Unit 1

When does the 10% Penalty not apply to Traditional IRA

death, diability, 10K first home purchase, qualified higher education experience for immediate family members not neice or nephew but grandchildren) certain medical expenses in excess of AGI. Substantially equal periodic payment.

Risk of Deferred Comp

deferred compensation plans may be somewhat risky because the employee covered by the plan becomes a general creditor if the business fails.

Individual Setting up Trust for Parent

if they want the statements to go to them this is permissible if they are sole trustee.

Adjusted Gross Income

total income before subtracting any deductions or expenses. Deductions include: traditional IRA Contributions, alimony paid, self-emloyment tax, penalties from early withdrawals. Determines eligibility for ROTH IRA.

JTWROS

- All checks must be payavle to both partners -Trades can be entered by one party member. -Any income generated in this account will be aggregated on their tax return should they file a joint tax return. - if husband and wife, and one dies, can present death ceritficate to BD. -if two people and want separate statements etc, must specify at opening. - if two brothers and one dies, wife of deceased may collect if she files paperwork.

Inherited IRA: Non-spouse beneficiary

- Any option of regular IRA except the "treat as your own"

ERISA

- Applies to corporate plans. - 21 yrs older, worked at least 1000 hours (one full year of service) - Funds contributed must be separated from other corporate assets - limits how long matching period (vesting) can last from employer side. -plan must be in writing and given annual statements. - all eligible employees must be treated fairly - beneficiaries must be named to recieve at death.

Inherited IRA - Spousal

- Can transfer assets to personal IRA (treat as normal) - Transfer into inherited IRA, taking lifetime distributions over life expectancy (may start at any age) - Transfer into inherited IRA, 5 year dist. - Take lump sum that is fully taxable but no early withdrawal penalty

Benefit of a TOD account

- Multiple beneficiaries that can be changed at any time -avoids probate - do not avoid estate tax.

Timeline for New Account Opening Docs

- completed new account form sent after 30 days, after that must be updated every 3 years at a minimum

Many businesses open brokerage accounts to invest surplus funds. For which of the following business forms would suitability information on the owners not be required?

A C corporation is the only business form where the tax and other consequences of the account do not accrue to the individual owners. Can you imagine a well-known publicly traded corporation with several million shareholders opening an account where the registered representative would have to obtain suitability information on all of them? Even when it is a small business, because the C corporation is its own taxable entity, the suitability requirements are not as critical as with the pass-through businesses (partnerships, LLCs, and S corporations). Of course, the sole proprietorship is the individual, so that is where the suitability is focused.

A financial institution sends a communication to its clients indicating an action the institution plans to change. The communication states that this change will take place in 45 days and any client wishing to opt-out must notify the institution before the end of that period. This is known as

A negative response letter is a communication where, unless the recipient responds negatively, the proposed action is accepted. The letter must contain certain disclosures such as different costs or features.

Obtaining all of the following complies with the regulations regarding customer identification programs except

A post office box is never acceptable without a physical address.

Features of an employee stock purchase program (ESPP) include all of the following except

Although the contributions are based on pre-tax income, unlike a qualified plan, the contributions are made with after-tax dollars.

If a customer wants to open an account in the name of her adult son and wants the account to be approved for uncovered option writing, her request should be refused because

An adult cannot open an account and name another adult as the beneficial owner unless approval is granted by that adult. The type of option trades and the third party's investment experience are not relevant. Furthermore, the child is an adult, not a minor, and we have no suitability information.

An agent is permitted to open all of the following customer accounts except

An agent is not permitted to open an individual account in the name of a third person.

One of your customers is a self-employed insurance agent specializing in long-term care insurance. She employs her eight-year-old daughter to perform certain clerical duties, such as filing and mailing. The daughter's hourly wage is competitive with industry standards. Your customer asks about her daughter's eligibility for a Roth IRA. The proper response is

Any natural person, of any age, can open a Roth IRA as long as they meet two requirements. The first, as with any IRA, is that the person must have earned income. The second is that the income must not exceed certain limits. The daughter's hourly wage is evidence of meeting the earned income requirement. We do not know the amount of the wage, but it is highly unlikely that a competitive wage for a clerical worker, regardless of age, is going to exceed the Roth limits. This is an example of the test-taking tip of not reading anything into a question to make it more complex.

Under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered calls on the securities in the portfolio?

As covered calls are not considered to be a speculative option strategy, they would be permitted as long as the strategy is deemed prudent and is consistent with the objectives of the plan. No outside approval is required.

Lindsey Wolfe, a public school teacher, has been contributing to a 403(b) TSA plan for the past 20 years. Contributions total $50,000 and the current value is $200,000. Wolfe is still teaching full time for the school system. When does Wolfe have to begin taking required minimum distributions?

At age 72 or when no longer working for school system whichever is later. Wolfe is invested in a qualified annuity. Therefore, the minimum distribution requirements are the same as for any qualified account. RMDs must begin at age 72 but can be postponed as long as continuously employed by the same employer. Unless qualifying for an exception, any withdrawals from a qualified annuity before reaching age 59½ are taxed as ordinary income with the additional 10% penalty.

UGMA/UTMA

Cannot be transferred from one child to another.

Non Compensation for IRA

Capital Gains Interest and dividend income Pension or annuity income. Child support passive income from DPPs

Ineligable investment for IRA

Collectables Life insurance contracts Tax free munis, muni bond funds, and muni bond UITs are eligible but considered inappropriate because yields are lower and taxable upon withdrawal. Covered call writing is allowed. No short sale, speculative option strategies, margin account trading.

All of the following are eligible investments in a traditional IRA except

Collectibles are ineligible investments. Municipal bond funds are inappropriate, but not ineligible. Eligible investments in an IRA include platinum bullion and limited partnerships

Which of the following is not true in jurisdictions that recognize the marital property designation known as community property?

Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. In addition, it does not apply to inheritances or gifts. There can be federal tax implications for property designated as community property, and laws in states that recognize community property ownership differ from jurisdiction to jurisdiction.

Someone considering saving for retirement in a Roth IRA could correctly be told that

Contributions to Roth IRAs are made with after-tax dollars, and distributions are received tax free (both cost basis and earnings) if holding period requirements are met.

All of the following must meet the nondiscrimination provisions of the Employee Retirement Income Security Act (ERISA) except

Deferred compensation plans are nonqualified, and therefore, do not have to meet the nondiscrimination provisions of ERISA.

Which of the following employer-sponsored plans is not required to meet the nondiscrimination provisions of ERISA?

Deferred compensation plans, by design, are nonqualified and not subject to ERISA. Therefore, they may discriminate as to who may participate. In any question on the exam, a qualified plan sponsored by a business will most likely have to comply with ERISA.

In a 401(k), the employer is given the choice of?

Dont have to match contributions every year.

Withdrawal from Roth IRA

Earnings can withdraw tax free following 5 years from deposit if the owner is 59.5, money withdrawn is used for a first time principal residence up to 10k or the account holder has died or become disabled.

EGTRRA

Economic Growth and Tax Relief Reconciliation Act of 2001 allows catch up payments for people age 50 and older to their IRAs.

Jack Mercure, age 72, has been a client of yours for many years. You have noticed he's a bit slower than before, but nothing troublesome. This morning, you get a call from Jack, and he wants you to wire a relatively substantial sum from his account to someone with a foreign address. Fearing this might be a case of senior exploitation, you discuss this with your manager. If the feeling is mutual, FINRA rules would permit your firm to

FINRA Rule 2165 permits a member firm that has a reasonable belief that financial exploitation may be occurring to place a temporary hold on the disbursement of funds or securities from the account. Temporary means not longer than 15 business days.

Under FINRA's rules governing the activities of member broker-dealers, prior notification to the employing firm and prior written consent from the employing firm would be required to open a brokerage account for all of the following except

FINRA requires prior written notification be made and prior written consent be received before any employee can open a brokerage account with other members or financial institutions. Exceptions include accounts where the only activity will be in 529 plans, mutual funds, or variable annuities.

An individual has given full power of attorney (POA) to a third party. This means that the designee is permitted to

Full POA gives the named third party—the designee—all of the power of the owner except the right to change the name on the account.

Compared to defined contribution plans, defined benefit plans give the highest return to employees who

Highly compensated employees who have fewer years until retirement will experience advantages over other employees with this type of plan. Their retirement benefits are predefined and generally linked to the compensation level they attained while employed. After a short time with the company, a person may qualify for benefits comparable to those it would have taken many years to attain under a defined contribution plan.

IRA Transfer

IRA funds moved from one trustee to another trustee. Unlimited per year

If a business owner's goal is to establish an entity that features ease in raising capital and limits personal liability, which of these entities is the most appropriate?

If a business owner's goal is ease in raising capital, the limited liability company (LLC) is preferable because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien. The sole proprietorship and general partnership carry unlimited personal liability.

60-day Rollover

If a distribution from an IRA or retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or retirement plan within 60 days. Taxes will be withheld requiring other funds to roll over the full amount of the distribution. Can only do once per 12 month period.

Probate Accounts

Individual accounts subject to probate TOD, JTWROS, and Irre trusts avoid probate

The concept of double taxation applies to shareholders of

It is the C corporation where the owners contend with double taxation. The first tax is on the corporation's earnings. After that, any dividends distributed to the shareholders are subject to tax.

An agent may open a joint account for which of the following?

Joint account owners share ownership of the account and must be adults. A minor may not legally exercise control over an account and may not be an owner of record of an account.

All of the following people could open a joint account except

Joint accounts can only be opened between adults.

Actuarial Calculations

Needed for defined benefit plans.

Which of the following statements regarding nonqualified deferred compensation plans is not true

Needing no IRS approval, nonqualified deferred compensation plans may be discriminatory and offered only to certain employees such as key executives. A typical deferred compensation plan is an agreement between a company and an employee in which the employee agrees to defer some income until retirement, the benefits payable at retirement would be taxable at that time. Board members are not considered to be employees, and therefore, are not eligible for these plans. Because these plans are rarely funded, business failure places the employee in the role of a general creditor. LO 1.f

A customer opens an account, and payment and delivery instructions are established. Beyond the opening of the account, these instructions may

Once payment and delivery instructions are established at the time the account is opened, they can be changed for any individual transaction or for all transactions going forward.

On Monday, John bought and sold 1,000 shares each of MEDX and CETN stock. On Wednesday, he purchased an additional 500 shares of CETN and 1,600 shares of KRS, which he closed in two trades of 800 shares each, later that day. On Friday, John executed a trade to purchase 2,000 shares of BUV and sell 300 shares of the CETN he purchased on Wednesday. Under FINRA rules, John meets the definition of

Pattern Day Trader: A day trader buys and sells the same security on the same day. Pattern day trading is a regulatory designation for a day trader who executes four or more day trades in a five-business-day period. And, yes, the exam can be this specific.

Direct Registration System

Registration of stock in purchaser's name on the corporation's books without a paper certificate, allowing easy electronic transfer of paperless shares.

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?

Rollovers from pension plans into IRAs must be accomplished within 60 days to retain tax-deferred status.

Highest Contribution

SEP IRA

You are at a social gathering speaking with an individual who is a tenured professor of astrophysics at the state university. She mentions that she participates in the school's TSA plan. That means she

TSA stands for tax-sheltered annuity and is the most common name for the 403(b) retirement plan. Although investments can be made into mutual funds, some 85% of the funding is through annuities.

An incorporated business model that allows flow-through of business income and losses directly to shareholders in order to avoid double taxation is

The S corporation, the general partnership, and the limited partnership are business models where all income or loss flows through to the owners. This avoids the double taxation on the business level and owner level, as is the case with the C corporation. With C corporations, corporate earnings taxed once at the business level and again when they are paid out to shareholders as dividends. Because the question is asking about the incorporated business model, the correct choice is the S corporation.

Under the USA PATROIT Act of 2001, which of the following must be maintained by financial institutions, such as banks and broker-dealers, to prevent the financing of terrorist operations and money laundering?

The USA PATRIOT Act of 2001 requires financial institutions to maintain CIPs to protect against financing terrorist operations or activities and potential money laundering activities. The Office of Foreign Asset Control (OFAC) publishes and maintains the Specially Designated Nationals and Blocked Persons list, which financial institutions use to determine if any customers or potential customers have been identified by OFAC as posing a terroristic threat or are involved in money-laundering activities.

A customer would like to set aside some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is true?

The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary reaches age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.

Sally Williams is a customer of your FINRA member firm. Sally was recently married and wishes to change the name on her individual account to her new last name. To do this,

The name change requires approval of a designated principal of the member firm. The principal will want to see evidence of the change in status, such as a marriage certificate, before granting the approval.

Direct Rollover

The plan administrator can transfer a distribution directly to another retirement plan or IRA. Sometimes a check will be issued made payable to your new account. No taxes will be withheld from your transfer amount.

When opening a new retail account or updating account information for a specified adult, FINRA Rule 2165 urges member firms to obtain the name and contact information of a "trusted contact person." If the client supplies that information, the person

The primary reason behind Rule 2165 is to try to prevent senior exploitation. By obtaining the name and contact information of a trusted contact person (who must be at least 18 years of age), the firm has someone to reach out to when red flags appear. It is important to understand that the naming of this person does not convey any rights over the account. This is not a power of attorney.

Roth Conversion

The process through which a traditional IRA is converted into a Roth IRA. Anyone can convert a traditional IRA to a Roth IRA. However, income taxes must be paid on the traditional IRA when the account is converted. From that point on, funds can be withdrawn tax free. Must be done within 60 days.

A schoolteacher has a 403(b) tax-qualified deferred retirement plan into which she has deposited $100,000 over a 12-year period. At retirement, if the teacher withdraws the total value of the account (now $220,000), how much of the withdrawal will be subject to taxation as ordinary income?

The retirement plan is qualified, which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn.

A married couple has had an account with your FINRA member firm for many years. The account is registered in both names, JTWROS. Upon the advice of their estate-planning attorney, they wish to move the assets in equal proportion to individual accounts. This would require all of the following except

There is no FINRA requirement to receive any information from the couple's lawyer. All the other statements are correct. Authorization of the change by a qualified registered principal designated by the member. C) before obtaining approval of the account designation change, a designated principal must be personally informed of the essential facts relative to the change. D) the essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records.

Employee Qualified plans moving to Rollover

They can move to rollover if take a lump-sum distribution and leaves the compnay. employer must hold 20% withholding tax and refund on next tax return.

You have a client who owns a small business. The business provides an ERISA-qualified plan for employees. Your client manages the investments and asks you about permitted strategies. ERISA rules would permit which of the following investments?

Uncovered call options carry a potentially unlimited risk of loss. As such, ERISA has declared them unsuitable for investments in a qualified plan. However, covered calls, as well as protective puts, are allowable investments. Selling a security to or buying a security from a plan participant is a prohibited transaction. Most collectibles are not permitted in ERISA plans.

Compensation for IRA

Wages, salaries, tips Commissions and bonuses Self-Employment income Alimony Nonraxable combat pay

Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client?

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, et cetera. In five years, your client will have to begin making withdrawals, regardless of any surrender charges the annuity may impose.

Which of the following accounts are billed a single fee annually for a group of services?

Wrap accounts are accounts for which firms registered as both broker-dealers and investment advisers provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap accounts are generally investment advisory accounts.

Which of the following investment activities are suitable for an individual retirement account?

Writing uncovered calls and writing naked puts subject the investor to a high degree of risk and are considered unsuitable activities.

Numbered Account

account identified with a number, not a name. Allowed if owner files a statement with the broker-dealer attesting to ownership

Spousal IRA

allows a spouse who is not in the paid labor force, or a low-earning spouse to make a fully deductible contribution to a traditional IRA (must file joint tax return)