Series 7 Chapter 11

If an employee makes a withdrawal from her IRA at age 52, she pays no penalty tax if she: A) has retired. B) used the funds for her nephew's college tuition. C) had no earned income that year. D) is disabled.

Your answer, used the funds for her nephew's college tuition., was incorrect. The correct answer was: is disabled. An employee may withdraw from an IRA before the age of 59½ without a penalty tax in the case of death or disability. Funds may be withdrawn without penalty for qualified education expenses for immediate family members, but that does not include nieces and nephews.

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

Your answer, the plans need not be offered to all employees., was incorrect. The correct answer was: employees may use accumulated funds as collateral for a bank loan. Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary upon retirement. The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral.

Which of the following statements about a Coverdell Education Savings Account (ESA) is NOT true? A) Contributions can be made to this type of plan and a Section 529 plan in the same year for the same beneficiary. B) Contributions of $2,000 per child per year are allowed. C) Contributions are tax deductible, subject to a modified AGI phaseout. D) The funds grow income tax deferred and, if used for elementary, secondary, or college educational expenses, the earnings are tax free.

Your answer, Contributions are tax deductible, subject to a modified AGI phaseout., was correct!. Contributions to an ESA are not tax deductible.

Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client? A) Variable annuities. B) Treasury notes. C) Common stock. D) Corporate bonds.

Your answer, Corporate bonds., was incorrect. The correct answer was: Variable annuities. Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, etc. In less than 4 years, your client will have to begin making withdrawals regardless of any surrender charges the annuity may impose.

A 45-year-old employment counselor has a Keogh plan for himself and three full-time employees who have been working for him for the past 4 years. If he earns $150,000 this year and contributes the maximum amount allowed to his Keogh plan, how much may he invest in an IRA? A) He may not have an IRA. B) He may have an IRA but may not make a contribution for this year. C) He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. D) He may invest any amount up to 100% of his earned income.

Your answer, He may have an IRA but may not make a contribution for this year., was incorrect. The correct answer was: He may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. Regardless of how much is invested in a Keogh plan, an investor may still invest in an IRA if he has earned income. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible.

Which of the following investments would be most suitable for an IRA? A) Technology company whose stock shows a high beta. B) Uncovered call on a stock whose price is extremely stable. C) Highly rated GO bond. D) Short sale of a stock which has just started what is expected to be a prolonged decrease in price.

Your answer, Highly rated GO bond., was incorrect. The correct answer was: Technology company whose stock shows a high beta. Short sales, uncovered calls, and municipal bonds are all inappropriate for individual retirement accounts.

A registered representative (RR) is explaining the characteristics of a Coverdell ESA to a customer. Which of the following statements regarding this type of savings account is CORRECT? Contributions are tax deductible. Contributions are not tax deductible. When used for qualified educational expenses, withdrawals are taxable. When used for qualified educational expenses, withdrawals are not taxable. A) I and IV. B) II and IV. C) II and III. D) I and III.

Your answer, II and III., was incorrect. The correct answer was: II and IV. Contributions to a Coverdell Education Saving Account (ESA) are made with after- tax dollars. Distributions used for qualified educational expenses are tax free.

Which of the following statements CORRECTLY describe a Roth IRA? The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is greater. The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is less. Contributions are tax deductible. Contributions are not tax deductible. A) I and III. B) II and III. C) II and IV. D) I and IV.

Your answer, II and III., was incorrect. The correct answer was: II and IV. The maximum annual contribution to a Roth IRA is 100% of earned income, not to exceed a maximum allowable dollar limit. Contributions are made with after-tax dollars.

Which of the following statements regarding Coverdell Education Savings Accounts are TRUE? After-tax contributions of up to an indexed maximum per student per year are allowed. Contributions may not be made for students past their 18th birthday. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. Distributions are always taxable. A) I and III. B) II and IV. C) I and II. D) III and IV.

Your answer, III and IV., was incorrect. The correct answer was: I and II. Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member.

Which of the following retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements? A) Payroll deduction plan. B) Keogh plan. C) Profit-sharing plan. D) Defined benefit pension plan.

Your answer, Keogh plan., was incorrect. The correct answer was: Payroll deduction plan. A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.

Which of the following investments is the least appropriate for a qualified pension or profit sharing plan? A) Treasury bonds. B) Corporate AAA bonds. C) Municipal bonds. D) Zero-coupon bonds.

Your answer, Municipal bonds., was correct!. When advising qualified plans, it is not a good investment practice to buy tax-free income. The yield on municipal bonds is typically lower than that on other bonds of comparable quality due to the tax-exempt status of their income payments. Any assets in the retirement plan are free of current taxation so the usual municipal security benefit is lost, and the portfolio contains assets that produce less income. A second problem arises because as participants in the plan begin withdrawing assets, the withdrawal is usually 100% taxable, thus turning what is inherently tax free into something taxable. It makes more sense to buy higher yielding taxable income and to shelter the income within the tax-exempt plan trust.

What is the total amount that may be invested in a Coverdell Education Savings Account in 1 year? A) The current maximum per parent. B) The current maximum per family member. C) The current maximum per child. D) The current maximum per couple.

Your answer, The current maximum per couple., was incorrect. The correct answer was: The current maximum per child. An indexed maximum contribution may be invested in each child's Coverdell Education Savings Account every year. For instance, if a couple has 3 children, they may invest the current maximum into each of 3 accounts.

Distribution from a traditional IRA can begin at age 59½ and must begin no later than: A) age 70½. B) 15 years from the individual's date of retirement. C) an age as determined by IRS life expectancy tables using the account holders year of birth. D) age 65.

Your answer, age 70½., was correct!. The owner of a traditional IRA has until April 1 of the year after the year in which he turns age 70½ to begin withdrawing from the account.

A customer who has just started an IRA will be vested: A) in 2 years. B) in 5 years. C) at age 70. D) immediately.

Your answer, at age 70., was incorrect. The correct answer was: immediately. Investors are always vested immediately in their IRAs.

All of the following are true regarding Section 529 college savings plans EXCEPT: A) tax-free withdrawal at the federal level for qualified education expenses. B) tax-deductible contributions at the federal level. C) high contribution limits. D) not subject to income limitations.

Your answer, high contribution limits., was incorrect. The correct answer was: tax-deductible contributions at the federal level. Contributions are made with after-tax dollars and are not deductible.

In an IRA, a 6% penalty will be levied if the account owner: A) changes the beneficiary designation more than once during any calendar year. B) makes an excess contribution. C) fails to make a contribution by April 15. D) makes a premature withdrawal.

Your answer, makes a premature withdrawal., was incorrect. The correct answer was: makes an excess contribution. Excess contributions to an IRA are subject to a 6% penalty tax.

Under ERISA, a plan trustee wishing to write uncovered calls may do so: A) without restriction. B) if explicitly allowed in the plan document. C) under no circumstances. D) if approved by the IRS in writing.

Your answer, under no circumstances., was correct!. ERISA prohibits retirement plan trustees from making investments that are excessively speculative; an uncovered call writer has unlimited risk.

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

Your answer, I and II., was incorrect. The correct answer was: I and III. Employees of 501(c)(3) and 403(b) organizations (which include charities, religious groups, sports organizations, and school systems) qualify for tax-sheltered annuities (TSAs).

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

Your answer, I and III., was incorrect. The correct answer was: I and IV. With a Roth IRA, the contributions are not deductible from current income. Withdrawals after age 59½ are tax free, provided the account has been open for at least 5 years. There is no age at which withdrawals must begin or contributions must cease.

Each of the following are permitted to open an IRA EXCEPT: A) a divorced mother whose sole income is alimony and child support. B) a self-employed attorney who has a Keogh plan. C) an individual whose sole income consists of dividends and capital gains. D) a corporate officer covered by a 401(k) plan.

Your answer, a corporate officer covered by a 401(k) plan., was incorrect. The correct answer was: an individual whose sole income consists of dividends and capital gains. An IRA contribution can be made only from earned income. Dividends and interest are investment income, but alimony is considered compensation for purposes of an IRA by the IRS even though it is not deemed to be earned income. Individuals can contribute to an IRA even if they are already covered by a corporate pension plan or Keogh plan. However, although a contribution can be made, it may or may not be deductible depending on the individual's income.

Buying municipal bonds would normally NOT be considered suitable for A) an individual investor B) a mutual fund portfolio C) a corporation's investment account D) a defined benefit plan portfolio

Your answer, a mutual fund portfolio, was incorrect. The correct answer was: a defined benefit plan portfolio A defined benefit plan is a form of qualified tax-deferred corporate pension plan. Tax-free municipal bonds would never be considered suitable for a tax-deferred account. An individual investor, a mutual fund portfolio and a corporate investment account could call benefit from receiving tax-free municipal bond interest.

When operating a Keogh plan, a self-employed individual must make contributions for A) all employees scheduled to work for 1,000 hours per year or more B) all employees C) full-time employees who are at least 21 years old and have worked for the company for at least one year D) part-time employees who have worked for the company for 3 or more years

Your answer, all employees, was incorrect. The correct answer was: full-time employees who are at least 21 years old and have worked for the company for at least one year Employees must be covered under a Keogh plan if they are at least 21 years old, have been employed a minimum of 1 year, and work full-time (at least 1,000 hours per year). Keogh plans do not include employees who are under 21 or have just started working with the employer.

A married couple are both employed by firms that cover them under the company pension plans, and each earns approximately $150,000 annually. If they both open a traditional IRA and make the maximum contribution, how much of their contribution could they deduct? A) One spouse only is eligible to deduct their entire contribution. B) Neither is eligible to make a contribution in any amount (deductible or not). C) Both may deduct the entire contribution. D) They are ineligible to deduct any contribution made.

Your answer, Both may deduct the entire contribution., was incorrect. The correct answer was: They are ineligible to deduct any contribution made. While each are eligible to make the maximum contribution, at this income level, neither spouse, both covered under employer sponsored plans, would be eligible to deduct their contributions to their respective IRAs.

Which of the following statements are TRUE regarding tax-deferred, noncontributory, defined benefit plans? Contribution amounts are fixed. Contribution amounts vary. Benefit payments are fixed. Benefit payments vary. A) I and IV. B) I and III. C) II and III. D) II and IV.

Your answer, I and III., was incorrect. The correct answer was: II and III. In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, etc.

One of your customers has maintained a traditional IRA for the past 15 years. Some of his annual contributions were not tax deductible due to his income level and participation in another qualified plan. At age 60, the customer elects to make a lump-sum withdrawal. Which of the following statements is TRUE? A) The portion representing earnings and principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. B) The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. C) The portion representing earnings from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. D) The entire withdrawal is taxable as ordinary income.

Your answer, The portion representing earnings from the nondeductible contributions is tax free, while the balance is taxable as ordinary income., was incorrect. The correct answer was: The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. All earnings, whether from deductible or nondeductible contributions, are tax deferred. Therefore, all earnings are taxable as ordinary income on withdrawal. Only the nondeductible contribution is returned tax free.

A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status? A) 30. B) 90. C) 45. D) 60.

Your answer, 90., was incorrect. The correct answer was: 60. Rollovers from pension plans into IRAs must be accomplished within 60 days in order to retain tax-deferred status.

Which statements are TRUE regarding funding for education? Distributions from a Coverdell ESA may be used for college only. Distributions from a Coverdell ESA may be used for both college and secondary education. Distributions from a Section 529 plan may be used for college only. Distributions from a Section 529 plan may be used for both college and secondary education. A) I and IV. B) I and III. C) II and IV. D) II and III.

Your answer, I and III., was incorrect. The correct answer was: II and III. Under Coverdell rules, an eligible educational institution includes colleges as well as elementary or secondary schools. Distributions from Section 529 plans are limited to higher education only.

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

Your answer, They may contribute up to the maximum annual allowable dollar limit split evenly between both accounts., was incorrect. The correct answer was: They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA. No matter how much income individuals or couples receive, they may contribute to their IRAs if they have earned income. Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.

Which of the following securities is the least suitable recommendation for a qualified retirement account plan account? A) Blue-chip common stock. B) Treasury bill. C) A rated corporate bond. D) Investment-grade municipal bond.

Your answer, A rated corporate bond., was incorrect. The correct answer was: Investment-grade municipal bond. Municipal bonds provide tax-exempt interest payments and, consequently, offer lower yields. Because earnings in a qualified retirement plan account grow tax deferred, the municipal bond is not a suitable investment. In addition, they will be fully taxed on withdrawal.

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

Your answer, A traditional spousal IRA for which the contribution has been deducted., was incorrect. The correct answer was: A SEP IRA. Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs.