Practice Exam 1

Lucy received a $1,200 profit sharing contribution this year. Lucy is married to George, an artist who had no earnings this year. Their combined AGI for this year is $220,000. How much of their $12,000 IRA contribution can they deduct for 2020?

$0 Lucy's status is active, since she did receive an annual addition (the profit sharing contribution). Their AGI is greater than the phaseout limit, so Lucy cannot make a deductible contribution. George has the full spousal deduction available, but the deductibility of the spousal IRA is also phased out because their AGI is greater than $206,000 in 2020. Lucy and George's total deduction is zero. They do not qualify for any deduction. Additionally, their ability to make Roth IRA contributions was also phased out when their AGI went over $206,000 for 2020. If they had no other traditional IRAs, they could make nondeductible IRA contributions and then convert them to Roth IRAs. They could also skip the IRA rules altogether and invest in nonqualified fixed or variable annuities.

Pa started receiving his Social Security benefits one year after his full retirement age (FRA). His primary insurance amount (PIA) was $1,800, but his delayed retirement credits took his monthly benefit up to $2,088. Ma started her Social Security early based on her work history. Her PIA was $1,200, but she received $840/month because she started her benefits four years early. Ma was one year short of her FRA for survivor benefits when Pa died and she started receiving her survivor benefits. How much would she get each month?

$1,914 Survivor benefits are calculated in two steps. First, the surviving spouse gets whatever check the deceased spouse was receiving. In this case, Pa was receiving $2,088/month. The second step is checking to see if the surviving spouse is at her FRA or older. Technically, this is the surviving spouse FRA, which mirrors the worker's FRA, but is increased on a two-year time lag behind the increase in the worker's FRA from 65 to 67. If the surviving spouse is at or older than this survivor FRA, then there is no reduction. If the surviving spouse commences survivor benefits earlier than her survivor FRA, then the reduction is 25/36ths of 1% for the first 36 months and 5/12ths of 1% for any months in excess of 36 months early. In this case, Ma was one year (12 months) early. Thus, the survivor benefit is reduced by 8.33% (12 × 26/36 ÷ 100). If the reduction is 8.33%, then she keeps 91.67%: $2,088 × .9167 = $1,914. Notice that Ma started her initial retirement benefits early. This can be early based on her work history or early as the spouse of a worker. However, her starting early when Pa was alive was under the rules for when both of the couple are alive. Survivor benefits are a different set of rules. If Pa would have lived until Ma reached her survivor FRA, Ma's survivor benefits would not be reduced and she would have received the same $2,088 he was receiving.

Nick wants to maintain the purchasing power of $75,000 (in today's dollars) in retirement. If inflation continues to average 3.5%, approximately what amount will Nick need in 20 years to equal the purchasing power of $75,000 today? (Round your answer to the nearest $5,000.)

$150,000 If inflation continues at a 3.5% level, Nick will need approximately double his original $75,000 to maintain purchasing power. This can be determined in two ways. If you know the Rule of 72, and you divide 3.5 into 72, you arrive at approximately 20, which is the number of years it will take for a sum to double. With a calculator, you can solve for the future value of $75,000 over 20 years at 3.5%.Keystrokes: 20 N, 3.5 I/YR, 75,000 PV, FV = $149,234; rounded to the nearest $5,000 = $150,000

Charles will have $100,000 in his IRA on December 31, 2024. 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 that year. What will his RMD be for 2024? (The Uniform Table factor is 25.6 at age 72.) - $3650 -$3774 -$3906 -$5501

$3906 100,000/25.6 = 3906.25 Rounded to $3906

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.

$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.

Over a period of 10 years, Mike contributed a total of $20,000 to a nondeductible IRA. The current value of his IRA is $32,000, and Mike, who is 50 years old, has decided to use his IRA assets toward the purchase of a second home in the mountains. Assuming Mike's marginal tax bracket is 24%, how much will he owe in taxes and penalties?

$4080 Mike must pay income taxes on $12,000 ($32,000 - $20,000 of after-tax contributions). Mike's effective tax rate is 34% (24% + 10% early withdrawal penalty = 34%). Remember, penalties in a nondeductible IRA apply only to earnings. Mike will have to pay $4,080 in taxes and penalties (34% × $12,000 = $4,080). Mike is not a first-time homebuyer in this question because he is buying a vacation home.

Which one of the following is correct regarding tax-exempt interest and the taxation of Social Security benefits? -None of the tax-exempt interest is included un the computation of taxation of social security benefits - 50% of tax exempt interest is included -85% of tax exempt interest is included - All of the tax exempt interest is included in the calculation

- All of the tax exempt interest is included in the computation of SS benefits 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.

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%? - $893.23 - $1,000 -$1,074.39 -$1,115.57

- $1115.57 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.

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? - $0 - $132 - $4,500 -$6,000

- $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.

James and Doris Stewart, both age 40, will contribute a total of $12,000 to their IRAs for 2020. They both work outside the home, and they file a joint tax return. James is a teacher at the local high school and contributes to a TSA. Doris's employer has no retirement plan. Their adjusted gross earnings for this year will be $112,000. What amount, if any, can they deduct for their IRA contributions? - $6,000 - $ 8,800 - $ 9,600 - $12,000

- $9,600 Doris is entitled to deduct the full $6,000 spousal IRA amount and James is in the phaseout range for active spouses: $124,000 - $112,000 = $12,000; $12,000 ÷ $20,000 phaseout range = 0.6; 0.6 × $6,000 = $3,600; $3,600 + $6,000 = $9,600. Notice that the Stewarts are in the phaseout range for active participants. Also, one of the spouses is not an active participant in a qualified retirement plan. Thus, the nonparticipant spouse can do the full amount and the active participant can do something. Thus, $6,000 is too small. Also, $12,000 is too large because at least some of the active participant's ability is phased out.

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? - $2000 - $7000 - $9000 -$14000

- $9000 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.

When using the "three bucket approach" to withdrawals from retirement savings, what are the buckets comprised of

1. short term liquid investments - 1-2 years living expenses 2. Combat inflation 3. grow portfolio

Which of the following individuals would be best served by a $5,000 Roth conversion - Mandy, a 30 year old highly paid executive - George, a 28 year old father of two whos wife is finishing school - Rachel, a 63 year old widow who makes $70k a year and has $55k in her IRA - Tom, a 51 year old middle manager making $90k

- George the 28 yr old 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.

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 must pay tax on the $2000 but there is no penalty - Harry must pay tax and penalty - Harry does not have to pay tax or penalty on the $2000 distribution even though he is only 34 - Harry must pay the penalty but no tax

- Harry does not have to pay tax or penalty 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 IRC 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.

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)? -The worker will receive 80% of his or her primary insurance amount - A 63 year old spouse of the retired spouse will receive at least 50% of the worker's PIA - If the spouse is at or above his full retirement age when commencing social security benefits they will receive at least 50% of the worker's PIA - If the spouse of the worker has attained FRA and is entitled to benefits on their earning record they will recieve the lesser of 100% of their benefit or 50% of the workers PIA

- If the spouse is at or above his or her full retirement age when commencing SS benefits the spouse will receive at least 50% of the workers PIA 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.

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 begin benefits at FRA regardless of life expectancy in order to maximize lifetime benefit - She should begin at FRA if she expects to live beyond the next three years - She should delay only if she expects to live beyond the next 12.5 years - She should delay beyond FRA regardless of life expectancy

- She should delay only if she expects to live beyond the next 12.5 yrs By delaying three years, Susan is forfeiting $1,000 x 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, it would pay to delay benefits by three years.

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 5 years - George could borrow $43,750 and since the loan is for his primary residence it could be longer than 5 years - George can borrow up to $50,000 but the term of the loan would be limited to 5 years - The amount of the loan would be limited to $50,000 and since the loan is for his primary residence it could be more than 5 years

- The amount of the loan would be limited to $43,750 and the term is limited to 5 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.

If a security has an average return of 14.2% and a standard deviation of 8.4, what can be said about the security? - The security's returns can be expected to never be negative - The security's return can be expected to be between 5.8% - The security's return can be expected to be between 8.4% and 14.2% approx 95% of the time - The security's annual volatility can be expected to be within a range of approximately 8.4% above and 8.4% below fair market value

- The security's returns can be expected to be between 5.8% and 22.6% approximately 68% of the time 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.

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 - He loses $1 in benefits for every $1 above the allowable limit - He loses $1 for every $2 over the limit - He loses $1 for every $3 above the limit

- There is no reductions 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."

All of the following are ways that a person can voluntarily transfer estate assets to another person or entity at death except - by probate - by will substitute - by gift - TOD

- by gift 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.

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? - make and implement recommendations - gather data - analyze information - monitor performance

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

Unsystematic risk - is increased through diversification - is reduced when market rates fluctuate less - is affected by the nature of how a firm finances its operations - increases during periods of volatile interest rates

- is affected by the nature of how a firm finances its operations 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.

Investors who want to bear the least amount of risk should acquire stocks with beta coefficients - greater than 1.5 - greater than 1.0 - less than 1.0 - less than 0.5

- less than 0.5 When seeking investments that have the least amount of risk, the lowest beta should be selected.

The two major risks associated with individual common stocks are - interest rate risk and purchasing power risk - interest rate risk and exchange rate risk - market risk and business risk - default risk and business risk

- market risk and business risk The primary risks associated with common stock are business risk and market risk. Interest rate risk, default risk, and purchasing power risk are the major risks of bonds

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 - strategic -tactical -dynamic - core/satellite

- strategic 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.

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? - Cyrus's cost basis less a 25% excise tax - Cyrus's cost basis - the market price as of the sale date - the market value on the day Cyrus died

- the market value on the day Cyrus died 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.

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 -$562.50 -$750 -$1,125 -$1,500

-$750 Because Linda has attained FRA, she would be eligible for 50% of Sam's full PIA, or $750.00.

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 must recieve the entire distribution because Samuel had already begun RMD's - Tully must continue distributions but they will be recalculated to her life expectancy -Tully must complete distribution by december 31 of Samuels death - Tully may roll the whole amount into an IRA in her name and defer RMD until she reaches age 70

-She may roll it into her own and defer RMD until age 72 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.

Which one of the following is not a key attribute of an investment policy? - long-term perspective - realistic - clearly defined - fluid

-fluid 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.

Assume that a worker's Social Security full retirement age is 66. What percentage of the worker's full retirement age benefits will be paid to her at age 62?

75% A worker can begin receiving Social Security retirement benefits at age 62, but at a 25% reduction from the full amount that would be received at full retirement age 66. The percentage of this worker's full retirement age benefits that will be paid to her at age 62 is 75% [(5/9 of 1% per month for each of the first 36 months prior to full retirement age = 20%) + (5/12 of 1% × 12 months = 5%); 20% + 5% = 25%].

Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what is the expected change in price for this fund?

9.75% decrease 1.5% × 6.5 = 9.75%. Recall that duration needs to have a negative sign in order to represent the inverse relationship between bond prices and interest rates. In this case, an increase in rates means the bonds or bond funds will fall in price. Therefore, this fund will decrease in price about 9.75%. Also, you can remember that bond prices move opposite to interest rates. An increase in interest rates means the price of bonds will go down.

Which one of the following statements is true regarding nonperiodic distributions from an annuity contract prior to the annuity start date? - A nonperiodic distribution is first considered a tax-free return of principal and a taxable interest payment - A nonperiodic distribution is prorated equally between tax free return of principal and a taxable interest payment - A nonperiodic distribution is taxed under exclusion ratio rules - A nonperiodic distribution is taxed first as taxable interest payment until all interest/earnings are completely exhausted and then as a tax free return of principal

A nonperiodic distribution is taxed first as a taxable interest payment until the interest/earnings are completely exhausted and then as a tax-free return of principal. 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).

Which one of the following statements correctly describes a basic provision of an IRA contribution in 2020? - IRA contributions made above the limit are subject to a nondeductible excise tax of 10% - A person participating in a 457 plan will be considered an active participant - Someone past age 72 is not allowed to contribute to a traditional IRA - A nonworking 45 year old who receives taxable alimony may contribute to an IRA the lesser of $6000 or 100% of the taxable alimony received

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. 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.

What do you consider when deciding how much to contribute to a roth ira

AGI

A medicare part A patient must pay

All costs for a hospital stay beyond 150 days 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.

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

All of the above are correct 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 correct statements about the legal requirements for a loan to a participant from a retirement plan? I. The term of a loan for a medical emergency must not exceed five years. II. Loans from SEP IRAs are not permitted. III. The term of a loan used to acquire a principal residence may exceed five years. IV. Loans from a SIMPLE 401(k) plan are permitted.

All of the above are true All of the statements are true. The term of the loan must not exceed five years; however, loans to acquire the participant's principal residence may be for a longer (unspecified) period. If a loan requiring repayment within five years is not repaid in five years, it may be treated as a distribution and taxed (and penalized) as such. Loans from IRAs, SEP IRAs, and SIMPLE IRAs are not permitted under current tax law; however, loans from a qualified plan, including a SIMPLE 401(k) plan, are permitted.

Sources of risk include which I. fluctuating exchange rates II. a firm's financing decisions III. higher interest rates IV. a loss of purchasing power

All of the options are types of systematic and unsystematic risk

All of the following are examples of asset allocation strategies except - tactical - alpha - core/satellite - strategic

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.

Which one of the following is not a characteristic of a rollover? -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. -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. -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. -A rollover generally must be completed within 60 days of the distribution.

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. 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 is correct regarding taxation of mutual funds?

An exchange of shares in one fund to shares of another fund within the same family will create a taxable event. An exchange of share in one fund to share of another fund within the same family is a taxable event. This is commonly referred to as a "telephone transfer." A nontaxable distribution based on interest from a private-activity, not public purpose, municipal bond may create an AMT issue. FIFO will generally create the largest gain during a bull market because the oldest, lowest cost basis shares are the ones treated as being first sold. FIFO is the method assumed by the IRS if the taxpayer fails to select another method. LIFO is not an allowable method for basis calculations.

Jan has been employed by Bryce Corporation for 40 years and is a 4% owner of the company. She received $60,000 in compensation during the preceding year and is a participant in the corporation's profit sharing plan. She will celebrate her 72nd birthday on July 3rd of this year and plans to retire in four more years. Which one of the following correctly describes the date by which Jan must start taking distributions from her profit sharing account?

April 1 of the year following the year she retires Distributions from qualified plans, IRAs, SEPs, SIMPLE IRAs, TSAs, and other retirement accounts must begin by a certain date. This rule does not apply to Roth IRAs. For IRAs, SEPs, SIMPLE IRAs, and 5% owners of a business with a qualified plan, that date is April 1 of the year following the year in which the participant attains age 72. Distributions from qualified plans, 403(b) plans, and 457 plans to individuals who are not 5% owners (such as Jan) must begin by April 1 of the year following the later of the year the participant attains age 72, or the year in which the participant retires.

Marys financial situation is as follows what is her net worth? Cash - 15k ST Debt - 8k LT Debt - 133k Tax Expense - 7k Auto Pmts - 4k Investments - 60k Use Assets - 188k

Assets = 263k Liabilities = 141k Net worth = 122k Taxes and auto notes arent in net worth, included in cash flow statement

Richard wants to have an annual retirement income of $100,000 (payable at the beginning of each year) protected against 3% inflation. Assuming a 7% after-tax rate of return and a retirement period of 30 years, how much money (rounded) does Richard need in order to meet his goal?

BEG mode inflation adjusted return = (1+ror/1+inflation) - 1 x 100 I/YR = 3.8835 PMT = 100,000 +/- N = 30 solve for PV =1,822,042

As a general rule, a Medigap insurance policy is designed to cover which one of the following Medicare-approved charges that are not paid by Medicare?

Deductibles or coinsirance amounts

Which one of the following distributions from a 403(b) tax sheltered annuity would not be subject to the 10% premature withdrawal penalty?

Distributions paid to an alternate payee pursuant to a qualif

Tom has been promised a stream of $40,000 annual payments at the end of each year for 25 years. The present value of these payments discounted at a rate of 5% equals which one of the following amounts?

END mode PMT = 40,000 N = 25 I/YR = 5 solve for PV

. Assume your client has a 5% bond, par value of $1,000, and 15 years to maturity. Comparable bonds are yielding 6%. What is the value of this bond?

FV = 1000 PMT = 25 I / YR = 3 N = 30 $902 Adjust N and I/YR for semi annual coupons of bonds

Which of the following are not used in technical analysis -moving averages -graphs -supply and demand of stocks -financial statement ratios

Financial statement ratios Moving averages, graphs, and statistics regarding the supply and demand of stocks are used by technicians. Financial statement ratios are part of fundamental analysis.

Assume the following asset classes have the correlations to long-term government bonds shown below: T-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?

Gold provides more diversification than large stocks. The asset with the lowest correlation provides the most diversification. Therefore, gold provides more diversification than any of the other assets.

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 pay neither taxes nor a penalty. The distribution is not qualified because Charlie is under age 59½ and he is withdrawing the money before the waiting period of five tax years. None of the 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). No penalty applies since the withdrawal is not taxable.

Which one of the following is covered under Medicare Part A and Part B?

Home health care

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 and 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.

Which of the following are correct statements about the effect that income and asset ownership have on Social Security benefit payments? I. The value of assets owned by a worker does not affect the amount of Social Security benefits that he or she will receive. II. The reduction is $1 of benefits for each $1 of income earned above the allowable limit for an individual who begins receiving Social Security benefits prior to the year he or she attains full retirement age. III. Investment income received by a worker does not affect the amount of Social Security benefits that he or she will receive. IV. The reduction is $1 of benefits for each $2 of income earned above the allowable limit for individuals who begin receiving Social Security benefits in the year they attain their Social Security full retirement age, but prior to the month in which they actually attain that age.

I and III Unearned income, such as income from investment assets, has no effect on the amount of Social Security benefits that will be paid to a worker. Similarly, the value of assets owned by the worker does not affect eligibility for Social Security benefits. Option II is incorrect. The reduction is $1 of benefits for each $2 of income earned above the allowable limit for an individual who is under his or her Social Security full retirement age for the entire year and begins receiving Social Security benefits. Option IV is incorrect. The reduction is $1 of benefits for each $3 of income earned above the allowable limit for an individual who begins receiving Social Security benefits in the year he or she attains his or her Social Security full retirement age, for the months prior to the month in which Social Security full retirement age is attained. (The reduction in benefits does not apply to the month in which an individual attains his or her Social Security full retirement age.)

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 and III are correct 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.

. Which of the following are correct statements about the capital utilization strategy? I. It produces an annual retirement income over a finite number of years. II. Assuming the yield remains the same, the larger the retirement income that is paid, the shorter the number of years over which it will be paid. III. When the capital utilization approach is used, the planner must be careful in making assumptions about the life expectancy of the client. IV. The effect of taxes on retirement savings and distributions should be considered when the before-tax approach is used to calculate the future value of retirement assets.

I, II, III, and IV All of the options are true. A capital utilization strategy would make it possible to produce a larger annual income for a client but over a finite number of years, after which the principal is exhausted. Therefore, a planner must make a good estimate of a client's life span; otherwise, a client may outlive his or her income. Assuming that the yield would remain the same, the larger the income, the shorter the number of years. The before-tax approach for calculating the future value of retirement assets does not take into account the shrinkage of retirement assets due to taxes. The amount of tax shrinkage may be significant; therefore, the impact of taxes will need to be taken into consideration. In contrast, the formula for calculating an inflation-adjusted yield takes the effect of inflation into account. The inflation-adjusted yield formula is [(1 + r) ÷ (1 + i)] - 1 × 100 where r = Investment return, and i = Inflation rate.

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, and IV All 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.

Your client, Susan, age 60, cannot afford to retire until age 62 when she becomes eligible for Social Security and company pension benefits. Susan no longer feels appreciated by her company and was recently passed over for a promotion. Her husband Brent, age 63, lost his company health care plan and dependent coverage when he retired, but Susan has been able to cover the two of them on her company's plan. If Susan takes early retirement at age 62, her company benefits plan stipulates that her health care coverage will end. Susan's health is excellent, but Brent's health is just fair. Susan should be concerned about which of the following issues regarding retirement? I. Is now the right time? II. Brent won't be eligible for Medicare for almost two more years. III. How will my spouse/family be affected?

II and III Susan knows now is not the right time for retirement. She cannot afford to retire until she turns 62. The right time may be when clients feel that they are losing their ability to perform up to standards, the economics of working become less favorable, or the worker's personal health is an issue. If Susan retires, neither she nor Brent will have health care coverage; also, neither will qualify for Medicare until age 65 (almost two more years for Brent). Although Susan's health is excellent, Brent's health is fair. Susan is very concerned about how her spouse and family situation will be affected. A client who doesn't feel appreciated by his or her company is typically asking whether he or she wants to be retired, is the work satisfying, and does he or she have control over working conditions.

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 and IV 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.

Which of the following are key obligations a broker-dealer must meet to satisfy Regulation Best Interest? I. act in accordance with the fiduciary standard II. exercise "reasonable diligence, care, and skill" when recommending transactions III. make "fair and considerate" disclosure of material facts regarding the investment at or before the making of a recommendation to an institutional client IV. a broker-dealer must have and enforce written policies and procedures that identify conflicts of interest and either eliminate or disclose these conflicts

II and IV A broker-dealer must exercise "reasonable diligence, care, and skill" in recommending transactions and have policies and procedures that address conflicts of interest by either disclosing or eliminating them. Regulation Best Interest is designed to maintain the two approaches in the marketplace: the sales-based and advice-based channels. One of the main points of Regulation Best Interest is to maintain a suitability approach and a fiduciary approach. Disclosure is required to be "full and adequate" disclosure of all material facts concerning its relationship with a retail customer before making a recommendation.

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 and IV As the sole beneficiary who is a surviving spouse, Marge is an eligible designated beneficiary (EDB). Being a spouse EDB gives her the unique ability to move the decedent's retirement money into a retirement account in her name. This is not only true for an IRA—she could also move the money into her employer retirement account if the plan document allowed. Now she is treated as if the money was always hers. She will face the normal RMD issues when she reaches age 72. The option to move the money under her name is always true for Marge as a surviving spouse EDB no matter when Homer passed away relative to his required beginning date (RBD). Alternatively, since Homer died prior to his RBD, Marge could title the account as an inherited IRA and postpone RMDs until Homer would have been 72. A nonspouse EDB would have to start RMDs in the year following the year of death.

Under the Affordable Care Act, "Platinum" plans offered on the exchanges vary in I. the services that they provideII. how the insured and insurer share the costs of care

II only Plans in each category (i.e., Platinum, Gold, Silver, Bronze, Catastrophic) all cover the same services. It is how the insured and the insurer share the costs of care that varies.

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

II, III, IV, and V The spouse may waive the QJSA 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.

Which of the following are correct statements about income replacement percentages? I. Income replacement percentages are typically much higher for those with higher preretirement incomes. II. Income replacement percentages vary between low-income and high-income retirees. III. Income replacement ratios should not be used as the only basis for planning.IV. Income replacement ratios are useful for younger clients as a guide to their long-range planning and investing. I and II I and IV II and III II, III, Iv

II,III,IV those with lower preretirement income usually need a higher income replacement percentage in retirement

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? I. Robert must begin distributions in the year following the year Dan died. II. Robert can move Dan's account into an inherited IRA. He must begin taking RMDs in the year following the year Dan died based on Robert's life expectancy in the year following the year of death and then reduced by 1 for each subsequent year. III. 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. IV. Robert will have no mandatory RMDs until the 10th year after Dan's death.

III and IV 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.

Which of the following limit ownership to spouses only? I. tenancy in common II. joint tenancy III. tenancy by the entirety IV. community property

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

Which one of the following statements is correct regarding a nondeductible IRA? -To qualify for a nondeductible IRA, a person's AGI must be below a specified amount. If the AGI is within the phaseout range, they may make a partial contribution. If the AGI is above certain limits, which vary depending upon the filing status of the taxpayer, contributions to a nondeductible IRA are prohibited. -If a person is an active participant, qualification for contributions to nondeductible IRAs would depend upon AGI and filing status of the taxpayer. -In many cases, a person who is eligible to deduct an IRA contribution may choose to make a nondeductible contribution instead. -A nondeductible IRA is the same as a Roth IRA.

In many cases, a person who is eligible to deduct an IRA contribution may choose to make a nondeductible contribution instead. A person may always choose not to deduct their IRA contribution regardless of AGI or whether or not the person is an active participant. However, why contribute to a nondeductible IRA if you are eligible to make a contribution to a Roth IRA? The taxation of withdrawn earnings on Roth IRAs can be tax free. On the other hand, people who make too much to contribute to a deductible IRA or a Roth IRA can always contribute to a nondeductible IRA if they have earned income. A nondeductible IRA would be eligible to convert to a Roth IRA. Finally, if the plan is not to convert to a Roth IRA, why not contribute to a nonqualified fixed or variable annuity instead of a nondeductible IRA? There is no annual limit on the amount that can be contributed to a nonqualified annuity and it would keep the accounting for any other IRAs simple.

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.

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? - Jennifer should leave the rollover funds until she reaches age 55 and then she can distribute the account - Jennifer should use the direct rollover to roll the entire IRA into her new employers qualified profit sharing plan in accordance w tax requirements and plan provisions if the plan allows her to do so and allows for loans - Jennifer should leave the rollover funds until shes age 65 and then can distribute the lump sum - Should leave until age 55 and she can distribute the account without penalty

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. 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.

Wally and Kim, a married couple with an average life expectancy, have a retirement budget of $6,000/month. While they are both alive their Social Security and Kim's military retirement will pay $4,500/month. Wally's IRA is sufficient to generate $1,505/month with the features they need. What Retirement Level have they achieved?

Level 1 If Wally and Kim annuitize their entire IRA, they will have an income sufficient to meet their retirement budget. The good news is that they will have the income for the rest of their lives; however, they will have very little in reserve and inflation will be a problem, especially over time. Still, annuitizing the money protects them against running out of income. It also can help them say no to children and grandchildren asking for money they do not have. While annuitizing all their retirement assets has many downsides, at least they have achieved Level 1 retirement preparedness according to this model.

You have a client, age 56, who has decided to take early retirement. She would like to maximize distributions from her IRA without having to pay the 10% penalty tax on premature distributions. Which, if any, of the following words of advice should you give her? I. At age 59½, she can stop taking substantially equal periodic payments until age 72, if she wishes. II. Use of the fixed annuitization method or the required distribution method will maximize the amount of substantially equal periodic payments she receives.

Neither I or II The client must take a series of substantially equal payments for the longer of five years (until age 61) or until she reaches age 59½, after which she can stop taking substantially equal periodic payments until age 72 (RMD age), if she wishes. Of the three methods that may be used to calculate substantially equal periodic payments, use of the fixed amortization or fixed annuitization methods will maximize payments to your client. In contrast, use of the required distribution method will minimize payments to your client.

What is bills cash flow? Salaries - 70,000 Auto pmts - 5k Insurance - 3.8k Food - 8k Credit card balance - 10k Dividends - 1.1k Utilities - 3.5k Mortgage pmts - 14k Taxes - 13k Clothing - 9k Interest income - 2.1k Checking acct - 4k Vacations - 8.4k Donations - 5.8k

Net out everything except the checking account and credit card balances are not included in 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?

PMT = 8,000 I/YR = 11% N = 12 FV = 250,000 solve for PV = $19,521

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? -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. -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. -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. -Policies issued today generally require an individual to be eligible for Medicare nursing home benefits prior to receiving any insurance policy benefits.

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. 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.

Which one of the following statements regarding IRA distributions is correct? -Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty. -Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty and taxation. -Distributions from an IRA following separation from service after age 54 are exempt from the 10% early withdrawal penalty. -Distributions under a QDRO are exempt from the 10% early withdrawal penalty.

Qualified education expenses are allowed Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty, but would be subject to taxation if contributions had been deductible. The exemption for distributions following separation from service after age 54 applies to qualified plans and 403(b) plans, but not IRAs.

Mike recently terminated employment with ENCO Inc. He has a $70,000 account balance in ENCO Inc.'s simplified employee pension (SEP) plan. Which one of the following steps should Mike take to roll over his SEP account into an IRA?

Roll over all of the distribution he receives, within 60 days of receipt, into an IRA. The direct rollover rules do not apply to plans that use IRAs as funding vehicles, i.e., SEPs, SARSEPs, and SIMPLE IRAs. The 20% withholding rules don't apply to rollover distributions from a SEP. A SEP is not a qualified plan, so he could not transfer it to an IRA.

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?

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

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?

Set calculator to END mode - end of year payments FV = $300,000 I/R = 7% N= 20 Solve for PMT = $7,318

Strategic asset allocation

Strategic asset allocation involves obtaining the best asset mix for a client over a long period. For example, this might be 60% stocks and 40% bonds. When these percentages change due to market movements, this strategic asset allocation requires the portfolio to be rebalanced back to the target mix, in this case 60/40 stocks/bonds.

What is the valuation date of a gift

The date on which the transfer is completed

The donee's basis in gifted property is determined by which of the following valuations?

The donors adjusted basis in the property at the time of the gift if the property has appreciated in value while owned by the donor AND if the propertys FMV at the time of the gift if this value is less than the donors adjusted basis and the property is sold or a loss

Juan, age 44, contributed $4,000 per year to his Roth IRA since opening it three years ago. Last year he converted $10,000 into his Roth IRA from his traditional IRA. This year he was forced to withdraw $25,000 to help his sister. Juan is in the 22% federal tax bracket. How much will he owe the federal government for this distribution?

The first $12,000 is allocated to his contributions. This money is neither income taxed nor penalized, ever. Next comes the conversion money. It is not income taxed, but it is subject to the 10% early withdrawal penalty for five years. His distribution does not meet one of the exceptions, so it will be penalized. This is $1,000 of early withdrawal penalty on the converted amount. The final $3,000 comes from earnings. This money is income taxed and 10% penalized. Thus, this money pays a 32% federal rate and amounts to $960, making the final total $1,960.

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 number of expected payments. -The number of expected payments is divided by the investment in the annuity contract. -The total expected return is divided by the investment in the annuity contract. -The investment in the annuity contract is divided by the total expected return

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.

Frank is age 54 and married. He and his wife, Helen, have a daughter named Meredith attending college. Frank has been making salary reduction contributions to his employer-sponsored 401(k) plan for the past four years, and is considered a highly compensated employee. The current balance of his 401(k) account (nonforfeitable accrued benefit) is $21,500, which includes $3,500 of account earnings. The plan provides for both hardship withdrawals and plan loans, and loans are available to all plan participants on an equal basis. Frank needs to use some of his plan assets to pay college tuition. Which of the following is a correct statement about how Frank could meet Meredith's college expenses?The maximum plan loan Frank could take is $10,750. Frank can borrow up to 50% of the nonforfeitable accrued benefit of $21,500—i.e., $10,750. As long as loans are available to all plan participants on an equal basis, highly compensated employees may take loans. A hardship distribution from a 401(k) plan for education expenses would be subject to the 10% premature distribution penalty.

The maximum plan loan Frank could take is $10,750. Frank can borrow up to 50% of the nonforfeitable accrued benefit of $21,500—i.e., $10,750. As long as loans are available to all plan participants on an equal basis, highly compensated employees may take loans. A hardship distribution from a 401(k) plan for education expenses would be subject to the 10% premature distribution penalty.

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?

The monthly retirement income need is not specified as "today's dollars," and no inflation rate specified; therefore, it is 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

1 and 2 in the Retirement Planning Process

The second step in the retirement planning process is to gather client data, including goals and expectations. The first step is to establish and define the client-counselor relationship, which includes disclosing the counselor's compensation arrangement.

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

The shareholder is treated as if he or she received a cash dividend equal to the fair market value of the shares purchased under the plan. 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.

Which of the following is correct regarding the additional payroll tax for high wage earners that was brought about by the Affordable Care Act? -The tax is split between the employer and employee. -The tax applies to those with an AGI in excess of $500,000. -The tax is 1.9%. '-The tax was designed to provide additional funding for Medicare.

This tax is an additional Medicare tax. The 0.9% tax is employee paid and applies to high earners only (AGI in excess of $250,000 for joint filers and $200,000 for single filers, not indexed).

Susan, age 47, who is married and files jointly, contributes 5% of her salary to her employer's 401(k) plan. Susan and her husband have modified AGI of $112,222. If Susan makes a full $6,000 contribution to an IRA, how much of this contribution will be deductible in 2020?

UL = Upper dollar limit of the phaseout range for married individuals filing jointly = $124,000 (for 2020)Phaseout range for married filing jointly = $20,000 (always for married filing jointly)$6,000 × [($124,000 - $112,222)/$20,000] = $3,533, which is bumped up to the nearest $10, which would be $3,540.Notice that the $3,533 is not rounded to the nearest $10. It is bumped up to the next $10. Thus, any answer that does not end in "0" will always be wrong. Formula Allowable contribution limit x (UL-AGI)/phaseout = Deductible amount

When is a living will applicable

When the declarant is in a terminal or similar condition

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? - Neither option will result in tax liability as long as the loan or withdrawal complies with qualified plan requirements - Withdrawing the funds from his IRA will result in tax liability, subject to ordinary income tax and 10% penalty on the $5000 - Borrowing funds from PSP will result in tax liability, subject to ordinary income tax and 10% penalty -Both will result only in income tax on $5000

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. 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.

A "rising equity glidepath" typically will lead to a(n) ______ equity exposure over one's total lifetime.

decreased The strategy of increasing equity exposure throughout retirement can result in less equity exposure over one's lifetime due to the reduced exposure in the early years.

Duty to always look out for the clients best interest

duty of loyalty

What is not a qualified roth ira distribution

a distribution made to an inidividual who retires on or after age 55

Wills, beneficiary designations, and correct titling of property can all accomplish which one of the following estate planning goals?

assure that property is distributed according to the owner's wishes A will cannot be used to plan for incapacity, avoid probate, or transfer assets during the life of the owner. Wills, beneficiary designations, and correct titling of property can assure that property is distributed in accordance with the owner's wishes.

Monte carlo

based on standard deviations and assumptions on rate of return to find the probability of certain situations

A springing durable power of attorney

gives the attorney in fact authority only when the principal becomes incompetent 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), 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.

Medicaid is

govt insurance program for individuals with low income or minimal assets

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

has a family history of longevity. 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.

Mark, a financial adviser, has a client who has worked in two positions during his lifetime. The client's first position was not covered by Social Security but he is receiving a pension from that employment. His second position was covered by Social Security and he is eligible for Social Security retirement benefits. Mark should advise his client that

his eligibility for Social Security retirement benefits may be reduced due to the windfall elimination provision (WEP). If you have a client who has worked in a position that was not covered by Social Security, and the client is receiving a pension from that employment, his eligibility for Social Security benefits based on his own work history covered by Social Security may be reduced due to the windfall elimination provision (WEP). The government pension offset provision (GPO) impacts Social Security benefits owed to spouses, ex-spouses, or to survivor benefits. If he has one or more survivors entitled to a benefit, the Social Security Administration recalculates the benefit to omit the WEP, which results in a higher survivor benefit. Reductions due to the WEP are NOT reflected in Social Security benefit estimates. One way to differentiate between the two is focusing on the W in WEP. The W can remind you of worker. Thus, the WEP reduces Social Security retirement benefits based on your own work history. That leaves the GPO as the one that reduces a spousal Social Security benefit based on what the spouse is getting from a retirement plan based on employment that did not pay into Social Security (such as public school teachers in several states).

The continuing evolution of investment advice and the regulation surrounding it will most likely lead to

increased client expectations of advisers and downward pressure on fees. 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.

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

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

All of the following are correct statements regarding longevity annuities except - owners must begin receiving income by age 75 -owners can put no more than 25% of their retirement plan money into a longevity annuity with an overall cap of $135,000 in 2020. -accumulations in these annuities are exempt from minimum distribution rules at age 72 in 2020 and beyond. -payments from longevity annuities are larger than those received from a regular annuity due to the delay in receipt of the annuity payments.

owners must begin receiving income by age 75. Owners must begin receiving income from a longevity annuity by age 85. All of the other statements are correct.

Jensens alpha

percentage portfolio return above that of a portfolio with the same beta as the portfolio that lies on the same SML % a manager over or underperformed based on the amount of risk taken = Rp - [Rf + Beta p (Rm-Rf) ]

LTC insurance covers

personal (custodial) care and skilled nursing home care The delivery of long-term care (LTC) generally takes one of two forms: skilled care or personal care. Skilled care is typically provided in a nursing home setting. Because of medical screening, people who need LTC now or in the near future with preexisting conditions (option I) (e.g., people who already have Parkinson's disease or Alzheimer's disease) will be unable to obtain a policy. LTC policies generally will not pay benefits in the future for services related to mental or nervous disorders (option IV) other than Alzheimer's disease, alcoholism or drug addiction, war-related illnesses or injuries, or attempted suicide or intentional self-inflicted injury.

In order to be considered a "qualified" policy, a long-term care policy must

provide for nonforfeiture options. To be classified as a qualified policy, cognitive impairment must be covered, it must provide for nonforfeiture options, and it must be guaranteed renewable and conform to the National Association of Insurance Commissioners Model Act. It cannot include a determination of medical necessity by a physician nor can it include return of premium.

A nonspringing durable power of attorney

remains effective after the principal becomes incapacitated. 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, and is effective immediately in this type of power of attorney.

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

reverse mortgage fees must be rolled into the loan. 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.

Which one of the following actions would probably not constitute the unauthorized practice of law by a non-attorney financial planner?

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 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.

All of the following assets would be included in a decedent's gross estate except -life insurance proceeds from a policy on the decedent in which the decedent had assigned all incidents of ownership two years before her death. -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. -an irrevocable trust established by the decedent five years before his death that paid all income to him until death, then the corpus to his children. -a residence that was owned by the decedent and his spouse as joint tenants with right of survivorship

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

What can reverse mortgage be used for

to generate a lump sum that can be used to fund long-term care A reverse mortgage can be used to generate a lump sum that can be used to fund long-term care. Payments can continue for as long as the homeowner resides in their home—not necessarily until their death. Depending on the ultimate sale price of the home and the amount of equity that has been paid out, there may not be funds remaining for the beneficiaries. Reverse mortgage balances do not need to be repaid while at least one owner lives in the home, maintains it, and pays the taxes, insurance, and any HOA dues that are payable. But, when the home is no longer the primary residence due to moving or death, the balance is payable.

When thinking about a tax-diversified overall portfolio, when is the proper time to take distributions from an after-tax investment like a Roth IRA or a taxable brokerage account to fund living expenses in retirement?

when investments were down sharply Tax diversification can help a client avoid selling portfolio assets at a loss. The point is that a client lives on after-tax income in retirement. Thus, she would have to sell enough shares of a taxable investment to pay the income taxes and also have the money to live on. If she pulled the money out of an after-tax investment like a Roth account or a regular brokerage account that did not have a large gain, the withdrawal amount during poor investment returns is reduced. The lower withdrawals should help the portfolio last longer in retirement.