Various Units
Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding except A) deferred compensation plans B) Keogh plans C) corporate pension plans D) profit-sharing plans
A is the answer - Explanation Deferred compensation plans are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.
Which of the following circumstances must be met for a fiduciary to trade options in a trust account? I. Special circumstances determined by the broker-dealer II. The trust agreement states the trustee has the power to trade options III. The trust's investment objectives are determined to be compatible with options trading IV. Only covered options may be traded by a fiduciary A) II and IV B) II and III C) I and IV D) I and III
B is the answer - Explanation A fiduciary account may only trade options if expressly authorized to do so and if suitable for the beneficial owner of the account. While it would be generally correct to state that the only options that may be written by a fiduciary are those that are covered, it is not uncommon to find fiduciaries purchasing protective puts.
Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? I. Registered securities held by a control person II. Unregistered securities held by a noncontrol person III. Registered securities held by a noncontrol person IV. Unregistered securities held by a control person A) I and III B) I and IV C) II and IV D) II and III
C. is the answer - Explanation The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is.
A pension plan administrator hires an investment adviser to oversee the investment decisions of the plan. The adviser's primary responsibility is to which of the following? A) The pension plan administrator B) The adviser C) The plan sponsor D) The plan
D is the answer - Explanation The adviser's primary fiduciary responsibility is to the plan itself. By maintaining proper fiduciary responsibility to the plan, the interests of the participants of the plan are protected. LO 18.g
Who is obligated for the payment of taxes in an UTMA account? A) Donor B) Parent C) Custodian D) Child
D is the answer - Explanation UTMA and UGMA accounts are custodial accounts. They are for the benefit of the child and bear the child's Social Security number. Although in practice the taxes are usually paid by the parent or legal guardian, they are the responsibility of the beneficial minor (child). LO 18.i
You have a 62-year-old client who opened a Roth IRA with your firm one year ago. The account was funded with a $6,500 deposit and the account's value is now $7,500. The client has another Roth, opened eight years ago at another firm. The client would like to withdraw $7,000 from this account rather than the one at the other firm. The tax consequences of this withdrawal would be A) ordinary income tax on the $1,000 growth because the account has not been open for 5 years. B) ordinary income tax on the $500 that exceeds the original cost. C) ordinary income tax on the entire amount because the account has not been open for 5 years. D) no tax.
The answer is D - Explanation An individual can always withdraw the initial principal in a Roth without tax or penalty - it is only the earnings that will be subject to tax if not meeting the requirements of the Internal Revenue Code. In order for withdrawals of earnings from a Roth IRA to be free of any tax, there are two primary requirements: The first is that the owner be at least 59½ years of age. The second is that it is at least 5 years since the first deposit to a Roth IRA in the individual's name. Both of those conditions are met here. The client is 62 and the initial Roth IRA deposit was made 8 years ago. It is irrelevant which account the money is taken from as long as there is an account that has been open for at least 5 years.
A market maker is quoting ABC common stock at $76.10 - $76.31. That means A) the market maker is willing to pay $76.10 for the stock. B) the spread is probably excessive. C) the market maker's commission is $.21 per share. D) the market maker is willing to pay $76.31 for the stock.
A is the answer - Explanation Marker makers provide a two-sided quote. Because market makers stand ready to buy and sell the specific security, they provide a bid price, the price the firm is willing to pay for the stock, and the offer price, the price they are asking to receive when selling the stock. Market makers do not earn a commission; they charge a markup or markdown. A $.21 spread on a stock at this price is certainly not excessive. LO 23.e
Which of the following investments is the most liquid? A) Oil drilling limited partnership interest B) Long-term municipal bond fund C) Municipal revenue bond issued by a township D) Common stock in a small oil drilling corporation that is quoted on the OTC Link
B is the answer - Explanation The long-term municipal bond fund is the most liquid because it is a mutual fund (a redeemable security), and the investor is assured of a buyer that will exchange money for the redeemed fund shares within 7 days of the redemption request. Municipal bonds of a township, especially those that are from extremely small issuers, may have thin trading markets where sellers have difficulty finding willing buyers. There is not an active secondary market for reselling interests in limited partnerships. Stock of a small corporation that trades on the OTC Link (formerly known as the "Pink Sheets") may also have a thin trading market.
An order to sell securities where immediate execution is more important than price is called A) an unsolicited order B) a market order C) a discretionary order D) a limit order
B is the answer - Explanation The market order is executed as soon as possible at the best price in the market at that moment. Limit orders specify a price.
When comparing a clearing firm to an introducing firm, it would be expected that A) the fully disclosed firm must comply with the customer protection rule (15c3-3). B) the fully-disclosed firm will generally have clearing arrangements with many carrying firms. C) the clearing firm has higher financial requirements. D) the clearing firm holds funds but not securities belonging to the customers of the introducing firm.
C is the answer - Explanation Because of the added risk (maintaining possession of customer funds and securities) the net capital requirements of a carrying (clearing) firm are substantially higher than those of an introducing firm. That is why the clearing firm must always comply with Rule 15c3-3, the customer protection rule, while the introducing firm is exempt. It would be unusual for a fully disclosed firm to have clearing arrangements with more than one BD; that would be like having two completely different back offices. LO 23.d
Which of the following statements regarding a traditional IRA for someone filing a 2023 tax return is true? A) With sufficient earned income, a taxpayer who contributes $6,500 to a Roth IRA can also contribute $6,500 to a traditional IRA. B) Distributions before age 59½ are subject to a 10% penalty in lieu of income taxes. C) The income and capital gains earned in the account are tax deferred until the funds are withdrawn. D) Distributions without penalty may begin after age 59½ and must begin by April 1 of the year preceding the year an individual turns 73.
C is the answer - Explanation The income and capital gains earned in the account are tax deferred until the funds are withdrawn. A traditional IRA allows a maximum annual contribution of $6,500 per individual ($7,500 for those age 50 and older). One may contribute to both a Roth IRA and a traditional IRA, but the total contribution cannot exceed the limit for a single IRA ($6,500 or $7,500 for age 50 and over). Distributions without penalty may begin after age 59½ and must begin by April 1 of the year following the year an individual turns 73. Distributions before age 59½ are subject to a 10% penalty in addition to ordinary income tax. LO 18.a
Under ERISA, a pension portfolio manager may engage in writing covered options A) under any circumstances B) only during declining markets C) only if it fits with the objectives of the plan D) at no time; writing options is too high a risk
C is the answer - Explanation Writing covered options is appropriate as long as it matches investment objectives. While writing covered calls is sometimes done to generate income, writing uncovered, or naked, calls is not appropriate for a pension plan because of the unlimited risk potential.
The main disadvantage of a contributory defined contribution pension plan is that A) at retirement, the client might want to use the retirement fund to generate income in retirement, possibly by purchasing an annuity. B) the employer contributed toward the retirement planning of the employee. C) the employees can choose the amount they wish to invest. D) the actual sum an employee will receive at retirement is unknown.
D is the answer - Explanation The liability of the employer in the defined contribution pension plan is an agreed contribution to the plan. The actual performance of the plan's investments will determine the final amount to be paid to the individual at retirement. In a contributory plan, the employee is also eligible to make contributions. LO 18.c
You have a client who is not covered under an employer-sponsored retirement plan and has been contributing the maximum to her traditional IRA. She has just informed you that she won $1 million in the lottery, plans to continue working, and would like to continue to contribute to her IRA. Which of the following statements is correct? A) Her income for the year exceeds the allowable limit for making a contribution. B) She may continue to contribute, but only a portion of her contribution will be tax deductible. C) She may continue to contribute, but her contribution will not be tax deductible. D) She may continue to contribute and her contribution will be tax deductible.
D is the answer - Explanation The only time that there is an earnings limit for tax deductibility is when the individual (or spouse) is covered under an employer-sponsored retirement plan. That is not the case here. It is important to note that the client intends to continue in her job because lottery winnings are not considered earned income for an IRA contribution.
Which of the following best describes the death benefit provision of a variable annuity? A) Upon death, the beneficiary will receive the benefit as a lump sum. B) Upon death, the proceeds pass to the beneficiary free of federal income tax. C) If death should occur before age 59½, the 10% early withdrawal penalty does not apply. D) The principal amount at death is the greater of the total of premium payments or the current market value.
D. is the answer - Explanation The death benefit insures that the investor will never receive back less than the original amount contributed to the account. Unlike life insurance proceeds, with annuities, anything above the cost basis is taxed as ordinary income. Receiving the benefit as a lump sum is only one of the options available to a beneficiary of a variable annuity death benefit. There are others, such as annuitizing the benefit. Although it is true that the 10% penalty for withdrawal before reaching age 59½ does not apply when the contract owner dies, that does not describe the death benefit. This is a case, as so often happens, when there is a second choice that looks good but doesn't "hit the nail on the head" as does the correct answer.
Jason, a recently divorced individual, is currently 55 years old and has built up approximately $400,000 in several initially funded and rollover individual retirement accounts (IRAs). He now wants to take an early distribution from one of these IRAs. Which one of the following distributions will escape the imposition of a tax penalty for early withdrawal? A) A distribution made in payment for higher-education costs of Jason's granddaughter B) A distribution made on account of financial hardship as determined by Jason's financial planner C) A distribution made upon separation of service from Jason's current Employer D) A distribution made to Jason's ex-wife under a qualified domestic relations order (QDRO)
Explanation A. is the answer - Jason can take a distribution from any of his IRAs without imposition of a tax penalty as long as the distribution is used to make a payment of higher-education costs (tuition, fees, books, supplies, and equipment) for a member of his immediate family. The IRS definition of immediate family for this exemption includes: the holder of the IRA; the holder's spouse; the holder or spouse's child, foster child, or adopted child; or the holder or spouse's grandchild. Nieces and nephews are not included. QDROs do not apply to IRAs. Separation from service will not affect Jason's ability to take a distribution from his IRA. A distribution due to financial hardship is always subject to the early distribution penalty if the participant is not yet age 59½. LO 18.f
