Financial Planning Exam Test Bank, Exams of Nursing

Download Financial Planning Exam Test Bank and more Exams Nursing in PDF only on Docsity! 2024 CRPC Exam Test Bank New Latest Version with All Questions from Actual Exam and 100% Correct Answers and Rationale 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? A)$8,000 B)$1,960 C)$960 D)$660 ------- Correct Answer -------- --B 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% The continuing evolution of investment advice and the regulation surrounding it will most likely lead to: A)increased client expectations of advisers and downward pressure on fees. B)minimal impact on client expectations of advisers or on any fees being charged. C)less and less government involvement with the financial services industry. D)decreased client expectations of advisers and fees will stay about the same. -------- Correct Answer -------- --A The bar is being raised because the fiduciary standard is a higher standard than the suitability standard. This will increase client expectations of advisers and put downward pressure on fees, especially high fee products that have better, lower fee alternatives available. There is very little chance the government will be less involved over time. 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. -------- Correct Answer -------- II & III Marge must begin distributions in the year following the year Homer died. Marge can move Homer's account into her previously existing IRA. She will not be subject to RMDs until she reaches age 72. Marge's only option is to have the account totally distributed by December 31 of the year with the 10th anniversary of Homer's death. Marge can move Homer's IRA into an inherited IRA. She would have to start RMDs when Homer would have been 72. LTC -------- Correct Answer -------- 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. 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? ------- - Correct Answer -------- $19,521 The correct calculator inputs are $8,000, +/-, [PMT]; 11 [I/YR] 12 [N]; $250,000 [FV]; 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? A) Payments from a qualified LTC policy paying up to an annually adjusted per-day limit for charges from an LTC facility will be income tax free. B) Policies issued today generally require an individual to be eligible for Medicare nursing home benefits prior to receiving any insurance policy benefits. C) Because of medical screening, healthy people without a preexisting condition who want to purchase LTC now but may potentially suffer from Alzheimer's disease in the future cannot obtain a qualified LTC policy. D) Practically all current long-term care policies provide for all levels of care-skilled, intermediate, custodial, and/or home care-if the patient needs assistance with two of t -- ------ Correct Answer -------- --A Payments from a qualified LTC policy are income tax-free up to the per-day limit for policies that pay per diem benefits. The per-day cap on tax-free LTC benefits cannot exceed $390 (for 2020). While many LTC policies cover all levels of care, many provide only for home care or exclude any care provided outside of a long-term care facility. Policies sold in states that have adopted the National Association of Insurance Commissioners' Long-Term Care Insurance Model Regulation must cover Alzheimer's. Although medical screening might prevent a person with Alzheimer's disease from purchasing an LTC policy, it cannot prevent a healthy person from purchasing an LTC policy in states that have adopted the model regulation (i.e., a qualified policy). 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? -------- Correct Answer -------- $389,957 The monthly retirement income need is not specified as "today's dollars," and no inflation rate specified; therefore, it must be assumed that the $2,500 net monthly income need represents retirement dollars, and the retirement period income stream is level. To calculate the lump sum needed at the beginning of retirement, discount the stream of monthly income payments at the investment return rate: 10BII+ PVAD calculation: Set calculator on BEG and 12 periods per year, then input the following: 2,500 [PMT] 25 [SHIFT] [N] 6 [I/YR] 0 [FV] Solve for PV = $389,957 Chris and Eve Bronson have analyzed their current living expenses and estimated their retirement income need, net of expected Social Security benefits, to be $90,000 in today's dollars. They are confident that they can earn a 7% after-tax return on their investments, and they expect inflation to average 4% over the long term. Determine the lump sum amount the Bronsons will need at the beginning of retirement to fund their retirement income needs, using the worksheet below. (1) Adjust income deficit for inflation over the preretirement period:$ 90,000present value of retirement income deficit25number of periods until retirement4%% inflation rateFuture value of income deficit in first retirement year$239,925(2) Determine retirement fund needed to meet income deficit:$239,925payment (future value of income deficit in first retirement year)30number of periods in retirement The lump sum needed at the beginning of the Br -------- Correct Answer -------- $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. 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? -------- Correct Answer -------- A) analyze information B) gather data C) make and implement recommendations D) monitor performance --B When the client's circumstances change, the asset management process goes back to the data gathering step in the process. When the client's circumstances change, the asset management process goes back to the data gathering step in the process. -------- Correct Answer -------- A) realistic B) clearly defined C) long-term perspective D) fluid --D An investment policy provides guidelines that are standards to be followed. If they are fluid, they are ever-changing and therefore would be difficult to implement and would provide inconsistency in the management of the portfolio. An investment policy provides guidelines that are standards to be followed. If they are fluid, they are ever-changing and therefore would be difficult to implement and would provide inconsistency in the management of the portfolio. -------- Correct Answer -------- A) tactical. B) alpha. C) core/satellite. D) strategic. --B Alpha is not an asset allocation strategy, but a way to measure a portfolio manager's return relative to the amount of risk that has been taken. Assume the following asset classes have the correlations to long-term government bonds shown below: Treasury bills:.12 Gold:-.25 Large stocks:.22 Small stocks:.17 Which one of the following correctly states the impact of diversification on long-term government bonds? -------- Correct Answer -------- A) Gold provides more diversification than large stocks. B) Small stocks provide more diversification than Treasury bills. C) Treasury bills provide more diversification than gold. D) Large stocks provide more diversification than small stocks. --A The asset with the lowest correlation provides the most diversification. Therefore, gold provides more diversification than any of the other assets. 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%? -------- Correct Answer -------- A) $1,074.39 B) $893.23 C) $1,000.00 D) $1,115.57 --D Set the calculator for 2 P/YR and use the END mode. The inputs then are as follows: 1,000 [FV], 35 [PMT], 20 [SHIFT] [N] = 40, 6 [I/YR], and solve for PV = $1,115.57. Note: The $35 payment is the semiannual payment of the bond. This is computed by taking the 7% coupon rate the par value of $1,000 = $70 and divide that by 2 to get the semiannual interest paid, in this case $35. Also, the yield to maturity (YTM) is less than the coupon rate, thus the bond must be selling at a premium. 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? -------- Correct Answer -------- -- There is no reduction to his benefits. The client's earnings (earned income) are below the allowable limit for the current year ($18,240 for 2020). Remember that according to the work penalty rule, only earned income is counted toward the "allowable limit." 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)? -------- Correct Answer -------- A) If the spouse of the worker has attained FRA and is entitled to benefits on their earning record, the benefit is the lesser of 100% of the spouse's own PIA or 50% of the worker's PIA. B) If the spouse is at or above his or her full retirement age when commencing Social Security benefits, the spouse will receive at least 50% of the worker's PIA. C) A 63-year-old spouse of the retired worker will receive at least 50% of the worker's PIA. D) The worker will receive 80% of his or her primary insurance amount (PIA). --B C) The security's returns can be expected to be between 5.8% and 22.6% approximately 68% of the time. D)The security's returns can be expected to never be negative. --C This security can be expected to have a return that does not range beyond one standard deviation on either side of its average return approximately 68% of the time. The standard deviation is subtracted from and added to the average return and there is no guarantee that an investor will never have a negative return. Volatility is measured by beta. Which one of the following individuals would be best served by a $5,000 Roth conversion? -------- Correct Answer -------- A)Tom, a 51-year-old mid-level manager making $90,000 B)George, a 28-year-old father of two whose wife is completing school; their income is $24,000 C)Mandy, a 30-year-old highly paid executive D)Rachel, a 63-year-old widowed grandmother whose income is $70,000 and has $55,000 in her IRA --B George is young, so converting now would give him the longest time for the Roth account to grow and thus produce tax-free income in retirement. Second, George's gross income is below the standard deduction for a couple married filing jointly. Also, they will receive two child tax credits and an earned income credit. Thus, the conversion will not be income taxed. The others are older and subject to income tax now. Rachel does not need to convert because she does not seem to be on a path that will make her pay income taxes in retirement when she takes a monthly benefit. 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: -------- Correct Answer -------- A) dynamic. B) tactical. C) strategic. D)core/satellite. --C This is a correct example of a strategic approach. Tactical is choosing various sectors that you believe will do best, and changing as you believe is necessary. The dynamic approach is to change asset allocation amounts as the market changes, typically used by institutional investors. Core/satellite is a combination of strategic and tactical. 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? -------- Correct Answer -------- -- Harry does not have to pay any tax or penalty on the $2,000 distribution, even though he is only 34. All Roth IRA contributions are made with after-tax funds, and contributions are considered to be withdrawn first, tax-free, then earnings. Also, the IRS rules allow the aggregation of all Roth IRAs for this calculation. Penalties would apply only to the gains the account experienced or withdrawals of converted amounts within five years of the conversion. 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? -------- Correct Answer -------- --$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. TSA -------- Correct Answer -------- A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities. It's similar to a 401(k) plan maintained by a for-profit entity. ... The deferred salary is generally not subject to federal or state income tax until it's distributed. Adjusted Gross Income (AGI) -------- Correct Answer -------- Is defined as gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account. Your AGI will never be more than your Gross Total Income on you return and in some cases may be lower. Refer to the 1040 instructions (Schedule 1) for more information. If you are filing using the Married Filing Jointly filing status, the $72,000 AGI limitation applies to the AGI for both of you combined. To e-file your federal tax return, you must verify your identity with your AGI or your self- select PIN from your 2019 tax return. 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? -------- Correct Answer -------- -- He will not pay taxes or a penalty. The distribution is not qualified because Charlie is under age 59½, not disabled, not dead, or not making a first-time home purchase and he is withdrawing the money before the waiting period of five tax years. Withdrawals within five years are not prohibited, but taxation may occur and penalties may apply in some cases. None of this withdrawal, however, is included in Charlie's taxable income because the $2,650 sum is less than the aggregate total of his contributions ($4,000). Also, no penalty applies because the withdrawal is accounted for as coming from his contributions. The "required beginning date" (RBD) for IRA distributions is which one of the following? -------- Correct Answer -------- --April 1 of the year following the year in which age 72 was attained. By definition, under the SECURE Act the required beginning date for IRA distributions is April 1 of the year following the year in which the participant or IRA owner turns age 72. 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? -------- Correct Answer -------- -- $9,000 Mark's effective tax rate is 45%; i.e., 35% plus the 10% early withdrawal penalty. 45% $20,000 tax-deferred earnings = $9,000. The $20,000 basis in the IRA is not subject to income tax or the early withdrawal penalty. Richard, age 45, and his wife Betty, age 44, plan to contribute a total of $12,000 to their IRAs for 2020. They both work outside the home, and they file a joint income tax return. Richard is a teacher at the local high school and participates in a 403(b) plan. Betty's employer does not provide a retirement plan. They expect that their adjusted gross income for the year will be $130,000. What amount, if any, can they deduct for their IRA contributions? -------- Correct Answer -------- --$6,000 An individual is not denied a deduction for his or her IRA contribution simply because of the other spouse's active participation, unless the couple's combined AGI exceeds $196,000 (phasing out to $206,000 in 2020). Based on their AGI, Betty will be able to deduct a contribution of up to $6,000 to an IRA. Richard cannot deduct any of his IRA contribution because their AGI is beyond the 2020 phaseout range for active participants of $104,000-$124,000 for 2020. Because their combined AGI is too high for Richard to make a deductible IRA contribution, he should consider contributing to a Roth IRA. Their AGI is well below the start of the phaseout range for married people filing jointly who contribute to a Roth IRA. For purposes of determining if an individual may contribute to an IRA, -------- Correct Answer -------- A) workers' compensation or unemployment compensation are considered to be earned compensation. B) taxable alimony received from a divorce finalized prior to January 1, 2019, is considered to be earned compensation. A Medicare Part A patient must pay -------- Correct Answer -------- 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 one of the following U.S. citizens is currently eligible for Medicare Part A coverage at no cost? -------- Correct Answer -------- A) an unmarried heiress who has always lived on trust fund money, has never had earned income, and just turned 65 B) a federal government employee, hired in 1989 and age 64 C) a self-employed truck driver, age 66 D) a professional independent corporate director, age 57 -- C Which of the following statements accurately describe basic provisions of Medicare Part B? Coverage includes benefits for physicians' services. Individuals who are eligible for Part A are automatically eligible for Part B. Coverage includes benefits for inpatient hospital services. Participants pay a monthly premium. -------- Correct Answer -------- -- I, II, and IV Medicare Part B includes coverage for physicians' services; Part A covers hospital charges. Part A is provided to eligible individuals at no charge, but participants must pay a premium for Part B. Individuals who are eligible for Part A are automatically eligible for Part B, and receive it if they pay the related premium. 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? -------- Correct Answer -------- 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. 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? -------- Correct Answer -------- I. Medicaid II. health insurance III. Medicare IV. group long-term care insurance offered through employers -- I. III. IV These three are possible sources of LTC except health insurance. Medicaid and long- term care insurance provide recipients with benefits such as nursing home care. Medicare provides only 20 days of skilled nursing care at full cost and 80 days thereafter with a substantial copay, in only a limited number of situations. It is designed only to provide temporary care while patients improve enough to go home, but it does provide some level of LTC coverage. Jennifer recently separated from service with Acme Inc. at age 52, and rolled her qualified plan lump sum into a new IRA. She had been a plan participant for 12 years. This year, she began working for a new employer that provides a profit sharing plan for employees. Jennifer will be eligible to participate in her new employer's profit sharing plan in June of next year. Which one of the following statements describes an option that will be to Jennifer's benefit? A) Jennifer should leave the rollover funds in the IRA for three more years. At age 55, she can distribute the account and benefit from capital gains treatment. B) Jennifer should use the direct rollover to roll the entire IRA over into her new employer's qualified profit sharing plan in accordance with tax requirements and plan provisions if the plan allows her to do so and allows for loans. C) Jennifer should leave the rollover funds in the rollover IRA unti -------- Correct Answer -------- --B If the qualified plan allows for loans, rolling the IRA into the qualified plan would give her a resource to meet a financial need without incurring income tax or a tax penalty. Forward-averaging treatment is not available on any distribution from an IRA, but that point is moot because Jennifer was not born before January 1, 1936. Jennifer would not qualify for capital gains treatment since all distributions from IRAs and qualified plans are taxed as ordinary income. Taking a current distribution from the IRA would result in a current tax liability. Which one of the following is a potential problem with a golden parachute? -------- Correct Answer -------- -- Any excess payment would be nondeductible by the payor and subject to an excise tax by the employee. If compensation falls into the golden parachute category, the employer will lose the deduction on any excess parachute payments and the employee will be charged a nondeductible 20% excise tax on any excess parachute payments. Which one of the following types of distributions are eligible for rollover treatment? A) Distributions that are made to comply with the minimum distribution requirements are eligible for rollover treatment. B) A lump sum payment from a profit sharing plan payable upon separation from service is eligible for rollover treatment. C) The nontaxable portion of any IRA distribution is eligible for rollover treatment. D) Distributions that are part of a series of substantially equal periodic payments are eligible for rollover treatment. -------- Correct Answer -------- --B A lump sum payment from a profit sharing plan payable upon separation from service is eligible for rollover treatment. The following distributions are not eligible for rollover treatment: 1. Distributions that are part of a series of substantially equal periodic payments are not eligible for rollover treatment. 2. Distributions that are made to comply with the minimum distribution requirements are not eligible for rollover treatment. 3. The nontaxable portion of any IRA distribution is not eligible for rollover treatment. With an IRA, there is no one but the owner to validate that the contributions were after- tax. With an employer retirement plan, the administrator of the plan validates that the contributions were actually after tax. Which of the following are correct statements about survivor benefits from a qualified retirement plan? -------- Correct Answer -------- Answer: II, III. IV. V. I. Profit sharing plans that accept direct transfers from pension plans are not required to provide a qualified joint and survivor annuity (QJSA). II. The QJSA may be waived if the spouse gives written consent to the effect of the election and the naming of another beneficiary. III. Defined benefit, money purchase, cash balance, and target benefit plans must provide a QJSA. IV. A pension plan is not required to provide a survivor annuity if the plan participant and spouse have been married for less than one year. V. The QJSA payable to the spouse must be at least 50%, but not more than 100%, of the annuity amount payable during the joint lives and actuarially equivalent to a single life annuity over the life of the participant. Survivor benefits from a qualified retirement plan -------- Correct Answer -------- The spouse may waive the QJSA (qualified joint and survivor annuity) option via written consent, which includes acknowledging the effect of the waiver and the naming of another beneficiary. If the participant and spouse have been married for less than one year, the plan does not have to provide a survivor annuity. The QJSA must be actuarially equivalent to a single life annuity over the life of the participant and at least 50%, but not more than 100%, of the annuity payable during the joint lives of the participant and spouse. Profit sharing plans that accept direct transfers from pension plans are subject to the QJSA requirements. Which one of the following is not a characteristic of a rollover? A) A rollover generally must be completed within 60 days of the distribution. B) If a qualified plan distribution is made due to the participant's death, the surviving spouse may roll the distribution into another qualified plan, TSA, SEP, IRA, or governmental 457 plan that accounts for such rollovers separately. C) A nonworking, 45-year-old divorced person who receives taxable alimony may contribute to an IRA the lesser of $6,000 or 100% of any taxable alimony received. D) Someone past age 72 is not allowed to contribute to a traditional IRA under any circumstances. --C For purposes of IRA eligibility, an individual must have "compensation" (earned income or taxable alimony). Thus, a 45-year-old divorced person who receives taxable alimony (alimony from a divorce settled before 2019) and does not work may contribute the lesser of $6,000 or 100% of the alimony received. Any person receiving an addition to a qualified retirement plan (employee contribution, employer contribution, or forfeitures) other than interest and earnings will be deemed an active participant. Section 457 plans follow many of the same rules as qualified plans, but participation in one will not result in the employee being considered an active participant. The SECURE Act deleted the former age restriction on traditional IRAs. Of course, the older person must still have earned income. OASDI-HI? -------- Correct Answer -------- Old-Age, Survivors, and Disability Insurance (OASDI) Program 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? -------- Correct Answer -------- I. survivor's benefit for Maxine's dependent child II. lump-sum death benefit for Maxine's spouse or child III. survivor's benefit for Maxine's dependent parent who is age 62 or older IV. survivor's benefit for Maxine's spouse or former spouse who is age 60 or older -- I&II With eight quarters of continuous coverage, Maxine would be currently insured, but she would not be fully insured. The test for being currently insured is earning six of the last 13 credits (a.k.a. quarters). She has eight of the last 13. To be fully insured, she would need one credit per year since age 21. She is 36, so she needs 15 credits to be fully insured (36 - 22 = 14, and 14 is more than the minimum of six credits), but she has only eight credits. To calculate the number of credits needed to be fully insured, you always subtract 22 from the age and then ensure this is at least the minimum requirement of six credits. The maximum is 40. After 40 credits you are fully insured for life; however, to be eligible for disability benefits you also need to have a recent attachment to the labor force. For those 31 and over, that usually means at least 20 of the most recent 40 credits. Options I and II are available to a currently insured worker. Options III and IV are only available to a fully insured worker. Capital gains -------- Correct Answer -------- Net long-term capital gains are subject to a 0% tax rate if the single taxpayer has taxable income under $40,000 (for 2020). Net short-term gains are subject to a taxpayer's ordinary income tax rate. A maximum rate of 28% applies to long-term gain on collectibles. In 2014 Jim, a single taxpayer, purchased a new residence that he used as his principal residence. Early in 2020 he sold the residence for a realized gain of $300,000. What is the maximum amount of gain that Jim may exclude under Section 121? -------- Correct Answer -------- $250,000 A single taxpayer may exclude up to $250,000. The remaining $50,000 of gain must be recognized (taxed). Which one of the following statements is true regarding nonperiodic distributions from an annuity contract prior to the annuity start date? -------- Correct Answer -------- LIFO A nonperiodic distribution (withdrawal) from an annuity is not prorated equally between a tax-free return of principal and a taxable interest payment; it is first considered a taxable interest payment and then a tax-free return of principal (LIFO). 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? -------- Correct Answer -------- 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. Which one of the following statements correctly describes the method for calculating the exclusion ratio for a fixed annuity? -------- Correct Answer -------- 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. What is the tax treatment for a shareholder participating in a common stock's dividend reinvestment program? -------- Correct Answer -------- 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 one of the following statements is correct regarding managing a taxable account? -------- Correct Answer -------- Qualified dividends are generally subject to a preferential tax rate of 0%, 15%, or 20% Qualified dividends are subject to preferential long-term capital gain rates. Net capital losses up to $3,000 per year are deductible and any additional losses can be carried forward to a future year. Dividends are subject to taxation, even if reinvested. In a taxable account, traders certainly do need to take into account the timing and taxability of their security transactions. The valuation date for gifts is -------- Correct Answer -------- the date on which the transfer is completed. A fundamental duty owed to a client is to always look out for what is in the client's best interest, what fiduciary duty best personifies this? -------- Correct Answer -------- duty of loyalty The fiduciary duty that best personifies looking out for the client's best interest first is the fiduciary duty of loyalty. This duty requires being loyal to the client first and foremost, and always looking out for what is in their best interest. duty of care -------- Correct Answer -------- The duty of care is analogous to medical care. It looks at the degree of skill and diligence, not the adviser's feelings about the client's situation. Which of the following limit ownership to spouses only? -------- Correct Answer -------- Only spouses can hold title as tenants by the entirety and as community property. Non-spouses can hold title as joint tenants (JTWROS) or tenants in common. All of the following assets would be included in a decedent's gross estate except -------- Correct Answer -------- --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. Gift splitting allows -------- Correct Answer -------- a married couple to double their allowable annual exclusions. 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. All of the following are ways that a person can voluntarily transfer estate assets to another person or entity at death except: A) by will substitute. B) by gift. C) transfer on death (T.O.D.). D) by probate. -------- Correct Answer -------- -- B Probate and will substitute are ways that a person can voluntarily transfer estate assets to another person or entity at death. Gifting is one of the two ways that a person can voluntarily transfer estate assets to another person or entity during life, not at death. T.O.D. passes the brokerage account to the named person when the owner of the account dies. P.O.D. (payable on death) transfers a bank account in the same way. Which one of the following statements regarding Henry, who recently married for the first time, is correct? A) Items received by a gift or inheritance during the marriage are considered community property. B) In a community property state, Henry's spouse is deemed to have a vested 50% interest in all of the property Henry owned at the time of the marriage. C) In a community property state, any property Henry owns at death will go to his spouse by right of survivorship. D) In a community property state, Henry's earnings from his job subsequent to the date of his marriage will be considered community property. -------- Correct Answer -------- --D Only property acquired after marriage is considered community property unless separate property acquired before marriage is later commingled with community property. Community property does not have a right of survivorship feature. Also, spouses can own property in their sole names in a community property state. Items received during the marriage by gift or inheritance are separate property. Which one of the following statements regarding different forms of property co- ownership is correct? A) JTWROS, TBE, and CP are all forms of co-ownership that do not require a probate proceeding when one tenant dies. B) Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and community property (CP) are all forms of co-ownership that can be used by a husband and wife. C) Payable on death (P.O.D.) and transfer on death (T.O.D.) designations are completed gifts that give the named person the right to handle the account while the original owner is alive. D) JTWROS, TBE, and tenancy in common are all forms of co-ownership that require the consent of other co-owners before an owner can sell his or her interest in the asset. -------- Correct Answer -------- -- B JTWROS can be used by anyone, including spouses; only spouses can use TBE and CP. CP requires the asset to go through probate. TBE requires the co-owner spouse to consent before the other spouse can sell his or her interest. This is unique to holding an asset as TBE. For example, a couple holding an asset as TBE is a good idea if one spouse has an addiction problem (gambling, drugs, etc.). T.O.D. and P.O.D. accounts are not completed gifts. They do not give the person named in the T.O.D. or P.O.D. any rights in the asset until the current owner dies. Different forms of property co-ownership -------- Correct Answer -------- JTWROS can be used by anyone, including spouses; only spouses can use TBE and CP. CP requires the asset to go through probate. TBE requires the co-owner spouse to consent before the other spouse can sell his or her interest. This is unique to holding an asset as TBE. For example, a couple holding an asset as TBE is a good idea if one spouse has an addiction problem (gambling, drugs, etc.). T.O.D. and P.O.D. accounts are not completed gifts. They do not give the person named in the T.O.D. or P.O.D. any rights in the asset until the current owner dies. Which one of the following actions would probably not constitute the unauthorized practice of law by a non-attorney financial planner? A) representing another person in court B) telling a client that property titled in joint tenancy with right of survivorship will pass outside of probate at his or her death, but that community property will be included in the deceased's probate estate C) drafting a power of attorney for a client D) advising a client to conduct business as a partnership rather than a corporation ------- - Correct Answer -------- --B Telling a client that property titled in joint tenancy with right of survivorship will pass outside of probate at his or her death merely recognizes a well-established fact and does not constitute the unauthorized practice of law. Because a power of attorney can be used to affect the client's property, only a licensed attorney should draft it. The form of business entity can greatly affect a client's legal rights and obligations; therefore, an attorney should make this recommendation. Many people think community property passes to the surviving spouse automatically. It does not. Community property goes through probate. If there is no will, community property passes according to state law. 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.) ------- Correct Answer -------- If you know the Rule of 72, and you divide 3.5 into 72, you arrive at the number 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 = $150,000 What is the second step in the retirement planning process? ------- Correct Answer ------- - The second step in the retirement planning process is to gather client data, including goals and expectations What is the first step in the retirement planning process? ------- Correct Answer -------- The first step is to establish and define the client-counselor relationship which includes disclosing the counselor's compensation arrangement What is a characteristic of a TIP? ------- Correct Answer -------- The increase in principal is taxable each year. Any annual increase in principal is subject to federal taxation (unless in a tax-deferred account). Returns are tied to the consumer price index. TIPS are sold at par value and have maturities up to 30 years. How you calculate the weighted beta of a portfolio? ------- Correct Answer -------- You multiply the weight times the beta for each stock, then you add those numbers up together. What does Jensen's alpha tell you ------- Correct Answer -------- The percentage a manager over or underperformed based on the amount of risk taken. Moving averages, graphs and statistics regarding the supply and demand of stocks are an example of what kind of analysis? ------- Correct Answer -------- Technical analysis. Financial statement ratios are part of what kind of analysis? ------- Correct Answer ------- - Fundamental analysis. When performing bond calculations, what general assumptions should be made unless stated otherwise? ------- Correct Answer -------- The coupon rate is annualized but paid semiannually for U.S. bonds. The face value of the bond should be assumed to be $1,000, not $10,000. The coupon rate is stated on an annual basis but is assumed to be paid semiannually for U.S. bonds and the coupon payment is always made at the end of the period, not the beginning. Which is correct regarding the additional payroll tax for high wage earners that was brought about by the Patient Protection and Affordable Care Act ------- Correct Answer - ------- 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. 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? ------- Correct Answer Name a few things that Medicare Supplemental Insurance (Part B) provides coverage for. ------- Correct Answer -------- Provides coverage for physicians services and the following that are not already covered by Part A: Home health care, medical services, therapist, ambulances and certain costs for blood that are no covered in Part A What are some medical expenses not covered by Part B? ------- Correct Answer -------- Most routing physicals, most immunizations, eyeglasses, hearing aids and exams, dental, and most prescription drugs. What is covered by Medicare Part A and Part B? ------- Correct Answer -------- Home Health Care. What is the government health insurance program designed for individuals with low income or minimal assets regardless of their age or employment status? ------- Correct Answer -------- Medicaid. The costs not covered by either Part A or Part B are referred to as what? ------- Correct Answer -------- Medigaps. Medigap insurance is designed to supplement Medicare's benefits by filling in some of what medicare does not cover including deductibles and co-insurance amounts The delivery of Long Term Care generally takes one of two forms. What are they? ------- Correct Answer -------- Personal care and Skilled care. In order to be considered a "qualified" policy, a long-term care policy must provide for what? ------- Correct Answer -------- Nonforfeiture options, cognitive impairment must be covered, it must be guaranteed renewable and conform to the National Association of Insurance Commissioners Model Act. What is a golden parachute plan? ------- Correct Answer -------- An arrangement between an employer and an executive that will provide the executive with severance benefits if the employer is sold and the new employee fires the executive. If you take a hardship distribution from your TSA, what would be the tax consequences? ------- Correct Answer -------- Hardship withdrawals that are used to pay certain medical expenses would be subject to income tax but not to the 10% tax penalty. What kind of distribution from a 403b would NOT be subject to the 10% premature withdrawal penalty? ------- Correct Answer -------- A QDRO. What kind of distribution would be exempt from the 10% penalty on a qualified plan distribution before age 59.5? ------- Correct Answer -------- Substantial equal periodic payments made to a participant following separation of service based on the participants life expectancy. Are withdrawals from an IRA to pay for qualified expenses exempt from the 10% early withdrawal penalty? ------- Correct Answer -------- Yes. Dan, age 58 has decided to being periodic withdrawals from his IRA. In order to avoid the 10% early withdrawal penalty, distributions must continue until at least what age? --- ---- Correct Answer -------- Age 63. Distributions must continue for at least five years or until the individual has reached 59.5, whichever is later. When is the distribution on a Roth IRA qualified? ------- Correct Answer -------- If the five year holding period has been met and the distribution is made after the attainment of age 59.5, death or disability or for the first time purchase of a home (max is $10k). A "rising equity glidepath" typically will lead to a ________ equity exposure over one's total lifetime. ------- Correct Answer -------- Decreased. Remember: RISING = decrease. HIGH = Low. What is the long term capital gain holding period? ------- Correct Answer -------- More than 12 months. Net short-term capital gains are treated as what type of income? ------- Correct Answer - ------- Ordinary. They are subject to the taxpayers regular marginal tax rate. How much can a single person exclude on the sale of their home? ------- Correct Answer -------- Up to $250,000.00, provided the home has been used as the principal residence for two of the previous five years. A partial exclusion is available if the two year rule is not met due to health, job or other unforeseen circumstances. What can a will NOT be used for? ------- Correct Answer -------- Planning for incapacity, avoiding probate, or to transfer assets during the life of the owner. Wills, beneficiary designations, and correct titling of property can all accomplish what when it comes to estate planning goals? ------- Correct Answer -------- Assure that property is distributed according to the owner's wishes. What is the duty to disclose? ------- Correct Answer -------- Requires you to explain the risks of investments sold to clients even those backed by the US government. What is the duty to diagnose? ------- Correct Answer -------- Includes knowing the customer and making sure that the investment recommendations are suitable for the customer. Why is owning property in joint tenancy with right of survivorship a will substitute? ------- Correct Answer -------- Because the property passes outside of probate. Intestate property passes by means of what? ------- Correct Answer -------- The probate process. It is NOT a will substitute. Property that passes by the laws of intestate succession is not affected y any will provisions. Intestate succession statues give property to many other family members before transferring it to the state. The donee's basis in gifted property is determined by what valuation? ------- Correct Answer -------- The donor's adjusted basis in the property at the time of the gift if the property has appreciated in value while owned by the donor AND the property's Fair Market Value at the time of the gift if this value is less than the donor's adjusted basis and the property is sold at a loss. What is a characteristic of the unified tax system that is NOT common to both federal gift taxation and federal estate taxation? ------- Correct Answer -------- Availability of the annual exclusion amount. What must a donor do for the federal gift tax to apply? ------- Correct Answer -------- They must give up control of the property. What is the Federal Gift Tax exclusion and what must someone do to qualify for it? ------ - Correct Answer -------- It is the maximum amount of present interest gifts allowed per donee per year or the actual amount given to the donee, whichever is less. To qualify, a donor must make a completed gift of a PRESENT interest which may be either partial or whole. Sequence of return risk is thought to have the most potential impact on an individual who has what? ------- Correct Answer -------- Just retired and begun distributions from his or her account. Which of the following are correct statements about the capital utilization strategy? ------ - Correct Answer -------- 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. Which one of the following is not a key element of an investment policy? ------- Correct Answer -------- A) a provision for periodic review B) the acceptable risk tolerance level C) a target asset allocation D) names of specific stocks to be in the portfolio --D The key elements in an investment policy are a clear statement of the client's goal, suitable investment vehicles and strategies, the acceptable risk tolerance level for the covered by Social Security. The client 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 ------- Correct Answer -------- his eligibility for Social Security retirement benefits may be reduced due to the windfall elimination provision (WEP). Worked in a position that was not covered by Social Security, and the client is receiving a pension from that employment, ------- Correct Answer -------- 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). Suzy begins her Social Security retirement benefit at full retirement age (FRA). What is the amount that she will receive? ------- Correct Answer -------- primary insurance amount (PIA) Workers who begin their Social Security retirement benefits at full retirement age will receive their primary insurance amount (PIA). This amount is based their lifetime average earnings, or AIME. If they delay their benefits until after attaining FRA they will begin to be credited with DRCs. Those who are only currently insured (not fully insured) are not eligible for Social Security retirement benefits. Henry, a fully insured worker for Social Security purposes, will retire next month at the age of 62. Henry is concerned that he may lose some of his Social Security benefits because of the earnings limitation test. Which of the following sources of Henry's income are counted for purposes of the earnings limitation test? I. IRA withdrawals II. self-employment earnings III. pension annuity payments IV. inheritance payments V. dividend income ------- Correct Answer -------- -- II only "Excess" earned income by Social Security beneficiaries who are under Social Security's full retirement age results in a partial or full loss of benefits, depending on the age of the person, the amount of Social Security benefit, and the amount of earned income. "Earned income" generally includes wages, salary, and self-employment earnings; investment income is not included in this definition. The following non-work sources of income do not count as wages for the earnings test: IRA withdrawals, pension annuity payments, inheritance payments, and dividend income. 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? ------- Correct Answer -------- -- 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%]. What is the maximum percentage of Social Security benefits that may be taxed? ------- Correct Answer -------- 85% The maximum percentage of Social Security benefits that may be taxed is 85%, which occurs when an individual's provisional income exceeds the upper limit of the tax threshold ($34,000 for single filers and $44,000 for married filers). ------- Correct Answer -------- 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. V. 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. ------- Correct Answer -------- -- 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. 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.) Which of the following are factors to consider when making the decision on when to receive Social Security benefits? I. earnings of dependents II. income benefit provided III. additional sources of income V. condition of health ------- Correct Answer -------- -- ALL Each of these is a worthwhile consideration. What children or other dependents earn usually has no impact on the decision of when to receive Social Security benefits because most retirees do not have children under 18 in their home. However, many grandparents today have grandchildren who are their dependents. Also, second marriages to a younger spouse can mean someone eligible for Social Security retirement benefits has a child who is eligible for child retirement benefits. If that child earned more than $18,240 in 2020, the child's retirement benefit would be cut accordingly. 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? ------- Correct Answer -------- -- $4,080 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. 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? ------- Correct Answer -------- -- $0 Lucy is an active participant because she received a profit sharing contribution. Their AGI is greater than the phaseout limit for active participants in 2020 ($104,000- $124,000). Thus, 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. that are payable. But, when the home is no longer the primary residence due to moving or death, the balance is payable. Under the Affordable Care Act, "Platinum" plans offered on the exchanges vary in I. the services that they provide. II. how the insured and insurer share the costs of care. ------- Correct Answer -------- -- 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. A nonspringing durable power of attorney A) remains effective after the principal becomes incapacitated. B) gives the attorney-in-fact authority only when the principal becomes incompetent. C) remains effective after the principal's death. D) is usually created in a person's revocable trust. ------- Correct Answer -------- --A 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. When are living wills applicable? ------- Correct Answer -------- A living will is applicable only when the declarant is in a terminal or similar condition. If the declarant is not in a terminal or similar condition, the medical provider is not required to comply with a patient's living will. Which one of the following is covered under Medicare Part A and Part B? A) most immunizations B) home health care C) hearing aids D) most prescription drugs ------- Correct Answer -------- --B Medicare Part A covers the following post-hospital home health care: 100 home health visits per benefit period. In general, Medicare Part A covers expenses such as inpatient hospital care, post-hospital skilled nursing care, post-hospital home health care, hospice care, psychiatric hospital care, and blood in excess of three pints. Medicare's Supplemental Medical Insurance (Part B) provides coverage for physicians' services and for the following services that are not already covered under Part A: home health care; medical services, which include physician services, therapist (physical, speech) services, supplies, and ambulances; outpatient hospital services; and certain costs for blood that are not covered by Medicare Part A. Medical expenses not covered by Part B include most routine physicals, most immunizations, eyeglasses (and eye exams), hearing aids (and hearing exams), cosmetic surgery, dental care, orthopedic shoes, and most prescription drugs. Which one of the following is correct regarding Medicaid? A) It is a government health insurance program designed for individuals with low income or minimal assets. B) Medicaid covers long-term care expenses using the same eligibility requirements as Medicare C) Medicaid eligibility begins at age 65. D) You must be retired in order to qualify for Medicaid. ------- Correct Answer -------- --A Medicaid is a government health insurance program designed for individuals with low income or minimal assets regardless of age or employment status. Medicaid is a major player in funding LTC expenses, paying a little over half of all LTC expenses incurred in America. 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? A) Medicare Part D deductibles B) deductibles or coinsurance amounts C) Medicare Part B excess amounts D) 100% of skilled nursing coinsurance ------- Correct Answer -------- --B The costs not covered by either Part A or Part B of Medicare are referred to as Medicare gaps or Medigaps. Medigap insurance is designed to supplement Medicare's benefits by filling in some of what Medicare does not cover. A Medigap policy pays for Medicare-approved charges that are not paid by Medicare because of deductibles or coinsurance amounts for which the beneficiary is responsible. The cost and services covered by Medigap policies varies from vendor to vendor and from plan to plan. Some, but not all, Medigap policies cover such items as Part D deductibles, skilled nursing coinsurance amounts, and Medicare Part B excess amounts. Which of the following are usually covered by long-term care insurance? I. treatment for preexisting health problems (within the first six months of the policy) II. personal (custodial) care III. skilled nursing home care IV. care for all mental disorders, in all situations ------- Correct Answer -------- -- II & III 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 A) provide for nonforfeiture options. B) include a return of premium. C) be conditionally renewable D) include a determination of medical necessity by a physician. ------- Correct Answer --- ----- --A 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. 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? ------- Correct Answer -------- -- II & 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. A golden parachute ------- Correct Answer -------- A golden parachute is an agreement between an executive and his or her company requiring the company to pay certain benefits in the event of a change in control of the company. The agreement, therefore, provides a guarantee of financial security to the executive in the event of a takeover. The agreement typically provides severance pay, which takes the form of cash, stock, compensation, extra pension benefits, medical and life insurance, other fringe benefits, and various combinations of all of these benefits. Nonqualified deferred compensation benefits: ------- Correct Answer -------- It is an arrangement whereby an executive makes salary deferrals and an employer makes matching contributions that are invested in blue chip securities held in an escrow account. Which one of the following statements regarding IRA distributions is correct? A) Distributions under a QDRO are exempt from the 10% early withdrawal penalty. B) Distributions from an IRA following separation from service after age 54 are exempt from the 10% early withdrawal penalty. C) Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty. D) Withdrawals from an IRA to pay for qualified education expenses are exempt from the 10% early withdrawal penalty and taxation. ------- Correct Answer -------- --C 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 exemptions for distributions following separation from service after age 54 and QDROs applies to qualified plans and 403(b) plans, but not IRAs. IRA distributions under a marital separation in accordance with a court order does qualify for the 10% early withdrawal penalty for 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? A) Transfer his SEP account, net of the mandatory 20% withholding, directly to an IRA. B) Ask for payment from the qualified plan to be made in the form of a check payable to the custodian of his conduit IRA. C) Roll over all of the distribution he receives, within 60 days of receipt, into an IRA. D) Elect payment in the form of a direct rollover to an IRA. ------- Correct Answer -------- - -C 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. 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. ------- Correct Answer -------- --neither I nor 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. Jane has contributed $1,000 each year to a Roth IRA, beginning with an initial payment of $1,000 on December 31, 2015. She wants to know when she can begin making qualified distributions. Which one of the following statements would represent what you, as her financial adviser, would tell her? A) She would only be able to take $10,000 out of her Roth IRA to pay for the purchase of a first-time home without paying the 10% early withdrawal penalty prior to age 59½. B) Any distribution she takes after January 1, 2020, will meet the five-year holding period requirement. C) Any distributions for medical expenses in excess of 7.5% of AGI would qualify as a tax-free distribution after satisfying the five-year holding period even if she has not attained age 59½. D) After December 31, 2020, the five years will have elapsed, but the earliest she could ever begin making qualified distributions would be after she attains 59½. ------- Correct Answer -------- --B The clock started on January 1, 2015, so five years will have elapsed on January 1, 2020. The five years are 2015, 2016, 2017, 2018, and 2019. Thus, January 1, 2020, would be more than five Roth years later. A Roth IRA owner is required to hold the account for a minimum of five years to qualify for tax-free distributions. In addition, the owner must be at least age 59½, disabled, or making a first-time home purchase. Also, a qualified distribution can be made to a beneficiary after the owner has passed away. The five-year Roth clock for all of these circumstances, including distributions to a beneficiary, start with the first year the Roth contribution was coded for. For example, Juan opened his Roth IRA on March 27, 2019, but the contribution was made for 2018. Thus, his Roth clock started January 1, 2018. Any distributions for medical expenses in excess of 7.5% in 2020 would not be subject to the 10% early withdrawal penalty, but medical expenses and higher education expenses are not withdrawal reasons that satisfy the qualified distribution rules. The exception for up to $10,000 for Roth withdrawals to pay for qualified first time homebuyer expenses does not count the withdrawal of contributions. It also does not count the withdrawal of conversions that are more than five years old. 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 $1,944. 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 past her FRA for survivor benefits when Pa died and she started receiving her survivor benefits. How much would she get each month? A) $2,088 B) $1,944 C) $2,928 D) $1,800 ------- Correct Answer -------- --B 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 $1,944/month. The second step is checking to see if the surviving spouse is at her survivor 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 a reduction is applied based on how many months survivor benefits start before the survivor would reach his or her survivor FRA. For people born in 1962 (not 1960) and later, the survivor FRA is age 67, the spouse's survivor benefits are reduced by .3393% per month the survivor benefit was begun prior to the applicable survivor FRA. Notice that Ma started her own initial retirement benefits based on her own work history. 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. Since Pa lived until Ma reached her survivor FRA, Ma's survivor benefits would not be reduced and she would have received the same $1,944 he was receiving. Howard, age 69, has contributed $100,000 in after-tax dollars to his qualified retirement plan at work. The balance in his account is $400,000. Howard's benefit is payable as a joint and survivor annuity with his 70-year-old wife, Joan. Howard wants to know how much of each monthly annuity payment he receives from the plan will be tax free. Using the table below, how will you calculate the correct amount? Combined Ages of Annuitants at Annuity Start Date: 131-140 Number of Monthly Payments: 260 ------- Correct Answer -------- -- divide $100,000 by 260 Howard and Joan's combined ages at their annuity starting date is 139. Based on their combined ages, they will receive 260 monthly payments over their lifetimes. By dividing $100,000 (after-tax contributions) by the estimated 260 monthly payments they will receive, they will know how much of each monthly annuity payment is a tax-free return of after-tax contributions. The remaining balance of each payment is therefore fully taxable. Your client, Jake, age 55, is considering taking immediate current distributions from his IRA. It was funded exclusively with rollover assets from a qualified pension plan after he decided to take early retirement. Jake would like to avoid any penalties associated with taking early distributions from an IRA. Which of the following are important planning considerations for Jake? A. Distributions can be part of a series of substantially equal periodic payments made over an individual's life expectancy B. Distributions can be made to an individual age 55 or older who has terminated employment with his or her employer. C. Under the required minimum distribution method (also known as the life expectancy method), the resulting annual payments are redetermined each year. A) Net long-term capital gains are generally subject to a maximum rate of 15% or 20%. B) The long-term capital gain holding period is more than 18 months. C) A 28% maximum capital gains rate applies to the gain on collectibles held for more than one year. D) Long-term gains and losses can be netted. ------- Correct Answer -------- --B The long-term capital gain holding period is more than 12 months. The net long-term capital gains rate is generally 15% or 20% (although a 0% rate applies if the taxable income is fairly low). Collectibles gain is subject to a maximum 28% long-term capital gains rate. Which one of the following statements regarding net short-term capital gains is correct? A) Net short-term capital gains are subject to a 15% capital gains rate. B) Net short-term capital gains are subject to a 0% capital gains rate. C) Net short-term capital gains are treated as ordinary income. D) Net short-term capital gains are subject to a 20% capital gains rate. ------- Correct Answer -------- --C A taxpayer's net short-term gains are treated as ordinary income and are subject to the taxpayer's regular marginal tax rate. They are not subject to a 0%, 15%, or 20% gains rate because they are not long-term capital gains. Which one of the following is correct regarding taxation of mutual funds? A) The use of the FIFO method of basis determination generally will result in the lowest gain during a bull market. B) An exchange of shares in one fund to shares of another fund within the same family will create a taxable event. C) LIFO is the method assumed by the IRS if the taxpayer fails to select another method. D) A distribution of interest income from public-purpose municipal bonds may create an alternative minimum tax problem. ------- Correct Answer -------- ==B 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. Annette, a single taxpayer, has lived in her principal residence for 18 months, and is relocating to another part of the country due to health reasons. She will have a gain of $400,000 on the sale. Which one of the following is correct with respect to the sale of her home? A) She will qualify for an exclusion of $300,000 ($400,000 gain times 18/24). B) She will qualify for an exclusion of $187,500 ($250,000 maximum exclusion times 18/24) on the sale of the home. C) She will qualify for an exclusion of $400,000, because the two-year rule is waived if the move is due to health reasons. D) She will qualify for no exclusion because she did not use the home as the principal residence for two of the last five years. ------- Correct Answer -------- --B The general rule is that a single person may exclude up to $250,000 in the sale of the home, provided the home has been used as the principal residence for two of the previous five years. A partial exclusion is available if the two-year rule is not met due to health, job, or other unforeseen circumstances. The exclusion is the percentage of the two-year period that the principal residence test is met, times the full exclusion amount. Which one of the following cannot achieve the estate planning goal of providing for incapacity? A) trust B) disability insurance C) durable power of attorney D) will ------- Correct Answer -------- --D A durable power of attorney and a trust can be used to manage the financial affairs of an incompetent person. Disability insurance can be used to replace income when an incapacitated person is no longer able to work. Because a will is only effective at death, it cannot be used for incapacity planning. Annette, a single taxpayer, has lived in her principal residence for 18 months, and is relocating to another part of the country due to health reasons. She will have a gain of $400,000 on the sale. Which one of the following is correct with respect to the sale of her home? A) She will qualify for an exclusion of $300,000 ($400,000 gain times 18/24). B) She will qualify for an exclusion of $187,500 ($250,000 maximum exclusion times 18/24) on the sale of the home. C)She will qualify for an exclusion of $400,000, because the two-year rule is waived if the move is due to health reasons. D) She will qualify for no exclusion because she did not use the home as the principal residence for two of the last five years. ------- Correct Answer -------- --B The general rule is that a single person may exclude up to $250,000 in the sale of the home, provided the home has been used as the principal residence for two of the previous five years. A partial exclusion is available if the two-year rule is not met due to health, job, or other unforeseen circumstances. The exclusion is the percentage of the two-year period that the principal residence test is met, times the full exclusion amount. Which of the following statements comparing the suitability standard and the fiduciary standard is correct? A) The suitability standard and the fiduciary standard are essentially the same thing. B) Both approaches require looking out for the best interest of the client. C) Verbal disclosure may be adequate under the suitability standard but not the fiduciary standard. D) Both standards are primarily solution-driven rather than product-driven. ------- Correct Answer -------- --C The suitability standard is often product-driven (is the product suitable?) whereas the fiduciary standard is solution-driven (what is in the best interest of the client?). The fiduciary standard is a higher standard and requires written disclosure, whereas in certain circumstances verbal disclosure may be adequate under the suitability standard. Roberto and Julia, a married couple with two young children and minimal assets, are considering creating an estate plan. Which one of the following statements is correct? -- ----- Correct Answer -------- --They should create an estate plan even though their assets do not exceed the applicable exclusion amount. There are many nontax reasons for developing an estate plan, such as planning to meet the needs of their dependent children, proper distribution of assets, and efficient transfer of assets at death. Owning property in joint tenancy with right of survivorship (JTWROS) is a will substitute because ------- Correct Answer -------- --the property passes outside of probate. It is precisely because JTWROS does pass property outside of probate that it is a will substitute. While a true statement, the fact that JTWROS property may be owned by more than two owners does not make it a will substitute and therefore not subject to probate. 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? A) when investments had recently had large gains B) when taxable income was low C) when investments were down sharply D) when the market was experiencing average performance ------- Correct Answer ------- - -- C 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. Which of the following are true statements about the level of trust in the financial services industry according to different major studies? I. The trust level of elites has recovered from the lows of the Great Recession, but the mass population's trust level is still low and has not recovered as much as it has for the affluent.