not sold until after one year from the date of the option's exercise and two years from the date of its grant, any gain in the value of the stock is treated as a long-term capital gain to the employee. She will also have a negative AMT adjustment of $1,000. Whenever a position created from an ISO is sold, it will be subject to a negative AMT adjustment. Because the bargain element was $1,000 when B was exercised [100 shares × ($27 − $17) = $1,000], the adjustment will be negative $1,000 when the position is sold. Dana will also have a $2,000 long term capital gain [100 shares × ($37 − $17) = $2,000] as a result of liquidating position B.

Which of these in a major medical insurance policy refers to the amount that the insured must pay and includes the deductible and any coinsurance amount? A) Stop-loss limit B) Incontestable clause C) Copayment D) Maximum out-of-pocket limit

D) Maximum out-of-pocket limit. If the major medical insurance policy has a maximum out-of-pocket limit, or the amount that the insured must pay, this includes the deductible and any coinsurance amount. The stop-loss limit is the dollar amount of covered benefits to which the coinsurance provision is applied and does not include the deductible.

James, 32, and Coralie, 30, have been married for 7 years and have no children. Recently, both James and Coralie were promoted to management positions at a downtown marketing firm and now have a significant amount of disposable income. The couple lives in the suburbs and they are planning to purchase a loft style apartment downtown within the next 6 months. Ideally, James and Coralie would like to invest their money in a safe place for the down payment during the 6 months they intend to spend searching for the perfect location and amenities. Which of the following investments would you recommend to James and Coralie to accomplish this goal? A) Investment-Grade Bond Fund B) Stock Index Fund C) U.S. Government Income Fund D) Money Market Fund

D) Money Market Fund. James and Coralie are preparing to make a significant purchase within a relatively short period of time. They will require a highly liquid investment to keep their money safe. Money market funds provide a modest rate of return, diversification, and liquidity. Based on these characteristics, the money market fund best matches the couple's investment objective.

A prospective client's objectives are to adopt a plan that only requires an employer contribution of a fixed percentage of employee compensation, is administratively convenient, is easily communicated to employees, and does not need to participate in PBGC. Which plan represents the best choice? A) Cash balance pension plan B) Traditional defined benefit pension plan C) A Section 401(k) plan with a matching employer contribution D) Money purchase pension plan

D) Money purchase pension plan. A traditional defined benefit pension plan maximizes owner-key employee and older employee benefits, but its costs are unpredictable and high. The money purchase pension plan fulfills all the client's objectives. The cash balance plan benefits are guaranteed by PBGC, and making an annual contribution to guarantee a fixed return on the investments is required. The Section 401(k) plan has increased administrative costs and complexity.

Forty Brands, Inc., a C corporation, has average annual gross receipts of $35 million over the last 10 years. Mark owns 100% of the stock of Morgan Consulting, Inc., an actuarial science business for which he provides the reports to the clients. Becky owns a successful business, Hampton Street Auto Sales, selling vintage autos on consignment as a sole proprietor with average gross receipts of $40 million for all prior years. Jeff and Larry are partners in Tip Top Roofing that have gross receipts of $50 million. Which of the following entities may use the cash method of accounting? A) Tip Top Roofing B) Forty Brands, Inc. C) Hampton Street Auto Sales D) Morgan Consulting, Inc.

D) Morgan Consulting, Inc. Forty Brands, Inc. is a C corporation with annual gross receipts over $27 million (2022) and cannot use the cash method of accounting. A qualified personal service corporation (Morgan Consulting, Inc.) can use the cash method of accounting if services are provided in the fields of actuarial science, accounting, law, engineering, health, consulting, architecture, or performing arts and accurately reflect income. Hampton Street Auto Sales (sole proprietor) and Tip Top Roofing (partnership) cannot use the cash method of accounting since their gross receipts exceed $27 million.

Which of the following statements concerning qualified retirement plans is(are) CORRECT? 1. Cash balance pension plans, money purchase pension plans, employee stock ownership plans (ESOPs), and top-hat plans are all examples of qualified retirement plans. 2. Target benefit pension plans, defined benefit pension plans, profit-sharing plans, and Section 457 plans are all examples of qualified retirement plans. A) Both I and II. B) II only. C) I only. D) Neither I nor II.

D) Neither I nor II. Both statements are incorrect. Top-hat plans and Section 457 plans are not qualified plans.

Dallas and Bud are brothers who are planning to purchase an expensive beachfront property together. Dallas plans to contribute 65% of the $10 million purchase price, and Bud will contribute the rest. They want to hold title to the property together, but they prefer that the purchase of the property not generate any tax consequences for either of them. In addition, each brother has a will leaving all of his assets to his surviving children. They both want their interest in the property to pass under their will when they die, and they want the property to avoid probate. Which of the following forms of ownership would you recommend to meet the brothers' objectives? Joint tenancy with right of survivorship (JTWROS) Tenancy in common A) I only B) Both I and II C) II only D) Neither I nor II

D) Neither I nor II. Neither form of ownership will meet the brothers' objectives. Statement I (JTWROS) is incorrect because a gift from Dallas to Bud will result if Dallas contributes more than an equal share of the purchase price. In addition, JTWROS property will not pass under the brothers' wills, although it will avoid probate. Statement II is also incorrect. Although taking title as tenants in common will not result in a taxable gift and allow the property to pass under the brothers' wills, tenancy in common property does not avoid probate.

On the recommendation of his CFP® professional, Claude executes a durable limited power of attorney naming his brother, Andrew, as attorney-in-fact. The power-of-attorney grants Andrew the limited power to sign legal documents in connection with the management of Claude's rental real estate, which is located in another state where Andrew lives. As part of his planning engagement with Claude, the CFP® professional has agreed to help Claude monitor the continuing effectiveness of the durable limited power of attorney he has granted to Andrew. Which of the following statements regarding these monitoring activities is(are) CORRECT? 1. If Claude becomes terminally ill, he should consider granting Andrew a durable unlimited power of attorney so Andrew can continue managing the real estate after Claude's death. 2. If Claude has a stroke and becomes incapacitated, the CFP® professional should immediately notify Andrew that his authority to manage the real estate under the durable limited power of attorney is no longer valid. 3. If Claude dies, the CFP® professional should advise Andrew that he can continue managing Claude's real estate, but only until an executor is appointed for Claude's estate. A) 2 and 3 B) 1 only C) 1 and 2 D) None of these statements are correct.

D) None of these statements are correct. Statements 1 and 3 are incorrect because an attorney-in-fact's authority under any power of attorney terminates at the principal's death. Statement 2 is incorrect because an attorney-in-fact's authority to act under a durable power of attorney survives the principal's incapacity.

Mama Mason's Inc., a regular C Corporation, is considering the adoption of a qualified retirement plan. The company has had fluctuating cash flows in the recent past, and such fluctuations are expected to continue into the future. The average age of nonowner employees is 24, and the average number of years of service is 3, with a high of 4 and a low of 1. Approximately 25% of the 12-person labor force turns over each year. The 2 owners earn approximately 2/3 of the covered compensation. Which is the most appropriate plan for Mama Mason's? A) Money purchase pension plan. B) Traditional defined benefit pension plan. C) Target benefit pension plan. D) Profit-sharing plan.

D) Profit-sharing plan. Because of the fluctuating cash flows, the most appropriate plan is a profit-sharing plan. Each of the other options given require a mandatory annual contribution.

Ryan and Kim have a 2-year-old son, Michael. One of their goals is to begin saving now for Michael's high school tuition at River Oaks Academy. After analyzing Ryan and Kim's financial statements and other relevant information, you conclude that they should save $2,000 at the beginning of the year for the next 12 years. Which of the following education planning vehicles is the most appropriate recommendation for Ryan and Kim? A) Certificates of deposit (CDs) B) Lifetime Learning Credit C) Series EE savings bonds D) Section 529 plan

D) Section 529 plan. As a result of the Tax Cuts and Jobs Act (TCJA), elementary and secondary school tuition up to $10,000/year is considered a qualified education expense within Section 529 plans. Certificates of deposit (CDs) are not the best investment option for Ryan and Kim because they offer a low rate of return that will not keep up with the pace of education inflation. Funds saved in Series EE savings bonds may not be used for high school expenses. The Lifetime Learning Credit is not a savings vehicle; it is a tax credit that may be used for post-secondary education.

Which investment strategy is consistent with a belief in the efficient market hypothesis? A) Searching for undervalued securities. B) Comparing the calculated value of a security, through fundamental analysis, to the market value of the stock. C) Waiting to purchase a stock until it increases above the 40-day moving average. D) Selecting a random set of stocks for a portfolio.

D) Selecting a random set of stocks for a portfolio. The efficient market hypothesis states that an investor cannot consistently outperform the market. Selecting a random set of stocks is consistent with this theory. The other strategies are aligned with technical and fundamental analysis.

Vince, age 53, recently lost his salaried job in which he earned $95,000 per year, due to his company downsizing the management team. He communicates to his CFP® professional that he is working with an executive placement agency to prepare a resume and search for another position within his field of expertise. In the meantime, he is concerned that he will not have enough liquidity to pay for his current expenses. Which of the following should the CFP® professional recommend to Vince to provide for his current needs? A) Sell his collection of inherited artwork worth $40,000 at auction. B) Take a loan from his Section 401(k) plan, with a balance of $350,000, and place this money into an interest-bearing money market deposit account. C) Elect a Section 72(t) distribution from his traditional IRA worth $73,500. D) Sell a portion of his ABC stock that he purchased five years ago for $25,000, which is currently worth $50,000.

D) Sell a portion of his ABC stock that he purchased five years ago for $25,000, which is currently worth $50,000. Selling the stock would be best choice because the stock is currently trading at a gain and the sale would be taxed at favorable long-term capital gains rates. Because Vince has separated from service, any loan provision in the Section 401(k) plan will not be available. Selling artwork at auction does not guarantee that he will receive full value. In addition, the auction house may take a commission on the sale. Electing a Section 72(t) distribution from his traditional IRA may not provide the necessary funds based on his life expectancy and the impact of taxation.

Which of the following terms best describes funding for product development and marketing for companies who have not sold products or services commercially? A) First-stage financing B) Bridge financing C) Seed financing D) Start-up financing

D) Start-up financing. Seed financing is funding for the purpose of research and development of an idea. First-stage financing is for initial manufacturing and sales. Bridge financing is for companies that expect to go public within approximately 1 year.

Which of the following is(are) forms of the interest-adjusted method of comparing life insurance policy costs? A) Annuity method B) Gross payment cost index C) Net-cost method D) Surrender cost index

D) Surrender cost index. The two interest-adjusted methods of comparing life insurance policy costs are the surrender cost index and the net payment index. The net-cost method does not factor in the time value of money or interest adjustments. The annuity method is a quick way to determine how much life insurance is required to meet an individual's financial needs and is not a method of policy cost comparison.

Which of the following are characteristics of a SIMPLE? A) Employees are permitted to make after-tax contributions to the SIMPLE. B) Distributions from a SIMPLE IRA used to pay higher education costs are exempt from income taxes and the early withdrawal penalty. C) An employer can combine a SIMPLE 401(k) with a money purchase pension plan to maximize the employer's income tax deduction. D) The ACP test is not required for a SIMPLE.

D) The ACP test is not required for a SIMPLE. After-tax contributions are not permitted with a SIMPLE. The ACP test is not required with SIMPLEs. Distributions for higher education expenses from a SIMPLE IRA (or any IRA) are exempt from the early withdrawal penalty, but not income taxes. An employer sponsoring a SIMPLE cannot also maintain a qualified plan.

Which of the following statements concerning the collateral source rule is CORRECT? A) The rule states that a person who commits a tort will not be liable for full damages. B) The person who commits a tort is not liable for full damages if the plaintiff has other available sources of recovery. C) The collateral source rule prevents an insurance company from receiving a portion of the insured's right to recover from the defendant. D) The collateral source rule prevents the person who committed the tort from benefiting because of fortuitous circumstances.

D) The collateral source rule prevents the person who committed the tort from benefiting because of fortuitous circumstances. The person who commits a tort 1) will be liable for full damages and 2) is not entitled to a reduction of damages simply because the injured person has other sources of recovery, such as insurance. An insurance company may recover damages from the defendant under the principle of subrogation.

After 16 years of service, Marla, age 56, has received a promotion to a department head at her not-for-profit hospital effective January 2022. Her salary will increase to $120,000 annually. Marla wants to start participating in the Section 403(b) plan and maximize her elective deferral to that plan because of her extra income. The hospital also has a money purchase plan that contributes 6% of each employee's compensation. How will her proposed deferral amount into the 403(b) affect the employer contribution to the money purchase plan? A) Marla cannot participate in the Section 403(b) plan because she is receiving employer contributions in the mandatory money purchase plan. B) The employer contributions to the money purchase plan are not included in the annual additions limit. C) The employer cannot make a contribution to the money purchase plan for Marla if she begins participation in the Section 403(b) plan. D) The employer contribution to the money purchase plan is unaffected by Marla's elective deferral in the Section 403(b) plan.

D) The employer contribution to the money purchase plan is unaffected by Marla's elective deferral in the Section 403(b) plan. The maximum amount Marla may defer to the Section 403(b) plan that will affect the annual additions limit for 2022 of $61,000 is $20,500, so the employer contribution to the money purchase plan is unaffected. Her total annual additions will be $37,200: $30,000 into the 403(b) ($20,500 + $3,000 catch-up for more than 15 years of service to the university + $6,500 for being age 50 or older). This is the maximum Section 403(b) deferral + $7,200 (employer contribution to the money purchase plan). Marla may participate in both the mandatory money purchase plan and the Section 403(b) plan. Catch-up contributions to the Section 403(b) plan are not included in the annual additions limit; however, this does not matter in this case because her total contributions from all sources are less than $61,000 in 2022. In other words, Marla will be contributing $30,000 to her 403(b), but only $23,500 counts toward her $61,000 limit for 2022. Thus, she has $37,500 left after the 403(b) is accounted for. The $7,200 going into the money purchase is nowhere near maxing her out.

Which of these is NOT a characteristic of a traditional defined benefit pension plan? A) The plan has less predictable costs than defined contribution plans. B) The plan specifies the benefit an employee receives. C) The law specifies the maximum allowable benefit payable from the plan is equal to the lesser of 100% of salary or $245,000 (2022) per year. D) The plan assigns the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employee.

D) The plan assigns the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employee. This is a characteristic of a defined contribution plan. Defined benefit pension plans assign the risk of preretirement inflation, investment performance, and adequacy of retirement income to the employer.

Which of the following policy provisions is required for a qualified long-term care (LTC) policy? A) The policy provisions provide annual payment of dividends in cash and payment of Medicare deductibles. B) The policy provisions are always forfeited if the policyowner surrenders the policy. C) The policy provisions provide for renewal at the insurer's option and dividends which are paid in cash annually. D) The policy provisions must offer inflation protection and guaranteed renewability.

D) The policy provisions must offer inflation protection and guaranteed renewability. The policy must be guaranteed renewable and provide inflation protection. The policy cannot provide a cash value. All dividends must reduce future premiums or increase future benefits. All policies must include a nonforfeiture option in the event the insured decides to surrender the policy. This option includes the right to a shortened benefit period.

Bond A is selling for $1,103.19 and pays a $50 coupon every 6 months. What would happen to the price of this 30-year bond if interest rates rose 2%? A) The price of the bond would change to $1,374.17. B) The price of the bond would change to $774.51. C) The price of the bond would decrease by $328.68. D) The price of the bond would decrease by $190.44.

D) The price of the bond would decrease by $190.44. Market interest rates and bond prices have an inverse relationship. When interest rates go up, bond prices go down. If the current value of the 30-year bond is $1,103.19, then the prevailing market interest rate is 9% (PV = 1,103.19; N = 60; PMT = 50; FV = 1,000; solve for I/YR = 4.5 × 2 = 9.0%). If the interest rate increased 2 percentage points to 11%, the value of the bond would decrease to $912.75 (FV = 1,000; N = 60; I/YR = 5.5(11% ÷ 2); PMT = 50; solve for PV = 912.75, or $912.75). The difference equals $190.44 ($1,103.19 − $912.75).

Stockwell Corporation wants to establish a qualified retirement plan and has identified the following criteria: Simplicity. Integration with Social Security. Flexible funding. Ability to invest primarily in company stock. In-service withdrawals. Distribution of benefits in cash if desired. Deductible employer contributions. Which of the following types of qualified plans would best meet Stockwell's criteria? A) Target benefit pension plan B) Employee stock ownership plan (ESOP) C) Money purchase pension plan D) Traditional profit-sharing plan

D) Traditional profit-sharing plan. Only a traditional profit-sharing plan will meet all of Stockwell's plan objectives. Pension plans limit investment in employer securities and do not offer flexible funding. An ESOP cannot be integrated with Social Security.

Which of the following plans may be eligible for a 10-year forward averaging for tax purposes if a qualifying lump-sum distribution is made? A) Section 403(b) tax-deferred annuity B) Individual retirement account (IRA) C) Simplified employee pension (SEP) plan D) Traditional profit-sharing plan

D) Traditional profit-sharing plan. Only lump sum distributions from qualified plans may be eligible for 10-year forward averaging. SEP plans, IRAs, and tax-deferred annuities, also known as Section 403(b) plans are not qualified plans and, therefore, are not eligible for 10-year forward averaging. Remember, to be eligible for 10-year forward averaging, a person must be born before January 2, 1936. Thus, only people working into their 80s can ever qualify for 10-year forward averaging today. Even then, they would have to take a lump sum distribution to meet another rule to qualify for 10-year forward averaging.

The incidental benefit rule provides that whole life insurance in a defined contribution plan: A) stipulates a life insurance a face value of $61,000 (2022) or less. B) stipulates the life insurance face value may not exceed one hundred times the annual contribution to the plan. C) stipulates no greater than 25% of the employer contributions may be used to purchase whole life insurance. D) stipulates no greater than 50% of the employer contributions may be used to purchase whole life insurance.

D) stipulates no greater than 50% of the employer contributions may be used to purchase whole life insurance. The incidental benefit rule for whole life insurance benefits in a defined contribution plans stipulates no greater than 50% of the plan contributions on behalf of a participant may be used to purchase whole life insurance.

Graham, age 68, owns a personal residence valued at $2 million which he purchased many years ago. Because of some serious health issues, Graham feels he has a life expectancy of only about eight years. He wants his residence to pass to his daughter, Lynne, when he dies but he wants to live in it until then. He would also like for the residence to be excluded from his gross estate when he dies. Which of the following recommendations is likely to satisfy Graham's objectives? A) Gift the residence to Lynne now with the understanding that he can continue living in it rent-free until he dies. B) Retitle the residence, granting himself a life estate and naming Lynne as the remainderman. C) Retitle the residence as JTWROS property with Lynne as the other joint owner. D) Transfer the residence to a QPRT with a term of five years.

D) Transfer the residence to a QPRT with a term of five years. The only recommendation that can satisfy Graham's objective of removing the residence from his gross estate is to transfer the residence to a qualified personal residence trust (QPRT) with a term of five years. If he survives the five-year trust term, the residence will be excluded from his gross estate. He can continue living in the residence without the residence being pulled back into his gross estate as long as he pays Lynne a fair market rent. Any method of transfer in which Graham retains a life estate will cause the residence to be included in his gross estate when he dies. Retitling the property as JTWROS with Lynne will also result in the residence being included in his gross estate because he contributed the original purchase price for the property.

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? A) Now, at FRA B) Not enough information to determine C) She should have started earlier D) Two years from now

D) 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 Ann would need to live until 78½ to "break even." Because she is expecting to live until age 90, she should opt to delay receipt of benefits. Expecting to live longer would make starting earlier a poor choice.

Which of the following statements regarding Social Security plan integration is CORRECT? A) The maximum increase in benefits for earnings above covered compensation level is 5.7% for a defined benefit pension plan. B) Only the excess method can be used by a defined benefit pension plan. C) Because there is a disparity in the Social Security system, all retirement plans are allowed to integrate with Social Security. D) Under the offset method of integration, a fixed or formula amount reduces the plan formula.

D) Under the offset method of integration, a fixed or formula amount reduces the plan formula. Not all retirement plans are allowed to integrate with Social Security. For example, ESOPs and SARSEPs are not permitted to use integration. The defined benefit pension plan can use either the excess or offset method in integrating with Social Security. Only the excess method can be used with defined contribution plans. The permitted disparity limit for a defined benefit pension plan is 26.25% above the covered compensation level.

Steve began his professional corporation single practitioner CPA firm 38 years ago. He worked profitably as a sole practitioner for the full 38 years until retiring December 31 of last year at his full retirement age. On January 1 of this year, he sold his practice for $400,000 to be received in 4 equal, annual payments of $100,000, beginning on the date of sale and continuing each January 1 for the next 3 years. Is Steve eligible for Social Security retirement benefits during this year and why? A) Yes, he is entitled to benefits, but they will be reduced because of the payments from the sale of his practice. B) No, even though he retired at his full retirement age, the proceeds from the sale of his practice will delay his receiving Social Security retirement benefits. C) No, he is not considered retired for Social Security purposes until the installment payments are complete. D) Yes, he is eligible because he retired at his full retirement age and is fully insured.

D) Yes, he is eligible because he retired at his full retirement age and is fully insured. Social Security benefits may be reduced for individuals under full retirement age with earned income above certain levels. The proceeds of the installment sale are not considered earned income for Social Security retirement benefit purposes. Therefore, Steve's benefits will not be reduced. He has attained his full retirement age and is fully insured. Note: The reduction of Social Security benefits based on earned income no longer applies once an individual reaches full retirement age. Because Steve retired at his full retirement age, his benefits would not be reduced, even if he had earned income.

If the insured under a life insurance policy becomes totally disabled due to bodily injury or disease before a stated age, all premiums due during the period of total disability are waived under: A) an incontestable clause B) a forfeiture of premium clause C) the grace period D) a disability waiver of premium rider

D) a disability waiver of premium rider. This rider protects insureds who become totally disabled and are unable to pay premiums because of total disability. The policy and benefits will continue as if the premiums have been paid by the premium payer.

A life insurance contract with low fixed premiums during the first 3 to 5 years and then higher fixed premiums for the remainder of the policy period is called: A) an increasing term life policy B) a variable life policy C) a limited pay whole life policy D) a modified whole life policy

D) a modified whole life policy. Modified whole life policies are designed for individuals, such as young professionals, who want permanent insurance but are not yet able to pay the higher premiums of traditional whole life insurance. The increase to an ultimately higher premium should match an anticipated increase in the premium payor's income.

Nonqualified plans A) have Employee Retirement Income Security Act (ERISA) protection such as vesting, fiduciary, and funding requirements. B) give an employee a deferral of income taxes. C) have higher administrative costs than qualified plans. D) give an employer a deferred tax deduction.

D) give an employer a deferred tax deduction. A qualified plan gives an employer and employees tax advantages. Nonqualified plans (e.g., IRAs), like qualified plans, can provide tax deferral. Administration costs are much lower for a nonqualified plan because of simplicity and lack of reporting requirements. Most ERISA requirements are not applicable to the typical nonqualified plan.

The doctrine of constructive receipt is: A) also called the economic benefit rule. B) triggered if there is an irrevocable transfer of funds made on the executive's behalf that provides a benefit to the executive. C) triggered if an executive has control to receive income within stated limits. D) triggered if an executive has the ability to access the funds or if the funds are securely set aside for the executive.

D) triggered if an executive has the ability to access the funds or if the funds are securely set aside for the executive. Constructive receipt is different than the economic benefit rule. The economic benefit rule is triggered if there is an irrevocable transfer of funds made on the executive's behalf that provides a benefit to the executive. There is no constructive receipt if income is available only upon surrender of a valuable right or if there are limits on the right to receive the income.

A nonqualified plan is considered funded: A) if it is available to the company's creditors. B) if a reserve is set up to pay a nonqualified benefit, but the assets are retained by the corporation and are subject to creditor's claims. C) if it is a rabbi trust. D) when a firm contributes specific assets to an escrow account in which the employee has a current beneficial interest.

D) when a firm contributes specific assets to an escrow account in which the employee has a current beneficial interest. A reserve set up to pay a nonqualified benefit where the assets are retained by the corporation and subject to creditor's claims is informally funded, which means that it is unfunded for income tax and Employee Retirement Income Security Act (ERISA) purposes. A rabbi trust and a plan that is available to the company's creditors refer to features of nonqualified informal or unfunded plans.

Raul is a 50-year-old businessowner with one employee, who earns $18,000 per year. Raul earns $170,000 per year and is establishing a profit-sharing plan that uses an age-weighted feature. The age-weighting formula allocates $27,850 to Raul and $350 to the employee. Which of the following statements is CORRECT? A) The contribution for worker is $350 and it will be deductible. B) The plan cannot allow the employee to direct the investment of his share of the plan's assets. C) A 3 to 7-year graded vesting schedule would be appropriate for this plan. D) Raul can make a deductible contribution of up to $4,500 for his employee. E) The contribution that must be made to the employee's account is $540.

E) The contribution that must be made to the employee's account is $540. The plan is top heavy, resulting in a minimum contribution to all nonkey employees of 3%. Therefore, the contribution that must be made to the employee's account is $540 (3% of $18,000). Top-heavy plans must use either a 3-year cliff or a 2- to 6-year vesting schedule. An employer can actually contribute more than $4,500 for employees as long as total contributions for all employees do not exceed 25% of aggregate covered compensation and the contributions do not violate the nondiscrimination rules. Either the employer (or plan trustee) can invest the plan's assets or employees can be allowed to choose from among several different investment options in which to invest their own account balance.

David recently purchased a home for $120,000. He put 20% down and financed the remaining amount over 15 years at 7.5%. How much interest will be paid over the life of the loan assuming he pays the loan as agreed? (Round to the nearest dollar). A) $64,188 B) $31,813 C) $160,188 D) $96,000

END mode PV = 96,000 (120,000 × 0.80) I/YR = 0.625 (7.5 ÷ 12) N = 180 (15 × 12) PMTOA = (889.9319) Total payments = $160,187.7358 ($889.9319 × 180) Less principal = ($96,000.00) Total interest = $64,187.7358, or $64,188

Kevin wishes to purchase a yacht in 20 years when he retires. If the yacht currently costs $450,000 and inflation is 2% annually, how much should he deposit at the beginning of each year to have enough to purchase the yacht at the end of 20 years? Assume that Kevin will earn an average compounded after-tax annual return of 5% on his investments. A) $19,620 B) $21,600 C) $19,260 D) $20,222

Future Cost of Yacht PV = 450,000 N = 20 I/YR = 2 PMT = 0 FV = (668,676), or $668,676 Yearly Deposit (BEG Mode) PV = 0 N = 20 I/YR = 5 FV = 668,676 PMTAD = (19,259.52). or $19,260

During a period of increasing inflation, which one of the following investments might be appropriate? A) Common stock of energy firms B) Long-term bonds C) Common stock of financial firms D) None of these

The answer is common stock of energy firms. Rising inflation causes interest rates to rise, which causes financial firms' cost of sales to rise, thereby restricting these firms' profits and depressing their stock prices. Rising inflation helps companies that hold and/or sell real assets, such as commodities and real estate, thereby causing these companies' stock prices to rise. Long-term bond prices fall as interest rates rise, which they generally do during periods of rising inflation.

The deductible contribution to a money purchase pension plan on behalf of a self-employed individual whose income from self-employment is $20,000 and whose deductible Social Security taxes are $1,413 is limited to: A) $4,618. B) $3,717. C) $4,000. D) $5,000.

The maximum contribution is $3,717, calculated as follows: $20,000 Schedule C net income − 1,413 Less: Deductible Social Security tax $18,587 Adjusted net self employment income × 20% Multiplied by: Adjusted contribution percentage (see below) $3,717 Maximum contribution to money purchase pension plan The adjusted contribution percentage is calculated by dividing the maximum employer-deductible contribution percentage (25% for a money purchase pension plan) by 1 plus the percentage (1.25). For a money purchase pension plan, the adjusted contribution percentage is 20% (25% divided by 1.25). The adjusted net self employment income is then multiplied by the adjusted contribution percentage to arrive at the maximum contribution. The adjusted contribution percentage only applies to self-employed persons and not to their employees.

Bailey and Jen, both age 28, are married and file a joint tax return. They have an AGI of $208,000 and have each contributed $3,000 to a Roth IRA during 2022. Bailey's mother contributed $2,000 to a Coverdell Education Savings Account for each of their two children. Neither Bailey nor Jen is an active participant in an employer-sponsored retirement plan. What is the most that Bailey and Jen can contribute in total to a traditional IRA for 2022? A) $10,000 B) $3,000 C) $6,000 D) $0

The maximum contribution to traditional and Roth IRAs is a total of $6,000 per person (who has not attained age 50) for 2022. They have already contributed to a Roth IRA, and they have an AGI within the phaseout range for 2022. Thus, the first thing to check is whether they can keep their current Roth IRA contributions for this year. Their maximum Roth contribution is phased out by 50% because their income exceeds the initial phaseout limit of $204,000. The phaseout range for 2022 is $204,000-$214,000; ($214,000 - $208,000 / $10,000 = 0.50 × $6,000 × 0.50 = $3,000). This is what they have each contributed to the Roth IRAs this year; so they may keep their current contributions, but they are not allowed any additional Roth IRA contributions this year. However, they can still make a deductible contribution of $6,000 ($3,000 each) to a traditional IRA for 2022. This is because neither of them is an active participant. $6,000 is the combined contribution limit that is divided between a Roth IRA and a traditional IRA. The most Bailey and Jen may contribute to a traditional IRA is $3,000 each, and the contributions are deductible.

Which of the following questions must be answered when applying the top-heavy test? 1. What percentage of employees are rank-and-file? 2. Who is a key employee? 3. Which employers will be treated as single employers for purposes of the top-heavy test? A) 2 and 3. B) 1 and 2. C) 1 and 3. D) 3 only.

The top-heavy test requires answers to questions 2 and 3.

ABC, Inc., is an S corporation. Bill and Diane are married and the sole owners of ABC. They are 2 of the 20 employees of the firm. ABC provides each of its employees $50,000 of group term life insurance coverage. The premiums on what total amount of insurance coverage are taxable to Bill and Diane? A) $75,000. B) $100,000. C) $50,000. D) $0.

b) $100,000 Fringe benefits are not deductible by an S corporation and the benefits are not tax free for the greater than 2% shareholders. Rather, the cost of coverage for both policies is taxable to Bill and Diane.