Ch 10: Investment Advisory Clients (part 2)

  1. What are the general characteristics of a Joint Tenants in Common (JTIC) account?
    It has multiple owners and each has trading rights. If one owner dies, his account value passes to his estate.
  2. What form of business provides owners with limited liability and income that flows through to its investors?
    A limited liability company (LLC)
  3. What would an IAR consider when performing a capital needs assessment for a client?
    The client's future earnings potential, expenses, and life expectancy, but also inflation expectations
  4. Retirement goals, future college tuition, and remaining mortgage payments are examples of _______ needs.
  5. True or False: When managing assets in a trust, the trustee should consider the grantor's tax status.
    False. Generally, the trustee should act in the best interests of the beneficiary, not the grantor.
  6. Identify the acronym: AGI
    Adjusted gross income
  7. What is adjusted gross income (AGI)?
    An individual's taxable income (e.g., wages, commissions, tips, dividends, and interest)
  8. What happens to a general partnership when a general partner dies?
    Typically, general partnerships dissolve upon the death of a general partner.
  9. If an IAR's client has just died without a will, from whom may she accept instructions?
    From the intestate Administrator
  10. True or False: Employers are required to contribute a specific amount to their employees' SEP-IRAs.
  11. What factors would determine a person's tax status?
    Age, marriage status, state or country of residence, earned income, and unearned income.
  12. What is the tax rate called that applies to the last dollar amount a person earns?
    Marginal tax rate
  13. The ________ tax rate is used to tax the last dollar amount a person earns.
  14. True or False: The amount left on a mortgage is found on a customer's cash flow statement.
    False. That would be a liability on the balance sheet.
  15. True or False: Mortgage payments are found on a customer's cash flow statement.
    True. Mortgage payments are also found on the income statement.
  16. True or False: Tax refunds are found on a customer's cash flow statement.
    True. Tax refunds are cash inflows (i.e. money coming into a customer's account).
  17. When is an individual (single filer) eligible to make tax-deductible contributions to a Traditional IRA?
    When not covered by an employer-sponsored plan or when covered by a plan and below an adjusted gross income limit.
  18. Which plans impose income limitations on the contributors, 529 plans or Coverdell ESAs?
    The Coverdell ESA
  19. How are S Corporations treated for tax purposes?
    S Corporations have the same flow-through treatment as partnerships (i.e., they are not taxable entities).
  20. What business structure does not provide for flow-through tax treatment?
    C Corporations
  21. True or False: When investing in a 401(k) plan, all forms of taxes are deferred on the money contributed.
    False. Although income taxes are deferred, unemployment and Medicare taxes must still be paid in the current year.
  22. ____% of earned income up to $_______ is the maximum contribution to an IRA.
    • 100%
    • $5,500
  23. If Joe is 55 years old, how much could he contribute to his IRA?
    For anyone 50 or older, an additional $1,000 is allowed, making the maximum contribution $6,500.
  24. A contribution of $_______ can be made to a Spousal IRA for a non-working spouse.
  25. True or False: 529 Plans allow for a 5-year front-end contribution of $70,000, which avoids gift tax.
    True ($14,000 x 5 years)
  26. Grandparents contributing to a grandchild's 529 Plan may give how much money and still avoid gift tax consequences?
    Front-loading 5 years of contributions is allowed; therefore, each could contribute $70,000 for a total of $140,000.
  27. A gift of securities between spouses will be subject to gift tax when more than what amount?
    There is no limit on gift size between spouses. The gift tax exclusion of $14,000 per year does not apply to spouses.
  28. Without incurring gift taxes, individuals may give gifts of up to $________ per year to any number of persons.
  29. What is the maximum annual contribution to a 401(k)?
  30. What is the maximum annual contribution to a 403(b)?
  31. What is the maximum annual contribution to a 457?
  32. What are some of the acceptable investments for IRA contributions?
    Stocks, bonds, mutual funds, and CDs
  33. There is a ____% penalty for early withdrawals from an IRA.
  34. When must IRA withdrawals begin in order to avoid the late withdrawal penalty?
    By April 1st of the year after an individual turns age 70 1/2
  35. How are withdrawals from a Traditional IRA treated for tax purposes?
    If all contributions were deductible, then the entire withdrawal is taxed as ordinary income.
  36. How are withdrawals from a Roth IRA treated for tax purposes?
    Withdrawals will be tax-free if the account is open for at least 5 years and is not considered an early withdrawal.
  37. Contributions to a Keogh plan are solely based on _________________ income.
  38. How much may be contributed to a Coverdell each year?
    An after-tax contribution of $2,000 is allowed per year.
  39. In a 529 Plan, what happens if the funds are withdrawn, but not used for qualified education expenses?
    The earnings would be subject to ordinary income tax plus a 10% penalty.
  40. Define vesting.
    The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits
  41. True or False: SEPs require employees to become immediately vested in the full amount contributed.
  42. In a qualified annuity, how is the payout taxed?
    The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.
  43. What is a Simplified Employee Pension (SEP) Plan?
    An employer-sponsored IRA for the self-employed and its employees
  44. For employers offering SEP plans, where are contributions made on behalf of their employees directed?
    In the employee's individual SEP IRA
  45. How much may be contributed to a 529 plan and avoid gift tax?
    A donor may give up to $14,000 per year and avoid the gift tax.
  46. True or False: A gift made to an UGMA/UTMA account is the preferred method of funding a child's college education.
    False. The assets in an UGMA/UTMA account are owned by the child, which may reduce the eligibility for student aid
  47. Why is a client's profession relevant when determining suitability?
    It may indicate the client's level of sophistication and the potential need for liquidity
  48. If a mutual fund's dividends are re-invested, what impact will this have on the cost basis of a client's shares?
    If re-invested dividends are used to acquire additional shares, the client's cost basis will increase.
  49. In calculating an IA's net worth, what assets are NOT included?
    Homes, home furnishings, automoblies, goodwill, and pre-paid expenses are not included.
  50. Under the provisions of UGMA/UTMA, when does a minor obtain ownership of the assets in the account?
    A minor is the owner at the time a gift is made, but does not gain control of the assets until he reaches legal age.
  51. Per IRS Publication 950, the gift tax annual exclusion is $______, but is adjusted by the cost of living (now $______).
    • $10,000
    • $14,000
  52. Due to a significant event, when is an issuer required to file a Form 8-K?
    Within four business days of the event. However, compliance with Regulation FD may require filing sooner.
  53. An investor buys stock for $100 and receives a $10 dividend. If she sells for $95, what is her capital gain or loss?
    Her loss is $5 ($100-$95). The $10 dividend is taxed separately and is not treated as a capital event.
  54. If Bruce intends to buy an IPO in his wife's individual account, what is the regulatory issue?
    Bruce must obtain signed third party authorization from his wife in order to complete this trade.
  55. What form is filed with the IRS when a financial institution acts as a fiduciary (e.g., receiver or conservator)?
    Form 56-F
  56. When selling a primary residence, how much of the gain (if any) is excluded from taxes?
    $250,000 for single filers or $500,000 for joint filers
  57. True or False: Under ERISA, business decisions (e.g., choosing the type of plan) are made by fiduciaries.
    False. Business decisions are made by settlors and are referred to as settlor functions.
  58. True or False: A stockholder is able to vote for a director, but not an officer.
  59. List the retirement accounts that have required minimum distributions.
    Required minimum distributions apply to traditional IRAs, 401(k), 457, and 403(b) plans.
  60. True or False: Required minimum distributions apply to SEP IRAs.
    True. Required minimum distributions apply to IRA SEP plans.
  61. True or False: IRA contributions must be made in cash.
    True. Although IRA contributions must be in cash, the account may be invested in various securities.
  62. True or False: An order ticket includes the price of execution.
    False. The price of execution is found on the customer confirmation.
  63. How much may be contributed to a Simplified Employee Pension (SEP) plan?
    Employers may contribute 25% of employee income up to $52,000 per year.
  64. What amount may be gifted without being subject to the gift tax?
    A gift of $14,000 per recipient, per year is permitted.
  65. What is the maximum annual contribution for a Keogh Plan?
    20% of pre-tax income up to $52,000 each year
  66. True or False: The income of a C Corporation is subject to double taxation.
    True. The corporation pays tax on its earnings, with any distributions being taxed to the owners (shareholders).
  67. When may an individual withdraw money from an IRA without penalty?
    After he turns 59 1/2
  68. What would be an advantage to being formed as a corporation as opposed to a partnership?
    Partnerships are dissolved due to the death of any of the partners, while corporations may continue.
  69. What happens if the S&P 500 declines by 20% at any time during the day?
    The market is closed for the remainder of the trading day
  70. A branching trust would pass on a(n) _________ of the trust to the next generation.
    equal share
  71. A per capita trust would pass on the same __________ of the trust to each member of the next generation.
  72. True or False: Required minimum distributions apply to Roth IRA accounts.
    False. Required minimum distributions apply to traditional IRA accounts, not Roth IRAs.
  73. A SIMPLE 401(k) may be established by a ______________.
    small business.
  74. A SIMPLE 401(k) may not be established by a business that has more than ___ employees.
  75. The maximum contribution that may be made to a SIMPLE 401(k) is _______.
  76. For employees who are 50 and older, the catch-up contribution in a SIMPLE 401(k) is ______.
Card Set
Ch 10: Investment Advisory Clients (part 2)
Ch 10: part 2