CRPC Practice Exam 1

Mary Goodwin's financial situation is as follows: Cash/cash equivalents$15,000S hort-term debts$8,000 Long-term debts$133,000 Tax expense$7,000 Auto note payments$4,000 Invested assets$60,000 Use assets$188,000 What is her net worth?

$122,000 Assets = $263,000; liabilities = $141,000, so net worth is $122,000. Taxes and auto note payments appear on the cash flow statement.

If an investor wants to accumulate $250,000 over the next 12 years, can invest $8,000 at the end of each year, and expects to earn an 11% compound return over the 12 years, what lump sum must she deposit today in the investment to meet her goal?

$19,521 The correct calculator inputs are $8,000, +/-, [PMT]; 11 [I/YR] 12 [N]; $250,000 [FV]; solve for PV = $19,521.

For the year ending December 31, XXXX, Bill Greer has the following financial information: Salaries$70,000Auto payments$5,000Insurance$3,800Food$8,000Credit card balance$10,000Dividends$1,100Utilities$3,500Mortgage payments$14,000Taxes$13,000Clothing$9,000Interest income$2,100Checking account$4,000Vacations$8,400Donations$5,800 What is the cash flow surplus or (deficit) for Bill?

$2,700 Income = $70,000 + $1,100 + $2,100 = $73,200. Expenses = $5,000 + $3,800 + $8,000 + $3,500 + $14,000 + $13,000 + $9,000 + $8,400 + $5,800 = $70,500, so there is a surplus of $2,700. The checking account and credit card balances would be on the statement of financial position.

In 2014 Jim, a single taxpayer, purchased a new residence that he used as his principal residence. Early in 2020 he sold the residence for a realized gain of $300,000. What is the maximum amount of gain that Jim may exclude under Section 121?

$250,000 A single taxpayer may exclude up to $250,000. The remaining $50,000 of gain must be recognized (taxed).

If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by their retirement date in 25 years (rather than an amount that grows with inflation each year), what level annual end-of-year savings amount will they need to deposit each year, assuming their savings earn 7% annually?

$31,621 Set calculator "End" and "1 P/Yr" Inputs: FV = 2000000, i = 7, N = 25, PV = 0, then Pmt = $31,621

Bill and Lisa Hahn have determined that they will need a monthly income of $6,000 during retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per month at the beginning of each month. Over the 12 remaining years of their preretirement period, they expect to generate an average annual after-tax investment return of 8%; during their 25-year retirement period, they want to assume a 6% annual after-tax investment return compounded monthly. What is the lump sum needed at the beginning of retirement to fund this income stream?

$389,957 The monthly retirement income need is not specified as "today's dollars," and no inflation rate specified; therefore, it must be assumed that the $2,500 net monthly income need represents retirement dollars, and the retirement period income stream is level. To calculate the lump sum needed at the beginning of retirement, discount the stream of monthly income payments at the investment return rate: 10BII+ PVAD calculation: Set calculator on BEG and 12 periods per year, then input the following: 2,500 [PMT] 25 [SHIFT] [N] 6 [I/YR] 0 [FV] Solve for PV = $389,957

Chris and Eve Bronson have analyzed their current living expenses and estimated their retirement income need, net of expected Social Security benefits, to be $90,000 in today's dollars. They are confident that they can earn a 7% after-tax return on their investments, and they expect inflation to average 4% over the long term. Determine the lump sum amount the Bronsons will need at the beginning of retirement to fund their retirement income needs, using the worksheet below. (1) Adjust income deficit for inflation over the preretirement period:$ 90,000present value of retirement income deficit25number of periods until retirement4%% inflation rateFuture value of income deficit in first retirement year$239,925(2) Determine retirement fund needed to meet income deficit:$239,925payment (future value of income deficit in first retirement year)30number of periods in retirement The lump sum needed at the beginning of the Bronsons' retirement period is

$4,911,256 This PVAD calculation requires that the calculator be set for beginning-of-period payments. First, the annual retirement income deficit is expressed in retirement-year-one dollars, resulting in a $239,925 income deficit in the first retirement year. This income deficit grows with inflation over the 30-year retirement period, and the retirement fund earns a 7% return. The calculator inputs are $239,925, [PMT]; 30, [N]; 2.8846, [I/YR]. Solve for [PV], to determine the retirement fund that will generate this income stream. If you enter 2.8846 directly into the calculator, you will get $4,911,265. If you use the equation to compute I/YR, and then hit the I/YR button you will get $4,911,256. Either way the answer is clear. The difference is that when you calculate the I/YR, the calculator takes the interest rate out to nine decimal places. If you enter in the 2.8846, then the calculator only takes the interest rate to four decimal places.

The Simpsons need to save an additional $300,000 (in retirement year 1 dollars) to build a sufficient retirement fund to support their targeted retirement lifestyle. They expect to earn a 7% after-tax return on their retirement savings and want to assume a 5% long-term inflation rate. Their preference is to allocate a level annual savings amount to build this fund. What level annual end-of-year savings amount will the Simpsons need to deposit at the end of each year during their 20-year preretirement period?

$7,318 In the level payment calculation, inflation is irrelevant. Calculator inputs are: $300,000 [FV], 20 [N], 7 [I/YR]; solve for [PMT] (with calculator set for end-of-year payments) = $7,318. Notice that there was not a need to use the inflation rate because the payment was level and not a serial payment. Also, the goal was not stated in terms of "today's dollars" or "inflation-adjusted dollars."

Charles will have $100,000 in his IRA on December 31, 2023. He would like to determine the amount that must be withdrawn under the RMD rules set out by the SECURE Act. He will turn 72 in 2024. What will his RMD be for 2024? (The Uniform Table factor is 25.6 at age 72.)

-- $3,650 $100,000 / 25.6 = $3,906.25, which rounds down to $3,906.

Over a period of 10 years, Mark contributed a total of $20,000 to a nondeductible IRA. The current value of Mark's IRA is $40,000, and Mark, who is now age 45, has decided to use all of his IRA assets for the down payment on a second home. Assuming Mark's marginal tax bracket is 35%, how much does he owe in taxes and penalties?

-- $9,000 Mark's effective tax rate is 45%; i.e., 35% plus the 10% early withdrawal penalty. 45% $20,000 tax-deferred earnings = $9,000. The $20,000 basis in the IRA is not subject to income tax or the early withdrawal penalty.

Which one of the following is a potential problem with a golden parachute?

-- Any excess payment would be nondeductible by the payor and subject to an excise tax by the employee. If compensation falls into the golden parachute category, the employer will lose the deduction on any excess parachute payments and the employee will be charged a nondeductible 20% excise tax on any excess parachute payments.

Which one of the following statements regarding different forms of property co-ownership is correct? A) JTWROS, TBE, and CP are all forms of co-ownership that do not require a probate proceeding when one tenant dies. B) Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and community property (CP) are all forms of co-ownership that can be used by a husband and wife. C) Payable on death (P.O.D.) and transfer on death (T.O.D.) designations are completed gifts that give the named person the right to handle the account while the original owner is alive. D) JTWROS, TBE, and tenancy in common are all forms of co-ownership that require the consent of other co-owners before an owner can sell his or her interest in the asset.

-- B JTWROS can be used by anyone, including spouses; only spouses can use TBE and CP. CP requires the asset to go through probate. TBE requires the co-owner spouse to consent before the other spouse can sell his or her interest. This is unique to holding an asset as TBE. For example, a couple holding an asset as TBE is a good idea if one spouse has an addiction problem (gambling, drugs, etc.). T.O.D. and P.O.D. accounts are not completed gifts. They do not give the person named in the T.O.D. or P.O.D. any rights in the asset until the current owner dies.

All of the following are ways that a person can voluntarily transfer estate assets to another person or entity at death except: A) by will substitute. B) by gift. C) transfer on death (T.O.D.). D) by probate.

-- B Probate and will substitute are ways that a person can voluntarily transfer estate assets to another person or entity at death. Gifting is one of the two ways that a person can voluntarily transfer estate assets to another person or entity during life, not at death. T.O.D. passes the brokerage account to the named person when the owner of the account dies. P.O.D. (payable on death) transfers a bank account in the same way.

Harry, who is 34 years old, contributed $2,000 to a Roth IRA six years ago. By this year, the investments in his account had grown to $3,785. Finding himself in a financial bind, Harry is now compelled to withdraw $2,000 from this Roth IRA. What is the tax and penalty status of this withdrawal?

-- Harry does not have to pay any tax or penalty on the $2,000 distribution, even though he is only 34. All Roth IRA contributions are made with after-tax funds, and contributions are considered to be withdrawn first, tax-free, then earnings. Also, the IRS rules allow the aggregation of all Roth IRAs for this calculation. Penalties would apply only to the gains the account experienced or withdrawals of converted amounts within five years of the conversion.

Charlie contributed $2,000 to Roth IRA 1 last year, when he was age 24, and $2,000 to Roth IRA 2 this year. Two years from now, Roth IRA 1 will have a balance of $2,650, and Roth IRA 2 will have a balance of $2,590, and Charlie will close Roth IRA 1, receiving the balance of $2,650. Which one of the following statements best describes his tax and penalty status for that year?

-- He will not pay taxes or a penalty. The distribution is not qualified because Charlie is under age 59½, not disabled, not dead, or not making a first-time home purchase and he is withdrawing the money before the waiting period of five tax years. Withdrawals within five years are not prohibited, but taxation may occur and penalties may apply in some cases. None of this withdrawal, however, is included in Charlie's taxable income because the $2,650 sum is less than the aggregate total of his contributions ($4,000). Also, no penalty applies because the withdrawal is accounted for as coming from his contributions.

Which of the following statements accurately describe basic provisions of Medicare Part B? Coverage includes benefits for physicians' services. Individuals who are eligible for Part A are automatically eligible for Part B. Coverage includes benefits for inpatient hospital services. Participants pay a monthly premium.

-- I, II, and IV Medicare Part B includes coverage for physicians' services; Part A covers hospital charges. Part A is provided to eligible individuals at no charge, but participants must pay a premium for Part B. Individuals who are eligible for Part A are automatically eligible for Part B, and receive it if they pay the related premium.

Which of the following are exempt from the 10% penalty on qualified plan distributions made before age 59½? I. distributions made to an employee because of "immediate and heavy" financial need II. in-service distributions made to an employee age 55 or older III. distributions made to a beneficiary after the participant's death IV. substantially equal periodic payments made to a participant following separation from service, based on the participant's remaining life expectancy

-- III & V The 10% premature distribution penalty does not apply to distributions on account of death or annuitized payments based on an individual's remaining life expectancy. Options I and II are incorrect. The law does not recognize heavy and immediate financial need as an exception to the penalty. The age 55 exception does not apply to in-service distributions; i.e., the employee must have separated from the service of the employer.

Susan has reached full retirement age (FRA). She is trying to decide between starting Social Security benefits of $1,000 per month now, or delaying receipt for three years and using her savings to provide current income. By delaying three years her benefit would increase to $1,240 per month. Ignoring the time value of money and cost-of-living adjustments, use the break-even calculation to determine how much longer Susan will need to live in order for delaying to "pay off."

-- She should delay only if she expects to live beyond the next 15½ years or so. By delaying three years, Susan is forfeiting $1,000 36 payments or $36,000 of benefits. She would then gain $240 per month going forward: $36,000/$240 = 150 months, or 12.5 years, from three years from now. If she thinks she is going to live beyond 15.5 years from now, it would pay to delay benefits by three years.

This year, your 63-year-old client had $17,025 of earned income and $30,000 of investment income. He was also drawing Social Security benefits. Which one of the following correctly describes the impact on his Social Security benefits?

-- There is no reduction to his benefits. The client's earnings (earned income) are below the allowable limit for the current year ($18,240 for 2020). Remember that according to the work penalty rule, only earned income is counted toward the "allowable limit."

Richard, age 45, and his wife Betty, age 44, plan to contribute a total of $12,000 to their IRAs for 2020. They both work outside the home, and they file a joint income tax return. Richard is a teacher at the local high school and participates in a 403(b) plan. Betty's employer does not provide a retirement plan. They expect that their adjusted gross income for the year will be $130,000. What amount, if any, can they deduct for their IRA contributions?

--$6,000 An individual is not denied a deduction for his or her IRA contribution simply because of the other spouse's active participation, unless the couple's combined AGI exceeds $196,000 (phasing out to $206,000 in 2020). Based on their AGI, Betty will be able to deduct a contribution of up to $6,000 to an IRA. Richard cannot deduct any of his IRA contribution because their AGI is beyond the 2020 phaseout range for active participants of $104,000-$124,000 for 2020. Because their combined AGI is too high for Richard to make a deductible IRA contribution, he should consider contributing to a Roth IRA. Their AGI is well below the start of the phaseout range for married people filing jointly who contribute to a Roth IRA.

Norman and Brenda Walker are married taxpayers filing jointly. They are both 44 years old. Norman earned $132 this year, and Brenda earned $100,000. Brenda is an active participant in the qualified plan offered by her employer, and she contributed $1,500 to her IRA for this tax year. How much can be contributed to a spousal IRA and deducted for Norman for 2020?

--$6,000 The maximum deductible contribution to a spousal IRA for Norman is $6,000. The deductible amount phases out at AGI of $196,000-$206,000 (for 2020) for Norman, who is the nonactive participant spouse.

Sam, age 62, begins receiving his Social Security income. His PIA is $1,500 per month. Because he has filed at age 62, his payment will be reduced by 25% to $1,125. His wife Linda, age 67, would like to begin spousal benefits. Her monthly income would be:

--$750.00. Because Linda has attained FRA, she would be eligible for 50% of Sam's full PIA, or $750.00.

The continuing evolution of investment advice and the regulation surrounding it will most likely lead to: A)increased client expectations of advisers and downward pressure on fees. B)minimal impact on client expectations of advisers or on any fees being charged. C)less and less government involvement with the financial services industry. D)decreased client expectations of advisers and fees will stay about the same.

--A The bar is being raised because the fiduciary standard is a higher standard than the suitability standard. This will increase client expectations of advisers and put downward pressure on fees, especially high fee products that have better, lower fee alternatives available. There is very little chance the government will be less involved over time.

All of the following are reasons reverse mortgages may become more common in the future except: A)reverse mortgage fees must be rolled into the loan. B)reverse mortgages are a potential tool for combating sequence of return risk. C)many older Americans have large amounts of equity in their homes but lack liquid assets capable of sustaining their lifestyle. D)government regulatory changes in 2013 standardized Home Equity Conversion Mortgage (HECM) rules to a great extent.

--A Fees may be rolled into the reverse mortgage, but that is not required. Until the late 1990s American tax law had strong incentives to purchase ever more expensive homes. This effect lingers on today. Next, people have to live somewhere. Buying a home is a forced savings plan as the mortgage is repaid each month. In addition, increases in home prices over time help accrue wealth. Reverse mortgages have the potential to fight sequence of return risk in several ways. First, reverse mortgage loans can pay off the original mortgage and thus eliminate the need for the original mortgage amount each month. Lowering income needs reduces the monthly need. Reducing the monthly need takes pressure off the portfolio. Also, money from a reverse mortgage is tax free (like all other loans received). Additionally, during a market downturn, monthly payments from a reverse mortgage can be substituted for portfolio withdrawals. In fact, the monthly reverse mortgage amount can be smaller than the normal withdrawal from a non-Roth retirement plan because the amount of income tax required with the retirement plan withdrawal is not needed when the monthly income is coming from a reverse mortgage.

To understand the long-term care (LTC) market, a financial planner must be familiar with the wide array of financial products designed to serve the unique needs of this market. As such, which one of the following statements is correct? A) Payments from a qualified LTC policy paying up to an annually adjusted per-day limit for charges from an LTC facility will be income tax free. B) Policies issued today generally require an individual to be eligible for Medicare nursing home benefits prior to receiving any insurance policy benefits. C) Because of medical screening, healthy people without a preexisting condition who want to purchase LTC now but may potentially suffer from Alzheimer's disease in the future cannot obtain a qualified LTC policy. D) Practically all current long-term care policies provide for all levels of care-skilled, intermediate, custodial, and/or home care-if the patient needs assistance with two of the six activities of daily living.

--A Payments from a qualified LTC policy are income tax-free up to the per-day limit for policies that pay per diem benefits. The per-day cap on tax-free LTC benefits cannot exceed $390 (for 2020). While many LTC policies cover all levels of care, many provide only for home care or exclude any care provided outside of a long-term care facility. Policies sold in states that have adopted the National Association of Insurance Commissioners' Long-Term Care Insurance Model Regulation must cover Alzheimer's. Although medical screening might prevent a person with Alzheimer's disease from purchasing an LTC policy, it cannot prevent a healthy person from purchasing an LTC policy in states that have adopted the model regulation (i.e., a qualified policy). Medicare is not much help in financing long-term care; it covers relatively intense care during a brief period of convalescence that follows a covered hospital stay.

The "required beginning date" (RBD) for IRA distributions is which one of the following?

--April 1 of the year following the year in which age 72 was attained. By definition, under the SECURE Act the required beginning date for IRA distributions is April 1 of the year following the year in which the participant or IRA owner turns age 72.

Jennifer recently separated from service with Acme Inc. at age 52, and rolled her qualified plan lump sum into a new IRA. She had been a plan participant for 12 years. This year, she began working for a new employer that provides a profit sharing plan for employees. Jennifer will be eligible to participate in her new employer's profit sharing plan in June of next year. Which one of the following statements describes an option that will be to Jennifer's benefit? A) Jennifer should leave the rollover funds in the IRA for three more years. At age 55, she can distribute the account and benefit from capital gains treatment. B) Jennifer should use the direct rollover to roll the entire IRA over into her new employer's qualified profit sharing plan in accordance with tax requirements and plan provisions if the plan allows her to do so and allows for loans. C) Jennifer should leave the rollover funds in the rollover IRA until she is age 65, then she can distribute the IRA and benefit from lump sum forward averaging treatment. D) Jennifer should leave the rollover funds in the IRA for three more years. At age 55, she can distribute the account and escape the 10% early withdrawal penalty.

--B If the qualified plan allows for loans, rolling the IRA into the qualified plan would give her a resource to meet a financial need without incurring income tax or a tax penalty. Forward-averaging treatment is not available on any distribution from an IRA, but that point is moot because Jennifer was not born before January 1, 1936. Jennifer would not qualify for capital gains treatment since all distributions from IRAs and qualified plans are taxed as ordinary income. Taking a current distribution from the IRA would result in a current tax liability.

Which one of the following types of distributions are eligible for rollover treatment? A) Distributions that are made to comply with the minimum distribution requirements are eligible for rollover treatment. B) A lump sum payment from a profit sharing plan payable upon separation from service is eligible for rollover treatment. C) The nontaxable portion of any IRA distribution is eligible for rollover treatment. D) Distributions that are part of a series of substantially equal periodic payments are eligible for rollover treatment.

--B A lump sum payment from a profit sharing plan payable upon separation from service is eligible for rollover treatment. The following distributions are not eligible for rollover treatment: 1. Distributions that are part of a series of substantially equal periodic payments are not eligible for rollover treatment. 2. Distributions that are made to comply with the minimum distribution requirements are not eligible for rollover treatment. 3. The nontaxable portion of any IRA distribution is not eligible for rollover treatment. With an IRA, there is no one but the owner to validate that the contributions were after-tax. With an employer retirement plan, the administrator of the plan validates that the contributions were actually after tax.

Which one of the following actions would probably not constitute the unauthorized practice of law by a non-attorney financial planner? A) representing another person in court B) telling a client that property titled in joint tenancy with right of survivorship will pass outside of probate at his or her death, but that community property will be included in the deceased's probate estate C) drafting a power of attorney for a client D) advising a client to conduct business as a partnership rather than a corporation

--B Telling a client that property titled in joint tenancy with right of survivorship will pass outside of probate at his or her death merely recognizes a well-established fact and does not constitute the unauthorized practice of law. Because a power of attorney can be used to affect the client's property, only a licensed attorney should draft it. The form of business entity can greatly affect a client's legal rights and obligations; therefore, an attorney should make this recommendation. Many people think community property passes to the surviving spouse automatically. It does not. Community property goes through probate. If there is no will, community property passes according to state law.

Which one of the following is not a characteristic of a rollover? A) A rollover generally must be completed within 60 days of the distribution. B) If a qualified plan distribution is made due to the participant's death, the surviving spouse may roll the distribution into another qualified plan, TSA, SEP, IRA, or governmental 457 plan that accounts for such rollovers separately. C) Amounts rolled over from a qualified plan to an IRA and subsequently distributed to the participant will be taxed according to the rules that apply to the original qualified plan. D) An eligible qualified plan distribution may be rolled over to another qualified plan, TSA, SEP, IRA, or governmental 457 plan that accounts for such rollovers separately.

--C Amounts distributed from an IRA are taxed according to the rules that apply to IRAs, regardless of the type of plan from which the funds may have been rolled over.

Which one of the following statements regarding Henry, who recently married for the first time, is correct? A) Items received by a gift or inheritance during the marriage are considered community property. B) In a community property state, Henry's spouse is deemed to have a vested 50% interest in all of the property Henry owned at the time of the marriage. C) In a community property state, any property Henry owns at death will go to his spouse by right of survivorship. D) In a community property state, Henry's earnings from his job subsequent to the date of his marriage will be considered community property.

--D Only property acquired after marriage is considered community property unless separate property acquired before marriage is later commingled with community property. Community property does not have a right of survivorship feature. Also, spouses can own property in their sole names in a community property state. Items received during the marriage by gift or inheritance are separate property.

Many retirees have difficulty dealing with Bengen's original safe initial withdrawal rate because

--It does not represent a lot of income. The biggest problem most people have with a 4% initial withdrawal rate is that it doesn't normally represent a lot of income. For example, it takes $300,000 of capital to produce $1,000/month.

The vested accrued benefit in George's tax-sheltered annuity is $87,500. He has never taken a loan from the plan but is interested in building an addition to his home. Which of the following statements correctly describes George's option?

--The amount of the loan would be limited to $43,750 and the term would be limited to five years. George wants to remodel, not purchase, his home. The amount of the loan cannot exceed 50% of the vested amount in George's account, and the term of the loan would be limited to five years.

When using the "bucket approach" to withdrawals from retirement savings, the "first" bucket should be comprised of

--short-term, liquid investments. In the "three bucket approach," a portfolio is segmented based on when the money will be needed. The first bucket is comprised of short-term, low-yielding, liquid investments that can be used to cover near term income needs (1-2 years' worth of living expenses).

All of the following assets would be included in a decedent's gross estate except

--the proceeds from a life insurance policy on the decedent that was always owned by the decedent's spouse, with the spouse as the named beneficiary. Because the decedent never owned this policy, and his estate is not the beneficiary, these proceeds are not included in the decedent's gross estate. The decedent's retained right to income in option c. causes inclusion. The decedent owned an interest in the residence at death, and therefore his interest must be included in his gross estate. If the decedent assigned incidents of ownership in this policy within three years of death, the proceeds must be included in the decedent's gross estate.

TSA

A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities. It's similar to a 401(k) plan maintained by a for-profit entity. ... The deferred salary is generally not subject to federal or state income tax until it's distributed.

Designated beneficiary

A designated beneficiary is named on a life insurance policy or financial account as the recipient of those assets in the event of the account holder's death. A designated beneficiary is a living person. Non-person entities are not considered to be designated beneficiaries, even if named on a retirement account.

What is the price of a bond with a 7% coupon, a $1,000 par value, and a maturity of 20 years if the market interest rate for similar bonds is 6%?

A) $1,074.39 B) $893.23 C) $1,000.00 D) $1,115.57 --D Set the calculator for 2 P/YR and use the END mode. The inputs then are as follows: 1,000 [FV], 35 [PMT], 20 [SHIFT] [N] = 40, 6 [I/YR], and solve for PV = $1,115.57. Note: The $35 payment is the semiannual payment of the bond. This is computed by taking the 7% coupon rate the par value of $1,000 = $70 and divide that by 2 to get the semiannual interest paid, in this case $35. Also, the yield to maturity (YTM) is less than the coupon rate, thus the bond must be selling at a premium.

Which one of the following is correct regarding most types of tax exempt interest and the taxation of Social Security benefits?

A) 85% of the tax-exempt interest is included in the computation of the taxation of Social Security benefits. B) All of the tax-exempt interest is included in the computation of the taxation of Social Security benefits. C) None of the tax-exempt interest is included in the computation of the taxation of Social Security benefits. D) 50% of the tax-exempt interest is included in the computation of the taxation of Social Security benefits. --B All tax-exempt interest income is included in computing the portion of Social Security benefits that are subject to taxation. However, tax-free Roth distributions are not counted when determining provisional income. A maximum of 85% of the Social Security benefits are subject to taxation.

Which one of the following statements correctly describes a basic provision of an IRA contribution in 2020?

A) A person participating in a Section 457 plan will be considered an active participant. B) IRA contributions made above the limit are subject to a nondeductible excise tax of 10%. C) A nonworking, 45-year-old divorced person who receives taxable alimony may contribute to an IRA the lesser of $6,000 or 100% of any taxable alimony received. D) Someone past age 72 is not allowed to contribute to a traditional IRA under any circumstances. --C For purposes of IRA eligibility, an individual must have "compensation" (earned income or taxable alimony). Thus, a 45-year-old divorced person who receives taxable alimony (alimony from a divorce settled before 2019) and does not work may contribute the lesser of $6,000 or 100% of the alimony received. Any person receiving an addition to a qualified retirement plan (employee contribution, employer contribution, or forfeitures) other than interest and earnings will be deemed an active participant. Section 457 plans follow many of the same rules as qualified plans, but participation in one will not result in the employee being considered an active participant. The SECURE Act deleted the former age restriction on traditional IRAs. Of course, the older person must still have earned income.

Assume the following asset classes have the correlations to long-term government bonds shown below: Treasury bills:.12 Gold:-.25 Large stocks:.22 Small stocks:.17 Which one of the following correctly states the impact of diversification on long-term government bonds?

A) Gold provides more diversification than large stocks. B) Small stocks provide more diversification than Treasury bills. C) Treasury bills provide more diversification than gold. D) Large stocks provide more diversification than small stocks. --A The asset with the lowest correlation provides the most diversification. Therefore, gold provides more diversification than any of the other assets.

Harry, a single professor who is age 36, started his Roth IRA three years ago, contributing $5,000 for his first year. He has since made a contribution of $5,500 in Year 2 and also in Year 3. He converted a traditional IRA of $17,000 to the Roth IRA last year. His total contributions are $16,000 plus the $17,000 conversion, and the account is now worth $36,497. Harry would like to make a complete withdrawal so that he can buy a new car. He wants to know what his options are and what the tax consequences would be. Which one of the following statements would be the correct information for Harry?

A) If Harry's Roth IRA meets the five-year holding period, the distribution will be a qualified distribution. B) Since Harry's Roth IRA has not met the five-year holding period, any withdrawal would be subject to taxation and the 10% penalty. C) If a withdrawal of converted IRA funds is made from the Roth account before five years has elapsed, such a withdrawal may be subject to the 10% penalty. D) Contribution amounts always come out of a Roth IRA account first, and then conversion amounts, if any. Since taxes have already been paid on these amounts, there are no taxes-either income taxes or penalty taxes-even if the distribution is not qualified. Thus, the entire distribution will be tax- and penalty-free. --C Contribution amounts always come out of a Roth IRA account first, and then conversion amounts, if any. Because taxes have already been paid on these amounts, there are no income taxes. In this case, Harry can withdraw up to $33,000 income-tax-free. If he withdrew all $36,497 he would only owe income taxes on $3,497. However, if a withdrawal of converted IRA funds is made from the Roth account before five years has elapsed, such a withdrawal would be subject to the 10% penalty unless it meets one of the exceptions. Thus, he would be subject to the 10% early withdrawal penalty on the $17,000 from last year's conversion. If the Roth IRA earnings are withdrawn and the distribution is not "qualified," the earnings will be subject to income taxation and the 10% penalty unless it satisfies an exception. If he withdrew the entire amount, he would owe income tax on $3,497 and the 10% early withdrawal penalty on $20,497.

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) If the spouse of the worker has attained FRA and is entitled to benefits on their earning record, the benefit is the lesser of 100% of the spouse's own PIA or 50% of the worker's PIA. B) If the spouse is at or above his or her full retirement age when commencing Social Security benefits, the spouse will receive at least 50% of the worker's PIA. C) A 63-year-old spouse of the retired worker will receive at least 50% of the worker's PIA. D) The worker will receive 80% of his or her primary insurance amount (PIA). --B The spouse who starts receiving benefits at his or her Social Security full retirement age will receive 50% of the worker's PIA unless the spouse's Social Security benefit is higher based on his or her own earnings. (Note: The FRA began increasing for those workers who reached age 62 in the year 2000.) At full retirement age the worker will receive 100% of PIA. The 50% of PIA is reduced for each month the spouse is under full retirement age when benefits begin. A spouse who is at FRA and entitled to benefits on their own working record would receive the higher of 100% of their own PIA or 50% of the spouse's PIA.

Dan, age 41, has been contributing $2,000 annually to his IRA for seven years; his contributions have been fully deductible. The most recent year-end account value was $18,100. He also has accumulated $16,800 in his profit sharing plan account at work; the plan permits loans. This year, Dan needs approximately $5,000 to replace the 15-year-old shingles on the roof of his home and is considering either withdrawing this amount from his IRA or borrowing it from his profit sharing plan account. Which one of the following best describes the potential tax liability from these two options?

A) Neither option results in any tax liability, as long as the withdrawal or the loan complies with qualified plan requirements. B) Borrowing the funds from his profit sharing plan will result in a tax liability. Dan will be subject to ordinary income tax and an early withdrawal penalty on the entire loan amount. C) Both options will result only in ordinary income taxation on the $5,000. D) Withdrawing the funds from his IRA will result in a tax liability. Dan will be subject to ordinary income tax and an early withdrawal penalty on the $5,000 withdrawal amount. --D The $5,000 IRA withdrawal will be subject to ordinary income tax and to the 10% early withdrawal penalty. Plan loans that meet all legal requirements are not subject to income tax at the time of the loan. If the loan is paid off on schedule there is no income tax or early withdrawal penalty.

If a security has an average return of 14.2% and a standard deviation of 8.4, what can be said about the security?

A) The security's returns can be expected to be between 8.4% and 14.2% approximately 95% of the time. B) The security's annual volatility can be expected to be within a range approximately 8.4% above and 8.4% below the current fair market value. C) The security's returns can be expected to be between 5.8% and 22.6% approximately 68% of the time. D)The security's returns can be expected to never be negative. --C This security can be expected to have a return that does not range beyond one standard deviation on either side of its average return approximately 68% of the time. The standard deviation is subtracted from and added to the average return and there is no guarantee that an investor will never have a negative return. Volatility is measured by beta.

Which one of the following U.S. citizens is currently eligible for Medicare Part A coverage at no cost?

A) an unmarried heiress who has always lived on trust fund money, has never had earned income, and just turned 65 B) a federal government employee, hired in 1989 and age 64 C) a self-employed truck driver, age 66 D) a professional independent corporate director, age 57 -- C

Assume a client and investment professional have worked together for several years. Recently, the client's personal and financial circumstances have changed. According to the course materials, what is the next asset management step that the investment professional should take?

A) analyze information B) gather data C) make and implement recommendations D) monitor performance --B When the client's circumstances change, the asset management process goes back to the data gathering step in the process.

Your client has established a balanced portfolio with various amounts allocated to different asset classes, and periodically she rebalances the portfolio to keep the same approximate percentages in the different asset classes. Her approach is:

A) dynamic. B) tactical. C) strategic. D)core/satellite. --C This is a correct example of a strategic approach. Tactical is choosing various sectors that you believe will do best, and changing as you believe is necessary. The dynamic approach is to change asset allocation amounts as the market changes, typically used by institutional investors. Core/satellite is a combination of strategic and tactical.

Investors who want to bear the least amount of risk should acquire stocks with beta coefficients:

A) greater than 1.5. B) less than 0.5. C) greater than 1.0. D) less than 1.0. --B When seeking investments that have the least amount of risk, the lowest beta should be selected.

Unsystematic risk

A) is increased through diversification. B) is reduced when markets fluctuate less. C) is affected by the nature of how a firm finances its operations. D) increases during periods of volatile interest rates. --C Financial risk is one of the types of unsystematic risk. Diversification decreases unsystematic risk. Market fluctuations affect market risk, a type of systematic risk. Volatile interest rates affect interest rate risk, which is a type of systematic risk.

A springing durable power of attorney:

A) is usually created in a person's revocable trust. B) gives the attorney-in-fact authority only when the principal becomes incompetent. C) remains effective after the principal's death. D) remains effective after the principal becomes incapacitated. --B The very purpose of any durable power of attorney is to give the attorney-in-fact authority to act after the principal becomes incapacitated. However, such authority does not survive the principal's death. Such authority is created in an independent document (not part of a living will or a living trust), and is effective immediately in this type of power of attorney. A springing durable power of attorney becomes effective when the principal becomes incompetent or incapacitated.

When the client's circumstances change, the asset management process goes back to the data gathering step in the process.

A) realistic B) clearly defined C) long-term perspective D) fluid --D An investment policy provides guidelines that are standards to be followed. If they are fluid, they are ever-changing and therefore would be difficult to implement and would provide inconsistency in the management of the portfolio.

An investment policy provides guidelines that are standards to be followed. If they are fluid, they are ever-changing and therefore would be difficult to implement and would provide inconsistency in the management of the portfolio.

A) tactical. B) alpha. C) core/satellite. D) strategic. --B Alpha is not an asset allocation strategy, but a way to measure a portfolio manager's return relative to the amount of risk that has been taken.

For purposes of determining if an individual may contribute to an IRA,

A) workers' compensation or unemployment compensation are considered to be earned compensation. B) taxable alimony received from a divorce finalized prior to January 1, 2019, is considered to be earned compensation. C) inheritance money counts as earned income for IRA contribution purposes. D) passive income, such as interest or dividends, is considered to be earned compensation. --B For IRA purposes, taxable alimony is earned income, but passive income, workers' compensation, or unemployment compensation are not. Alimony is taxable income if the divorce was finalized prior to January 1, 2019, and not substantially amended since then.

Which one of the following individuals would be best served by a $5,000 Roth conversion?

A)Tom, a 51-year-old mid-level manager making $90,000 B)George, a 28-year-old father of two whose wife is completing school; their income is $24,000 C)Mandy, a 30-year-old highly paid executive D)Rachel, a 63-year-old widowed grandmother whose income is $70,000 and has $55,000 in her IRA --B George is young, so converting now would give him the longest time for the Roth account to grow and thus produce tax-free income in retirement. Second, George's gross income is below the standard deduction for a couple married filing jointly. Also, they will receive two child tax credits and an earned income credit. Thus, the conversion will not be income taxed. The others are older and subject to income tax now. Rachel does not need to convert because she does not seem to be on a path that will make her pay income taxes in retirement when she takes a monthly benefit.

Which of the following are correct statements about survivor benefits from a qualified retirement plan?

Answer: II, III. IV. V. I. Profit sharing plans that accept direct transfers from pension plans are not required to provide a qualified joint and survivor annuity (QJSA). II. The QJSA may be waived if the spouse gives written consent to the effect of the election and the naming of another beneficiary. III. Defined benefit, money purchase, cash balance, and target benefit plans must provide a QJSA. IV. A pension plan is not required to provide a survivor annuity if the plan participant and spouse have been married for less than one year. V. The QJSA payable to the spouse must be at least 50%, but not more than 100%, of the annuity amount payable during the joint lives and actuarially equivalent to a single life annuity over the life of the participant.

Eligible designated beneficiary (EDB):

Any of the following individuals are considered an eligible designated beneficiary (EDB): a surviving spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than the IRA owner, or a child of the IRA owner who has not reached the age of majority.

Your client has asked you what sources exist for long-term care insurance. Which of the following are generally considered potential sources for the funds to cover at least some of the cost of long-term custodial care?

I. Medicaid II. health insurance III. Medicare IV. group long-term care insurance offered through employers -- I. III. IV These three are possible sources of LTC except health insurance. Medicaid and long-term care insurance provide recipients with benefits such as nursing home care. Medicare provides only 20 days of skilled nursing care at full cost and 80 days thereafter with a substantial copay, in only a limited number of situations. It is designed only to provide temporary care while patients improve enough to go home, but it does provide some level of LTC coverage.

An income-tax-penalty-free distribution cannot be made from a tax-sheltered annuity (TSA) until the employee does which of the following?

I. separates from service after attaining age 55 II. attains age 55 III. becomes disabled or dies IV. takes a distribution under most hardship withdrawal rules -- I, II, III, IV. Penalty-free distributions can be made from a TSA or 401(k) when an employee separates from service after attaining age 55, attains age 59½, becomes disabled or dies, or takes a hardship distribution for deductible medical expenses only. All other hardship withdrawals are subject to early withdrawal penalty rules. Attaining age 55 means the worker is 55 on December 31 of the year of separation-not that the worker was 55 on the day of separation.

Maxine is 36 years old. She first entered the workforce two years ago and has been continuously employed since then. Which of the following benefits would Maxine be entitled to under OASDI-HI?

I. survivor's benefit for Maxine's dependent child II. lump-sum death benefit for Maxine's spouse or child III. survivor's benefit for Maxine's dependent parent who is age 62 or older IV. survivor's benefit for Maxine's spouse or former spouse who is age 60 or older -- I&II With eight quarters of continuous coverage, Maxine would be currently insured, but she would not be fully insured. The test for being currently insured is earning six of the last 13 credits (a.k.a. quarters). She has eight of the last 13. To be fully insured, she would need one credit per year since age 21. She is 36, so she needs 15 credits to be fully insured (36 - 22 = 14, and 14 is more than the minimum of six credits), but she has only eight credits. To calculate the number of credits needed to be fully insured, you always subtract 22 from the age and then ensure this is at least the minimum requirement of six credits. The maximum is 40. After 40 credits you are fully insured for life; however, to be eligible for disability benefits you also need to have a recent attachment to the labor force. For those 31 and over, that usually means at least 20 of the most recent 40 credits. Options I and II are available to a currently insured worker. Options III and IV are only available to a fully insured worker.

Homer and Marge are married. Homer died in 2020 at age 66. Marge is his sole beneficiary for his IRA. What is/are Marge's option(s) for handling the required minimum distributions (RMDs) from his IRA assets? I.Marge must begin distributions in the year following the year Homer died. II.Marge can move Homer's account into her previously existing IRA. She will not be subject to RMDs until she reaches age 72. III.Marge's only option is to have the account totally distributed by December 31 of the year with the 10th anniversary of Homer's death. IV. Marge can move Homer's IRA into an inherited IRA. She would have to start RMDs when Homer would have been 72.

II & III Marge must begin distributions in the year following the year Homer died. Marge can move Homer's account into her previously existing IRA. She will not be subject to RMDs until she reaches age 72. Marge's only option is to have the account totally distributed by December 31 of the year with the 10th anniversary of Homer's death. Marge can move Homer's IRA into an inherited IRA. She would have to start RMDs when Homer would have been 72.

Which of the following are correct statements about income replacement percentages?

II, III, and IV The inverse of Option I is true. Those with a lower preretirement income typically need a much higher income replacement percentage in retirement.

Adjusted Gross Income (AGI)

Is defined as gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account. Your AGI will never be more than your Gross Total Income on you return and in some cases may be lower. Refer to the 1040 instructions (Schedule 1) for more information. If you are filing using the Married Filing Jointly filing status, the $72,000 AGI limitation applies to the AGI for both of you combined. To e-file your federal tax return, you must verify your identity with your AGI or your self-select PIN from your 2019 tax return.

Different forms of property co-ownership

JTWROS can be used by anyone, including spouses; only spouses can use TBE and CP. CP requires the asset to go through probate. TBE requires the co-owner spouse to consent before the other spouse can sell his or her interest. This is unique to holding an asset as TBE. For example, a couple holding an asset as TBE is a good idea if one spouse has an addiction problem (gambling, drugs, etc.). T.O.D. and P.O.D. accounts are not completed gifts. They do not give the person named in the T.O.D. or P.O.D. any rights in the asset until the current owner dies.

Which one of the following statements is true regarding nonperiodic distributions from an annuity contract prior to the annuity start date?

LIFO A nonperiodic distribution (withdrawal) from an annuity is not prorated equally between a tax-free return of principal and a taxable interest payment; it is first considered a taxable interest payment and then a tax-free return of principal (LIFO).

Capital gains

Net long-term capital gains are subject to a 0% tax rate if the single taxpayer has taxable income under $40,000 (for 2020). Net short-term gains are subject to a taxpayer's ordinary income tax rate. A maximum rate of 28% applies to long-term gain on collectibles.

OASDI-HI?

Old-Age, Survivors, and Disability Insurance (OASDI) Program

Which of the following limit ownership to spouses only?

Only spouses can hold title as tenants by the entirety and as community property. Non-spouses can hold title as joint tenants (JTWROS) or tenants in common.

LTC

Payments from a qualified LTC policy are income tax-free up to the per-day limit for policies that pay per diem benefits. The per-day cap on tax-free LTC benefits cannot exceed $390 (for 2020). While many LTC policies cover all levels of care, many provide only for home care or exclude any care provided outside of a long-term care facility. Policies sold in states that have adopted the National Association of Insurance Commissioners' Long-Term Care Insurance Model Regulation must cover Alzheimer's. Although medical screening might prevent a person with Alzheimer's disease from purchasing an LTC policy, it cannot prevent a healthy person from purchasing an LTC policy in states that have adopted the model regulation (i.e., a qualified policy). Medicare is not much help in financing long-term care; it covers relatively intense care during a brief period of convalescence that follows a covered hospital stay.

Provisional income

Provisional income is defined by the Internal Revenue Service (IRS) as the sum of wages, taxable and nontaxable interest, dividends, pensions, self- employment and other taxable income plus half (50 percent) of your annual Social Security benefits.

Qualified longevity annuity contracts (QLACs) may be suitable if your client

QLACs are not for everyone, and each individual will need to consider his or her level of wealth and ability to "self-insure" for longevity, and what he or she is trying to accomplish with their retirement dollars. Those in poor health or with ample assets do not need the guarantees of an annuity. On the flip side, a QLAC may not be suited for those with extremely limited retirement income resources. However, for those who are healthy and have a family history of longevity, and those entering retirement with Social Security as their only source of guaranteed income, purchasing a longevity annuity could markedly improve their financial security late in life.

Which one of the following statements is correct regarding managing a taxable account?

Qualified dividends are generally subject to a preferential tax rate of 0%, 15%, or 20% Qualified dividends are subject to preferential long-term capital gain rates. Net capital losses up to $3,000 per year are deductible and any additional losses can be carried forward to a future year. Dividends are subject to taxation, even if reinvested. In a taxable account, traders certainly do need to take into account the timing and taxability of their security transactions.

Dan died at age 69 in 2020. His beneficiary was his son Robert, age 44. Robert has come to you to ask about his required minimum distribution (RMD) options. Which of the following would be acceptable RMD options for Robert?

Robert's only option is to have the account totally distributed by December 31 of the year with the 10th anniversary of Dan's death. Robert will have no mandatory RMDs until the 10th year after Dan's death. As a healthy person more than 10 years younger that Dan, Robert is only a designated beneficiary, not an eligible designated beneficiary. Thus, he is under the 10-year rule. There are no mandatory annual contributions until December 31 of the year containing the 10th anniversary of Dan's death.

Systematic Risk

Systematic risk refers to the risk inherent to the entire market or market segment. Systematic risk, also known as "undiversifiable risk," "volatility" or "market risk," affects the overall market, not just a particular stock or industry.

Tax-exempt interest?

Tax-exempt interest is interest income that is not subject to federal income tax. ... The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.

Cyrus passed away early this year, leaving a sizable estate. His will left, among other things, 2,000 shares of GE to his daughter, Bianca. These shares had been purchased as a single lot in 2005. Bianca and her husband sold the stock. What was their cost basis in these shares?

The basis of an asset acquired by inheritance generally is the fair market value on the date of death. This is referred to as a "stepped-up basis." For stocks, the FMV is the average between the high and the low for that day.

What is the tax treatment for a shareholder participating in a common stock's dividend reinvestment program?

The dividend paid from the stock is simply used to purchase more shares of stock. The shareholder is treated as if he or she received a dividend of cash equal to the fair market value of the shares purchased under the plan. The fair market value of the shares purchased is generally taxed at a 15% or 20% LTCG rate.

duty of care

The duty of care is analogous to medical care. It looks at the degree of skill and diligence, not the adviser's feelings about the client's situation.

Which one of the following statements correctly describes the method for calculating the exclusion ratio for a fixed annuity?

The investment in the annuity contract is divided by the total expected return. The exclusion ratio for a fixed annuity contract is not calculated by dividing the number of expected payments by the investment in the contract. It is calculated by dividing the investment in the contract by the total expected return. The "total expected return" is an industry term meaning the monthly payment times the life expectancy. For example, if the monthly payment is $1,000/month and the life expectancy is 20 years, the total expected return would be $240,000 ($1,000/month 12 20). The exclusion ratio for a variable annuity contract is calculated by dividing the investment in the contract by the number of expected payments.

A Medicare Part A patient must pay

The patient must pay all costs related to a hospital stay beyond 150 days. The annual deductible describes a gap in Medicare Part B coverage, not Part A. Medicare pays for the cost of the first 60 days in a hospital, but the patient must pay the Part A deductible. Medicare will pay the approved charges for the first 20 days in a skilled nursing facility. The gap results from the cost of care that exceeds 20 days (the patient pays the per day copayment) or the need for custodial care.

Survivor benefits from a qualified retirement plan

The spouse may waive the QJSA (qualified joint and survivor annuity) option via written consent, which includes acknowledging the effect of the waiver and the naming of another beneficiary. If the participant and spouse have been married for less than one year, the plan does not have to provide a survivor annuity. The QJSA must be actuarially equivalent to a single life annuity over the life of the participant and at least 50%, but not more than 100%, of the annuity payable during the joint lives of the participant and spouse. Profit sharing plans that accept direct transfers from pension plans are subject to the QJSA requirements.

On December 31 of last year (year 1), Samuel had $360,000 in his IRA (a five-year CD earning 6.5%). He has named Tully, his wife, as beneficiary. In year 2, Samuel turned 72 on October 17, and Tully turned 56 on January 8. Assume that it is now year 4 and that Samuel dies on April 15. Tully wants you to determine her distribution alternatives. Which one of the statements below correctly describes one of the choices available to Tully?

Tully is not required to take a lump sum distribution, receive all distributions by the end of the fifth year following Samuel's death, or even continue distributions-although these are all options available to her. As a spouse, she would have the option to roll over the remaining balance to an IRA in her name and defer RMD until she reaches age 72.

Unsystematic risk

Unsystematic risk is the risk that is unique to a specific company or industry. It's also known as nonsystematic risk, specific risk, diversifiable risk, ...

Gift splitting allows

a married couple to double their allowable annual exclusions. Gift splitting is allowed only for married couples. It allows a non-donor spouse to become a "deemed donor" for half of the gift, and therefore permits twice the annual exclusions otherwise available for present interest gifts to third parties. Gift splitting does not apply to gifts from one spouse to the other spouse.

A fundamental duty owed to a client is to always look out for what is in the client's best interest, what fiduciary duty best personifies this?

duty of loyalty The fiduciary duty that best personifies looking out for the client's best interest first is the fiduciary duty of loyalty. This duty requires being loyal to the client first and foremost, and always looking out for what is in their best interest.

A lump sum payment of the proceeds of a life insurance policy that is made to the beneficiary upon the insured's death

is generally exempt from income taxation. The lump sum proceeds of a life insurance policy (even if a MEC) paid to a beneficiary are generally exempt from income taxation. Withdrawals and loans from a MEC may be taxable. Life insurance proceeds, however, are subject to estate taxes if the deceased owned a life insurance policy. If the deceased owner was also the insured, the death benefits are included in his estate. If the deceased owner is not also the insured, the current value of the policy is in the deceased owner's gross estate.

John was killed in a car accident at age 45. His wife Lottie, age 40, is the primary beneficiary of his retirement account at work and his IRA. Thanks to you, John had sufficient life insurance, so there does not seem to be any immediate need for Lottie to take withdrawals from John's retirement assets. You and Lottie discuss her options for titling her inherited retirement accounts. Which of the following would give Lottie the most flexibility for tax-efficient distributions from John's retirement assets?

move some of John's money into Lottie's current IRA and place the rest into an inherited IRA titled John Q. Jones (deceased July 4, 2020) FBO Lottie S. Jones. One advantage of placing retirement assets into an inherited IRA is that no withdrawal for any reason would ever be subject to the 10% early withdrawal penalty (EWP) because it would always be coded as a withdrawal due to a death. That means Lottie would have access to this money without the 10% EWP but she would have to start RMDs when John would have been 72. A potential advantage of moving retirement money inherited from a spouse into the surviving spouse's own name is that the surviving spouse would be treated as the original owner for the start of RMDs. In this case, Lottie is five years younger than John. Thus, moving money into her name would give her five more years before facing RMDs. If this IRA was worth $250,000 when John would have been 72 and it grew at 6% for five years, it would be worth about $335,000 when Lottie reached 72. However, withdrawals from an account in her own name would be subject to the 10% EWP until Lottie reached 59½ unless the withdrawal met another exception. Thus, the most flexibility for Lottie would be moving some into each type of IRA. The more access she might need, the more would go into the inherited account. The more she wanted to delay RMDs, the more would come under her name.

This year, Irwin sold several securities that left him with the following types of gains and losses: long-term capital gain-$18,000, short-term capital gain-$11,800, long-term capital loss-$12,200, and short-term capital loss-$12,000. What is the net capital gain or loss on Irwin's security sales?

net long-term gain of $5,600 The long-term gain and loss are netted, leaving a long-term gain of $5,800. Short-term gains and losses are netted, leaving a short-term loss of $200. Because there is a positive and a negative, these are again netted to leave a net long-term capital gain of $5,600. Net long-term losses can be written off up to $3,000/year with any remaining losses carried forward to the next year.

The valuation date for gifts is

the date on which the transfer is completed.