CFP - Hot Questions Quiz
Your client wants to retire in 10 years. Upon retirement she wants to receive equal payments of $100,000 each year for 25 years (which is her life expectancy). Upon her death she wants to leave $1,000,000 to her children. Her current portfolio value is $715,000. What is the IRR?
12c 715,000 CHS [g] CFo 0 [g] CFj 9 [g] Nj 100,000 [g] CFj 25 [g] Nj 1,000,000 [g] CFj [f] IRR
Holly worked at Florida State University and contributed the maximum to the 403(b) plan this year, including a catch-up contribution. However, she decided to change jobs in July of this year and went to work for the Georgia Department of Revenue, which sponsors a 457 plan. Holly just turned 63 years old and plans on retirement in two years at age 65. What is the most that she can contribute to the 457 plan this year (2018)?
457 also has catch up contribution, but is not a qualified plan so she can also contribute the max. Holly can contribute the annual deferral limit of $19,000 (2019) plus the catch-up contribution of $6,000 for a total of $25,000. She cannot double her deferral because she does not have prior unused deferrals.
All of the following have been identified by studies of American consumers as reasons for not properly planning for their financial futures EXCEPT: Lack of financial knowledge needed to evaluate financial strategies Resistance to the idea of disclosing financial information The tendency to procrastinate Living beyond their means
Although some consumers are undoubtedly careful about disclosing financial information, there is no evidence this is a widespread cause, while studies have documented the other three reasons.
John, who is 2 years away from retirement and is 63 years old, is a long-time employee of an organization that sponsors a 457 plan. What is the most that John could defer in the plan for 2019? If he works for the Slidell Fire Department, it is $25,000. $25,000 if he is a curator at the Texas Museum of Art, a not for profit organization. $56,000 if he is the head coach of a Division 1 football team and the plan is a 457(f) plan. None of the choices are correct.
Answer A is false - since the fire department is a government agency, the 457 plan is public, meaning that both catch-up options are available. He "could" defer up to twice the annual limit or $38,000 for 2019. Answer B is incorrect since the 457 plan must be private and the plan cannot offer a greater than age 50 catch-up provision. Answer C is false since a 457(f) plan does not have an annual limit.
Bo was awarded 1,000 shares of restricted stock of Data Corp at a time when the stock price was $22. Assume Bo properly makes an 83(b) election on the date of the award. The stock vests 3 years later at a price of $42 and Bo sells it then. What are Bo's tax consequences in the year he makes the 83(b) election? Bo has W-2 income of $20,000. Bo has a long-term capital gain of $20,000. Bo has W-2 income of $22,000. Bo has no tax consequences at that time.
At the time Bo makes the 83(b) election, the value of the stock at that date will be included in his taxable income. Thus, Bo will have W-2 income of $22,000 ($22 × $1,000).
Bella was granted 10,000 ISOs on March 4th of last year. At the time of the option grant, the value of the underlying stock was $45 and the exercise price was equal to $45. If Bella exercises the options on September 2nd of this year, when is the earliest of the following dates that she can sell the stock without having a disqualifying disposition? March 5th next year July 1st next year September 15th next year March 5th of the year after next
Bella must wait until 2 years after the date of grant and 1 year after the date of exercise to sell the stock and have favorable tax treatment. Prior to that, it will be a disqualifying disposition.
Which of the following statements is/are correct concerning the CFP Board's Financial Planning Practice Standards? The Disciplinary Committee of the CFP Board relies upon the Code and Standards to determine if any Financial Planning Practice Standards have been violated The Practice Standards are organized based on the domains of financial planning
Both are correct
Bradley received 100 ISOs when he joined World Dog Park Corporation on January 3, 2016. The exercise price was $1 per share. If Bradley exercised his options on January 4, 2017, when the fair market value of the stock was $5 per share, Bradley would recognize no income for regular tax purposes. World Dog Park Corp. went public on January 5, 2018. Bradley decided to sell his 100 shares of WDP following the IPO at $20 a share. What is Bradley's tax liability for this transaction?
Bradley would recognize $1,900 of LTCG. Since he met the rules to avoid a disqualifying disposition, selling 2 years from grant and 1 year from exercise, he can benefit from the tax status. He will have a negative $400 AMT adjustment and pay LTCG on the full gain ($20 - $5) × 100 shares and ($5 - $1) × 4 which is the bargain element at exercise.
Wendel a CFP® Professional had a bad year which ended with unsurmountable medical bills from a car accident while traveling with his family. The family went through all of their savings and still owed over a million dollars in medical bills. Wendel filed for Bankruptcy to help keep his family afloat. He reported the bankruptcy to CFP Board. What will be the CFP Board's response? Publish a public letter of admonishment. The CFP Board will not subject Wendel to disciplinary proceeding. Suspend Wendel's use of the CFP® Marks for a period of 12 months. Revoke Wendel's ability to use the CFP® Marks.
CFP Board recognizes that in certain limited circumstances, a bankruptcy does not demonstrate a CFP® professional's inability to manage his or her finances. A CFP® professional had the right to demonstrate to the DEC that the bankruptcy was not the result of an inability to manage responsibly the CFP® professional's financial affairs. In those circumstances where the CFP® professional is able to make that showing, the CFP® professional will not be subject to discipline and CFP Board will not issue a press release announcing the bankruptcy. Regardless of the outcome of the disciplinary proceedings before the DEC, a CFP® professional must provide to the Client the location of all relevant public websites of any authority that sets forth the CFP® professional's personal bankruptcy or business bankruptcy where the CFP® professional was a Control Person of the business.
Which of the following adverse actions would not require the CFP® Professional to report to the CFP Board within 30 days of the incident? A $300 fine and 3 points on their license for running a red light at 1am. A neighbor is suing the CFP® Professional for a fence being placed across a property line. The CFP® professional has been named as an accessory in a charge for stealing funds from the Town Rotary Club Account. The CFP® Professional was arrested for running a red light and charged with a second DUI. The individual was given a summons to appear in 6 weeks.
Details can be referenced in Section E of the CFP Board Code and Standards. A traffic misdemeanor does not need to be files with CFP Board unless it is a second offense involving drugs and/or alcohol. Any civil lawsuit, arbitration, findings, or charges involving theft or fraud need to be reported.
Kenny Zee (age 65) died after creating a testamentary bypass trust with his wife, Liz (age 65), as the income beneficiary and his two children, Will (age 37), and Doug (age 35) as remainder beneficiaries. His executor funds the bypass trust with the full life time exemption for estates in 2019. The remainder of his estate he leaves as follows: • $1,000,000 outright to his wife, Liz. • $2,000,000 to his girlfriend, Dolly Wink (age 27) in a GPOA trust. The other $4,000,000 in a QTIP with Liz as the income beneficiary and his two children, Walter (age 5) and Devin (age 3) from his girlfriend, Dolly Wink, as the remainder beneficiaries. Which of the following statements are true? Presuming no previous taxable gifts, Kenny's executor will have an estate tax liability of $800,000. The GPOA trust is subject to GST tax.
Dolly Wink is more than 37 1/2 years younger than Kenny and therefore the trust is subject to GST and the $2,000,000 is subject to estate tax at a 40% rate or $800,000. The only other taxable transfer is to the bypass trust, which is sheltered by the lifetime exemption credit equivalency.
Hannah owns a house that has a replacement value of $300,000. The home is 20 years old and is 25% depreciated. She has an HO3 policy with an 80/20 coinsurance requirement. She is carrying $225,000 insurance on the dwelling and has a $1,000 deductible. During a recent storm, the home incurred $40,000 of damage. How much will the insurance company pay?
Greater of actual cash value: ($40,000 × 75% = $30,000) or Coinsurance calculation: 225/(80% of $300) 240 × $40,000 = $37,500 Less the deductible: so $37,500-$1,000 = $36,500
Marlin is meeting with prospective clients that he believes will become comprehensive financial planning clients. Which of the following documents may be delivered orally or in writing? Privacy Policy Material Conflicts of Interest Referral Compensation Arrangements Public Discipline and Bankruptcy
In a financial planning engagement, all documents must be in writing except for the Material Conflicts of Interest, which can be delivered orally or in writing,
Joe Comanda has consulted a CFP® certficant who prepares his income tax returns, and he has inquired about a loan he took from his whole life insurance policy. The policy has a face amount of $250,000, and Joe borrowed $100,000 from the policy two years ago and has not repaid the loan. Joe thinks that he does not need the coverage any longer and would like to surrender the policy for the remaining $15,000 of cash value. Joe has paid premiums of $3,000 each year for 30 years. If Joe does not repay the loan when the policy is surrendered, what will he report for taxable gain?
Joe has paid premiums of $3,000 for 30 years so his basis is $90,000. Joe has taken a loan of $100,000 and will receive $15,000 more of cash value at surrender, so the total amount received from the policy will be $115,000. The gain is $115,000 minus his basis of $90,000 or $25,000, which will be taxed as ordinary income.
Jorge Vasquez retires at age 65 and receives a lump-sum distribution worth $650,000. The market value of employer securities is $135,000, and the cost basis for the securities is $60,000. He is in the 32% income tax bracket. He has chosen to roll the company securities separately from the remainder of his retirement plan base on his financial planner's advice. Within 3 weeks of the transfer, he decides to sell all his shares of stock when it is valued at $140,000. What are his tax consequences for this transaction? $21,100 LTCG $25,600 STCG $12,000 STCG $11,250 LTCG and $1,600 STCG
Jorge would roll $135,000 of employer stock to a brokerage account. The basis in the stock of $60,000 would be taxable to him at the time of the rollover. $60,000 at 32% is $19,200. When he sells the stock, the remainder is taxed at LTCG rates base on NUA rules. At the time of sale, his shares were worth $140,000, the remainder of the NUA distribution (135,000-60,000) at 15% LTCG rate = 11,250. The value above NUA is $5,000 and is STCG (32%) = 1,600. Had he rolled the entire balance to an IRA, the full distribution would be at ordinary tax rates ($80,000 at 32%= 25,600). The balance of $515,000 will roll tax-deferred to an IRA.
Kenny Zee (age 65) died after creating a testamentary bypass trust with his wife, Liz (age 65), as the income beneficiary and his two children, Will (age 37), and Doug (age 35) as remainder beneficiaries. His executor funds the bypass trust with the full life time exemption for estates in 2019. The remainder of his estate he leaves as follows: • $1,000,000 outright to his wife, Liz. • $2,000,000 to his girlfriend, Dolly Wink (age 27) in a GPOA trust. The other $4,000,000 in a QTIP with Liz as the income beneficiary and his two children, Walter (age 5) and Devin (age 3) from his girlfriend, Dolly Wink, as the remainder beneficiaries. Which of the following statements is true? The QTIP trust will be a GST trust because the age difference between Kenny and Walter and Devin is greater than 37.5 years. The QTIP trust assets will be included in Liz's gross estate at her death even though the assets go to Dolly Wink's children. The QTIP trust can accumulate income but it must pay all income out to Liz or Liz's heir prior to any distribution to Walter and Devin. The executor can put the personal residence of Kenny in the QTIP trust and there is nothing that Liz can do about it.
QTIP assets are always included in the gross estate of the surviving spouse. The QTIP trust may or may not be a GST trust. Answer A is incorrect because the age difference is irrelevant. Answer C is incorrect because the QTIP must pay out all income at least annually. Answer D is incorrect because the income beneficiary (spouse) of the QTIP can force the trustee to invest the assets in income producing investments.
Mark receives incentive stock options (ISOs) with an exercise price equal to the FMV at the date of the grant of $12. Mark exercises these options in July four years from the date of the grant when the FMV of the stock is $22. Mark then sells the stock for $35 before the end of the same year on December 31st. Which of the following statements is (are) true? At the date of grant, Mark will have ordinary income equal to $0. At the date of exercise, Mark will have W-2 income of $10 per share. At the date of sale, Mark will have long-term capital gain of $13 per share. Mark's employer will not have a tax deduction related to the grant, exercise or sale of this ISO by Mark.
Statement 1 is correct. There is no income upon grant as long as the strike price is not less than the FMV on the date of grant. Statement 2 is not correct, since it is an ISO, and an AMT adjustment is made at the time of exercise for the amount of the bargain element. However, by selling the stock within one year of the date of exercise, he creates a disqualifying disposition. He will have ordinary income in that year equal to $10 per share and a short-term capital gain of $13 per share. Thus, statements 3 and 4 are false. Additionally, his employer will have a deduction due to the disqualifying disposition.
Ella received nonqualified stock options (NQSOs) with an exercise price equal to the FMV at the date of the grant of $20. Ella executes a cashless exercise when the FMV of the stock was $30. Which of the following statements are true? Ella has ordinary income at the time of the grant. Ella has W-2 income at the time of exercise of $30. Ella has capital gain of $10 when the stock is sold. Ella will receive less than $10 due to withholding and transaction costs.
Statement 1 is false - there is no income at the time of grant when the strike price equals the FMV on the date of grant. Statement 2 is false. W-2 income equals $10 at the time of exercise. Statement 3 is false since there is no capital gain. Statement 4 is correct.
Which of the following statements is true regarding the Capital Asset Pricing model? it determines the price an investor will pay for an asset given the amount of total risk it is a single factor model that explains the relationship between security returns and market risk it shows that assets with greater total risk (measured by standard deviation) should provide higher returns. it describes required return as a function of multiple factors (such as GDP, unemployment, interest rates, etc.)
Statement a. is incorrect because CAPM determines a rate of return, not a price. Also, CAPM only considers systematic risk, not total risk. Statement c. is incorrect because of reference to total risk and standard deviation. Answer d. is incorrect as it describes APT, not CAPM
Which of the following are fiscal policy actions that may be taken to stimulate the economy? Increase tax credits Buy government securities Decrease government spending Decrease rate paid on excess reserves
Taxation is a fiscal policy tool. Increasing tax credits essentially lowers tax liabilities. This is expected to have a positive impact on the economy. Statement C is incorrect as it will have the opposite expected effect. Statements B and D are monetary tools, not fiscal policy tools
A CFP® professional was recently arrested for DUI. He immediately informed the CFP® Board. His case is pending with the judicial system. He has an upcoming meeting with a client. What is the appropriate action?
The CFP® professional is not obligated to inform the CFP Board or the client unless the CFP® professional is arrested for a second DUI, or if the First was labeled a Felony. Code and Standards E.1.b
Which of the following assets is contributing the most to the market risk of the portfolio? Asset A: $10,000 FMV with 1.3 beta Asset B: $20,000 FMV with 0.7 beta Asset C: $15,000 FMV with 1.0 beta Asset D: $ 5,000 FMV with 2.0 beta
The beta of a portfolio is a weighted average of the betas that comprise the portfolio. Asset A's contribution to portfolio beta is .20 ×1.3 = .26 (10,000/50,000 = .2)Asset B's contribution to portfolio beta is .40 ×.7 =.28 (20,000/50,000 = .4)Asset C's contribution to portfolio beta is .30 ×1.0 = .30 (15,000/50,000 = .3)Asset D's contribution to portfolio beta is.10×2.0 =.20 (5,000/50,000 = .1)
Which items are deductible before AGI? Medical expenses. Real estate taxes. The employer portion of Social Security taxes for an S Corp owner. Capital losses.
The employer portion of social security taxes is deductible by the S corp and will then flow through to the owner. Capital losses are for AGI.
Levi Forester is trained as an oil and gas engineer. He is a self-employed consultant who provides seminar courses in oil and gas project management. His self-employment income is $120,000. He also owns an interest in a LLC that provides personal advice (gossip column) on love, money, and environmental matters through the internet. His two sisters, Marleen and Barbara, run the gossip column. Levi invested $100,000 in the gossip LLC and was issued a K-1 showing a loss of $24,000 for this year. Which of the following is correct regarding his current income tax situation? He can take the LLC loss against his Schedule C income. He can take a portion of the LLC loss against his Schedule C income because his AGI is between $100,000 and under $150,000. The LLC loss is suspended under the passive activity rules. The LLC loss is partially suspended under the at-risk rules and partially suspended under the passive activity rules.
The income from the LLC is passive income and therefore cannot be deducted without passive income. It is thus suspended under the passive activity rules.
Dana is an executive of STEEL, Inc. She earns $500,000 during the year and defers $13,000 into the SIMPLE. STEEL, Inc uses the maximum match for SIMPLE Plans. How much would the matching contribution be for Dana?
The matching contribution is 3 percent of an employee's compensation up to $13,000 for 2019. The covered compensation limit does not apply with the match for a SIMPLE.
Barron is the CFO of Bo, Inc. He earns $500,000 during the year and defers $13,000 into the Bo SIMPLE. Bo, Inc. utilizes a non-elective contribution for their plan. What is the contribution made on behalf of Barron for 2019?
The non-elective contribution equals 2 percent of compensation up to the covered compensation limit, which is $280,000 for 2019.
Your client has a personal auto policy with the following characteristics: $250 deductible: comprehensive $500 deductible: collision 300/500/300 split liability limits Your client causes a multi-car accident. The damages to the other automobiles will require them to be totaled. The estimate for damages is $326,000. Medical bills are still coming in, and so far totaling $156,000. A total of 13 cars were involved on an ice roadway, and there were many broken bones and surgeries that were needed. Which of the following statements is true? Your client's policy will pay a total of $800,000 for bodily injury as a result of the accident. Your client's policy will cover up to $300,000 for damage to all automobiles involved in the accident. The deductible will be $250. The medical payments to others will be $100,000 each for up to 3 injured parties.
The split limits in the policy are $300,000 per person, but not more than $500,000 in total for the accident, plus up to $300,000 of property damage. A is incorrect only $500,000 coverage for the entire accident. C is incorrect, the deductible will be $500. D is incorrect, the policy will pay $300,000 each for a total of $500,000.
Roger worked for Shark Hunters (SH) for the last 28 years. SH is a publicly traded company that sponsors a 401(k) plan with a company match. The company match is in the form of SH stock. Included in his account balance in the plan is $550,000 of SH stock in the 401(k) plan He decides to retire and take a full distribution including the SH stock, which he ended up selling later the same year for $500,000. The total value of the SH stock when it was first purchased in the account equals $150,000. What is the tax consequence of the distribution and sale of the stock?
This distribution qualifies for NUA treatment. The $150,000 is taxable as ordinary income because it is the original contribution of Employer Securities. It also establishes the basis for future sales of the stock. The sale of the stock is LTCG with proceeds of $500,000 and a basis of $150,000. Thus, a LTCG of $350,000.
Joe wants to retire in 20 years when he turns 70. Joe wants to have enough money to replace 75% of his current income less what he expects to receive from Social Security at the beginning of each year. His Social Security benefit is $20,000 per year in today's dollars at his normal age retirement of age 67. However, he will begin collecting Social Security benefits when he retires. Joe is conservative and wants to assume a 7% annual investment rate of return and assumes that inflation will be 3% per year. Based on his family history, Joe expects that he will live to be 95 years old. Joe currently earns $100,000 per year and he expects his raises to equal the inflation rate. He has accumulated $199,571 towards retirement. How much does he need to save every year to fulfill his retirement goals?
This is asking you to figure out 1) what his wage replacement is going to look like and needs to be inflated. Income is currently 100k so 75% of it is $75K. They're asking you to reduce his SS from the $75K. Need to adjust for taking it out at age 70. So instead of 20k it becomes 24.8k. The replacement we're looking for is $50,200 2) Inflate the $50K to how much it'll be at retirement - so 3% inflation for 20 years gets you $90K 3)must figure out the present value of the cash flow of 90K adjusted for inflation and market return. 4) that PV becomes FV and need to figure out how much PMT is when you start with the 199k and achieve 7% return.
Jeter is 56 years old and owns Short Stop Sandwiches, a very successful deli in NY City. He sponsors a 401(k) plan with a dollar-for-dollar match up to four percent. The NHCEs deferred three percent this year, while the HCEs deferred six percent. Should he be concerned? No. The plan meets the ADP test. No. The plan is a safe harbor plan. Yes. He can only fix the problem with a corrective distribution. Yes. He can fix the problem with a qualified non-elective contribution
This one is a bit tricky. He can do a correct distribution or fix it with a QNEC. C is wrong because it says only one option. The plan does not meet the ADP test. If the NHCEs deferred 3%, then the HCEs could only defer 5%. The plan is not a safe harbor plan, even though it provides a benefit equal to that required by a safe harbor plan. The plan is not stated to be a safe harbor plan, which requires the employer to either match 100% of the fist 3% contributed + 50% of the next 2% contributed, or provided a 3% nonelective contribution to all eligible employees. In a safe harbor plan, the employer contributions are 100% immediately vested (we don't know if they are 100% vested immediately unless the question tells us that or tells us it is a safe harbor plan). He could fix the ADP issue with either a corrective distribution from the HCEs, or with a QNEC or a QMC.
Bo was awarded 1,000 shares of restricted stock of Data Corp at a time when the stock price was $22. Assume Bo properly makes an 83(b) election on the date of the award. The stock vests 3 years later at a price of $42 and Bo retains the stock. What are Bo's tax consequences in the year the stock vests? Bo has W-2 income of $20,000. Bo has a long-term capital gain of $20,000. Bo has W-2 income of $22,000. Bo has no tax consequences at that time.
This question is about when is the taxation happening. When electing 83b, the income will be included in that year. So $22K will be recognizable at date of the award. When the stock vests 3 years later it doesn't matter and is not included at that time. If sold, there is gain that will be taxed.
According to the CFP Board's Practice Standards, which of the following is/are correct? If the scope of the engagement is limited to financial advice not requiring financial planning, no written agreement is required. The Practice Standards for Financial Planning do apply when the practitioner is not engaged in financial planning.
When financial advice that does not require financial planning is given, the agreement can be made orally and is not required to be in writing. The Privacy policy must be given in writing. If a financial Planner is engaged in Financial advice that does not require financial planning, the client is owed a fiduciary duty, but the Practice Standards for Financial Planning would not need to be followed.
Your client, Carlos, wants to create a testamentary trust for his two children, Ramon and Ramona. Carlos wants the trustee to be able to distribute all income annually or to accumulate income at the trustee's discretion. Which one of the following types of trusts would meet Carlos's needs? A simple trust. A revocable trust. A complex revocable trust. A complex irrevocable trust.
a complex irrevocable trust - The trust is a testamentary trust therefore, it is irrevocable. It must also be complex to permit the trustee discretion over distribution and accumulations. A simple trust must pay out all income annually.
Which of the following is/are correct statements regarding a client's risk tolerance? The financial planner should understand that a client's decision making biases may influence their risk tolerance. The financial planner should understand that most clients overstate their risk tolerance.
both are correct
A company needs to raise money for a research project through a private placement, based on Regulation D. How many accredited investors may they have?
e number of accredited investors is not limited. Accredited investors include natural personal with a net worth over $1M (excluding primary residence) or with income over $200,000 ($300,000 joint with spouse). Up to 35 non-accredited investors can also invest.
According to the CFP Board's Practice Standards, which of the following is/are correct? The financial planning practitioner and the client mutually consider sufficient and relevant alternatives to the client's current course of action. If the practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, the planner should either restrict the scope of or terminate the engagement.
only FP is charged with considering relevant alternatives. The second part is true.
Starfish Capital would like to offer their employees some additional benefits. The first step is for them to identify who their key employees are. Which of the following employees is a key employee for 2019? Doug, an officer of the company, who earns $145,000 per year and owns 3% of the company. Dan who earns $49,000 per year and owns 4% of the company. Diane, a sales director who earns $295,000. Dirk, a 10% owner of the company who earns $19,000 per year as a mail room attendant.
only dirk - Only Dirk is a key employee. A key employee is anyone who is any one or more of the following (1) a greater than five percent owner, or (2) a greater than one percent owner with compensation in excess of $150,000, or (3) an officer with compensation in excess of $180,000 (2019).
Florida State University establishes a 457 plan for eligible employees. Which of the following is correct? The funds in the plan are subject to the claims of FSU general creditors. The funds in the plan are subject to the claims of employee creditors. Employees who are over the age of 50 can contribute up to $24,500 in 2018 Employee funds in the 457 plan cannot be self directed.
public plans are in a trust and not subject to claims of general creditors. Florida State University establishes a 457 plan for eligible employees. Which of the following is correct? The funds in the plan are subject to the claims of FSU general creditors. The funds in the plan are subject to the claims of employee creditors. Employees who are over the age of 50 can contribute up to $24,500 in 2018 Employee funds in the 457 plan cannot be self directed.
Bob and Sandy are happily married. Bob, who is 58 year old, retired 5 years ago and plays golf every day. Sandy, who is eight years younger, works as a waitress and earns $50,000 per year. She actually defers $3,000 in the restaurant's 401(k) plan. They also receive $3,000 in qualified dividends each year. Bob has $45,000 in his Roth IRA, which he first contributed to in 2002. After discussing with Sandy, Bob decides to take out all $45,000 to pay for a golf trip to Pebble Beach with three of his best buds. Assume that he contributed $10,000, converted $20,000 last year and the rest of the account is from earnings. Also assume that he and Sandy are in the 22 percent marginal income tax bracket. How much tax and penalty is he subject to for this distribution?
the earnings are taxed and penalized. The converted amount that hasn't met the 5 years is not taxed but is penalized at 10%. The distribution is not a qualified distribution since he does not meet one of the four permissible distributions - over age 59 ½, death, disability or first time home purchase. Therefore, the distribution must be separated into contributions, conversions and earnings.
Erin, a 31-year-old single mom with a gross income of $72,000 per year, has asked you to assist her with some financial planning. She is concerned about the investment allocation of her 401(k), saving for college for her twin sons (age 3), reducing taxes (she is in the 25% tax bracket, combined federal, state, and local), and disability income protection (she has no disability coverage through her employer). She currently has savings of $10,000 in a money market account and $15,000 in small cap stocks. Which of the following is the most important recommendation for her? To invest her 401(k) in low-expense index funds with an appropriate strategic allocation. To immediately begin saving for college in a 529 plan for each of the kids to gain tax advantages and allow as much time for growth as possible. To purchase additional life insurance to provide for the children if something should happen to her. To purchase a reasonably priced disability insurance policy with an elimination period no longer than her emergency funds will last.
this is a good reminder to not make up a narrative in your head. Since Erin is a single mom, the family is completely dependent on her income, making disability income protection the most important of the recommendations listed. Answer choice C is incorrect because it is not one of the objectives listed (students should be careful not to read into the question).
