Chapter 12 - Tax-Advantaged Accounts and Products

Question 1

Which of the following is an example on a non-qualified retirement account?
A) 401 K plan
B) Profit-sharing plan
C) Payroll deduction plan
D) HR 10 plan

Answer 1

C

Answer Explanation
Payroll deduction plans are non-qualified retirement plans. With these plans, employees may deduct a portion of their salaries for retirement savings, but those funds are taxable when earned.

Textbook Reference
Please see textbook section 12.1.2

Question 2

In a 401(k) with a Roth account option, how are employer matching contributions allocated?
A) To either the regular 401(k) or Roth account, at the employer’s option
B) To the regular 401(k) only
C) To the Roth account only
D) To either the regular 401(k) or Roth account, at the employee’s option

Answer 2

B

Answer Explanation
Only employee deferrals, not employer contributions, may go into the Roth account. All employer contributions go into the regular 401(k).

Textbook Reference
Please see textbook section 12.1.1.3

Question 3

Which of the following statements is correct regarding Traditional IRAs?
A) Contributions are usually after-tax, earnings and growth tax-deferred, and all distributions are taxed as ordinary income.
B) Contributions are usually pre-tax, earnings and growth are tax-deferred, and all distributions are taxed as long-term capital gains.
C) Contributions are usually pre-tax, earnings and growth are tax-deferred, and all distributions are taxed as ordinary income.
D) Contributions are usually pre-tax, earnings and growth taxable each year, and all distributions taxed at a preferred rate.

Answer 3

C

Answer Explanation
Traditional IRA’s allow for pre-tax contributions, tax-deferred earnings and growth, and distributions which are taxed as ordinary income.

Textbook Reference
Please see textbook section 12.2.1.2

Question 4

Which of the following is a permitted investment in an IRA brokerage account?
A) Specified gold coins minted by the Treasury
B) Antiques
C) Most collectibles
D) Life insurance

Answer 4

A

Answer Explanation
Investments that can’t be held in an IRA include most collectible - art works, antiques and precious metals - other than specified U.S. gold or silver coins minted by the U.S. Treasury and certain gold, silver, platinum or palladium bullion bars.

Textbook Reference
Please see textbook section 12.2.1.1

Question 5

How can a Roth IRA distribution always avoid a 10% penalty?
A) Be taken after a five-year holding period
B) Be rolled over to a Traditional IRA
C) Be used to buy a first home
D) Be taken after age 59 ½

Answer 5

D

Answer Explanation
If a Roth distribution is taken after age 59 ½, it is non-qualified and taxable if it has not been held at least five years. But it will not be subject to a 10% penalty. If it is used to buy a first home, only the first $10,000 avoids the 10% penalty. If it is taken after a five-year holding period but before 59 ½, it is not qualified and a penalty applies. Rollovers from Roths to Traditional IRAs are not allowed.

Textbook Reference
Please see textbook section 12.2.2

Question 6

In a 401(k), which amounts represent pre-tax money for the employee?
A) Neither employer contributions nor elective deferrals
B) Both employer contributions and elective deferrals
C) Elective deferrals only
D) Employer contributions only

Answer 6

B

Answer Explanation
All employer contributions and the participant’s own elective deferrals are made with pre-tax money.

Textbook Reference
Please see textbook section 12.1.1.3

Question 7

The maximum annual contribution in a Roth IRA is
A) $6,000
B) $1,500
C) $2,000
D) $5,000

Answer 7

A

Answer Explanation
The maximum annual contribution to a Roth IRA is $6,000. This $6,000 limit applies to all contributions to Roth IRAs and Traditional IRAs in a given year. That is, an investor can allocate up to $6,000 in contributions in any way between multiple IRAs but can not exceed the $6,000 limit. An exception to the $6,000 limit is for investors who are 50 years old or older who can make an additional $1,000 contribution (for a total of $7,000) per year. Note that the contribution limit was increased to $6,000 from $5,500 on January 1st, 2019.

Textbook Reference
Please see textbook section 12.2.2

Question 8

Judy started a 529 plan for her daughter three years ago. If she earns $2,000 on its investments this year, how is this amount treated for income tax purposes now, assuming she does not plan to start taking distributions for college expenses for several more years?
A) It is always tax-free
B) It is tax-deferred until distribution
C) It is currently taxable as ordinary income
D) It is currently taxable as capital gains

Answer 8

B

Answer Explanation
Investment earnings accumulate on a tax-deferred basis in 529 plans. There is no IRS reporting until distributions are made. Then, distributions used for qualified education expenses are tax-free.

Textbook Reference
Please see textbook section 12.4.1.5

Question 9

Coverdell ESA’s can be opened for any student
A) under the age of 18.
B) who is currently a student at an accredited institution.
C) under the age of 30.
D) at least 18 years of age.

Answer 9

A

Answer Explanation
Coverdell ESA’s can be opened for any student who is under the age of 18, and the assets must be used / withdrawn by the time the individual reaches the age of 30.

Textbook Reference
Please see textbook section 12.4.2

Question 10

The funds that are invested in a variable annuity are typically
A) Pre-tax dollars.
B) Post-tax dollars.
C) Deductible from earned income in the year the contribution is made.
D) A combination of pre- and post- tax dollars.

Answer 10

B

Answer Explanation
In most instances, the funds contributed into a variable annuity are after-tax dollars. This should be assumed for purposes of the exam, unless other information is provided.

Textbook Reference
Please see textbook section 12.3.3.5

Question 11

The maximum amount of money that may be deposited each year into a Coverdell Education Savings Account is
A) $24,000 in total for all Coverdell ESAs owned by the individual.
B) $6,000 per beneficiary.
C) $2,000 per beneficiary.
D) unlimited, until the account totals $145,000 per beneficiary.

Answer 11

C

Answer Explanation
The main drawback to a Coverdell is their low contribution limit of just $2,000 per beneficiary per year. Each account has one beneficiary.

Textbook Reference
Please see textbook section 12.4.2

Question 12

Diego is a single person, age 75, who has an income of $25,000 from Social Security, $15,000 from investment interest, and $3,000 from part-time work. What is the maximum contribution he can make to a Roth IRA?
A) $5,500
B) Zero
C) $3,000
D) $5,500 plus catch-up

Answer 12

C

Answer Explanation
Contributions can be made to Roth IRAs at any age, provided the worker has compensation that does not exceed the MAGI threshold. The contribution is limited to 100% of compensation from active work – not passive sources such as Social Security or investments.

Textbook Reference
Please see textbook section 12.2.2

Question 13

What is the maximum age at which the account owner may contribute to a Roth IRA?
A) 70 ½
B) There is no age limit
C) 59 ½
D) 85

Answer 13

B

Answer Explanation
There is no age limit for making contributions to a Roth IRA.

Textbook Reference
Please see textbook section 12.2.2

Question 14

ERISA fiduciaries meet a standard of conduct by acting solely on behalf of
A) A plan’s investors
B) A plan’s participants and beneficiaries
C) A plan sponsor’s shareholders
D) A plan’s sponsor

Answer 14

B

Answer Explanation
The ERISA standard of conduct requires fiduciaries to act solely on behalf of the plan’s participants and beneficiaries.

Textbook Reference
Please see textbook section 12.1.1.1

Question 15

Walter, age 40, wants to sell his home and buy a new one right away, using his Traditional IRA to make the down payment. As a homebuyer, can he qualify for an exception to the 10% penalty on Traditional IRA withdrawals before age 59 ½?
A) No, because he is too young
B) Only if the new home costs more than his current home
C) Yes, in any case
D) No, because he is not a first-time homebuyer

Answer 15

D

Answer Explanation
This exception is only available to a first-time homebuyer. The new home is considered a first home if neither the IRA owner nor a spouse had an interest in a main home in the two years before the home’s purchase. He would have to wait at least two years between transactions to qualify.

Textbook Reference
Please see textbook section 12.2.1.3

Question 16

A customer that has recently purchased a variable annuity contract wishes to take an emergency cash withdrawal of 50% of the purchase payments. Which of the following statements is TRUE?
A) Variable annuity contracts allow customers to withdraw funds when needed without charge
B) The customer may withdraw the funds, but will be subject to surrender charges
C) The customer may withdraw the funds through the policy loan provision
D) This type of withdrawal is not permitted

Answer 16

B

Answer Explanation
Insurance companies charge surrender charges on early withdrawals from contracts to ensure their costs are covered. These charges typically decrease each year of the contract.

Textbook Reference
Please see textbook section 12.3.3.4

Question 17

Laura and Diego, a married couple, file a joint tax return, which reports wage compensation of $60,000 for both. They are in their 30s. Their maximum contributions to a Traditional IRA are determined by
A) A percentage of their combined earnings
B) Their ages
C) Their respective earnings
D) A dollar limit

Answer 17

D

Answer Explanation
For most individuals and couples, the maximum contribution is determined by a dollar limit, which is $6,000 plus a $1,000 catch-up for those age 50 and over. The combined compensation of a married couple must equal or exceed their combined contributions. Note that the contribution limit was increased to $6,000 from $5,500 on January 1st, 2019.

Textbook Reference
Please see textbook section 12.2.1

Question 18

Direct-sold 529 college savings plans
A) May be purchased through a primary distributor, or through state personnel.
B) Can only be purchased in states approved by the IRS for this purpose.
C) Incur fees which are typically higher than with an advisor-sold plan.
D) Usually offer investment advice directly from the state.

Answer 18

A

Answer Explanation
Direct-sold 529 plans can be purchased without the aid of an intermediary. The investor, though, may not be able to receive the same type of investment advice that would typically be available through an adviser-sold plan.

Textbook Reference
Please see textbook section 12.4.1.3

Question 19

Who is eligible to set up a Traditional IRA?
A) Those not covered by a workplace retirement plan
B) Anyone age 21 and older
C) Anyone who works and their spouses
D) The self-employed

Answer 19

C

Answer Explanation
Anyone who works and earns compensation (and their spouses) can set up a Traditional IRA and make annual contributions to it, up to age 72.

Textbook Reference
Please see textbook section 12.2.1

Question 20

Which of the following is not a benefit of most types of non-qualified executive compensation plans?
A) No limits on income that can be contributed
B) Avoidance of nondiscrimination tests
C) Flexibility to choose which employees participate
D) An immediate tax deduction for the company

Answer 20

D

Answer Explanation
Unlike qualified retirement plans, most types of non-qualified plans do not create an immediate tax deduction for the company, meaning that contributions are after-tax.

Textbook Reference
Please see textbook section 12.1.2

Question 21

What type of self-directed retirement plan is established by public school systems and nonprofit organizations?
A) 403(b)
B) 401(k)
C) SIMPLE
D) 457(b)

Answer 21

A

Answer Explanation
403(b) plans are established by public school systems and nonprofit organizations such as hospitals and charities.

Textbook Reference
Please see textbook section 12.1.1.4

Question 22

Parents want to set up a Coverdell Education Savings Account for their daughter. To be an eligible beneficiary, the daughter must be
A) under the age of 30.
B) between the ages of 18 and 21.
C) under the age of 18.
D) under the age of 21.

Answer 22

C

Answer Explanation
A Coverdell can be opened for any student under the age of 18, but the assets must be withdrawn by the time the student reaches the age of 30.

Textbook Reference
Please see textbook section 12.4.2

Question 23

Which two of the following statements are true regarding variable annuity surrender charges?

I. They can apply for a period of no more than 5 years
II. They are usually a level charge for the period of years during which they apply
III. They are similar to mutual fund contingent deferred sales charges
IV. When an existing variable annuity contract is exchanged for a new annuity, a new surrender charge period is likely
A) III and IV
B) I and II
C) II and IV
D) II and III

Answer 23

A) III and IV

Answer Explanation
Variable annuity surrender charges commonly apply for periods of 6 - 10 years. They are similar to CDSCs (contingent deferred sales charges) charged by mutual funds, and decline over the period of years during which they apply. It is important that individuals understand that a new surrender charge period is likely to apply when annuity contracts are exchanged.

Textbook Reference
Please see textbook section 12.3.3.4

Question 24

For purposes of calculating the Required Minimum Distribution (RMD) from a Traditional IRA, which life expectancy factors are used?
A) The account owner may choose to use any generally accepted tables
B) Social Security’s Period Life Table
C) IRS tables
D) The life insurance industry’s standard mortality table

Answer 24

C

Answer Explanation
The denominator of the RMD calculation is a life expectancy factor taken from a set of IRS tables.

Textbook Reference
Please see textbook section 12.2.1.4

Question 25

How do the investment options in a Roth IRA differ from those available in a Traditional IRA?
A) Individual securities are not allowed in a Roth
B) There are no differences
C) Mutual funds are not allowed in a Roth
D) Roths may use margin accounts

Answer 25

B

Answer Explanation
The investment options and prohibited transactions in Roth IRAs are the same as in Traditional IRAs.

Textbook Reference
Please see textbook section 12.2.2

Question 26

The phase of an annuity contract that is associated with annuity units is the
A) Payout phase
B) Performance phase
C) Accumulation phase
D) Deferral phase

Answer 26

A

Answer Explanation
Annuity units are associated with the payout, or annuity, phase of a variable annuity contract.

Textbook Reference
Please see textbook section 12.3.3.2

Question 27

What type of employer contribution to a 401(k) plan is made only for participants who elect to defer part of their pay into the plan?
A) Discretionary
B) Matching
C) Nonelective
D) Incentive

Answer 27

B

Answer Explanation
Matching contributions give employees incentive to put their own money (deferrals) into a 401(k). The employer matches all or part of each participant’s deferrals.

Textbook Reference
Please see textbook section 12.1.1.3

Question 28

An individual has purchased a variable annuity contract with a joint and last survivor payout structure. She can expect
A) twice the payouts of a life annuity.
B) a guaranteed minimum monthly payout.
C) larger monthly payouts when compared to the life annuity option.
D) smaller monthly payouts when compared to the life annuity option.

Answer 28

D

Answer Explanation
A joint and last survivor annuity will provide payments over the course of two lives. Upon the death of the investor, the insurance company will continue to make payments to the named beneficiary until their death. As a result, the payouts on the joint and last survivor annuity will have the smallest payouts. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.

Textbook Reference
Please see textbook section 12.3.3.2

Question 29

Donald is employed by a company that offers a straight profit-sharing plan. He wants to know whether he is required to contribute his own money to the plan, and also whether the company is required to contribute money. The answer is
A) both employees and the employer are required to make annual contributions
B) neither employees nor the employer are required to make annual contributions.
C) employees are required to contribute; employers aren’t.
D) employees are not required to contribute; employers are.

Answer 29

B

Answer Explanation
Profit-sharing plans are designed for flexibility. They allow employers to make contributions in profitable years (or whenever they wish) and make little or no contributions in other years. The key requirement is that the same percentage of salary must be contributed for all eligible plan participants.

Textbook Reference
Please see textbook section 12.1.1.3

Question 30

What is the maximum number of beneficiaries a 529 savings plan may have?
A) One
B) Three
C) Two
D) There is no limit

Answer 30

A

Answer Explanation
Each 529 savings plan may have one designated beneficiary, usually a student or future student for whom education costs will be paid.

Textbook Reference
Please see textbook section 12.4.1.1

Question 31

Which two of the following are likely to be included in variable annuity subaccounts, but not in the general account of an insurance company?

I. Corporate bonds
II. mutual funds
III. ETFs
IV. U.S. Treasury securities
A) I and IV
B) II and III
C) II and IV
D) I and III

Answer 31

B) II and III

Answer Explanation
The separate account of the insurer that provides variable products offers growth opportunities for purchasers. Equity products like mutual fund and ETF subaccounts are found in separate accounts but not in the insurer’s general account.

Textbook Reference
Please see textbook section 12.3.3

Question 32

An investor has made an excess contribution into a traditional IRA. What is the consequence of this excess contribution?
A) A 6% penalty on the excess amount
B) A 10% penalty on the excess amount
C) A 50% penalty on the excess amount
D) No penalty if the account has been established for at least five years.

Answer 32

A

Answer Explanation
There is a 6% penalty assessed on contributions in excess of the legal maximum, as set by the IRS.

Textbook Reference
Please see textbook section 12.2.1

Question 33

Which one of the following is not a type of employer-sponsored IRA plan?
A) SEP-IRA
B) SIMPLE IRA
C) Traditional IRA
D) All of these are employer-sponsored plans

Answer 33

C

Answer Explanation
A Traditional IRA is an individual retirement plan. SIMPLE IRAs and SEP-IRAs are employer-sponsored.

Textbook Reference
Please see textbook section 12.2.1

Question 34

At what age is Janet required to begin taking Required Minimum Distributions (RMDs) from a Roth IRA that she owns?
A) 72 ½
B) 70 ½
C) No RMDs are required during her lifetime
D) 65

Answer 34

C

Answer Explanation
There are no Required Minimum Distributions (RMDs) from Roth IRAs during the account owner’s lifetime

Textbook Reference
Please see textbook section 12.2.2

Question 35

Individuals that take withdrawals from annuity contracts prior to annuitization may be required to pay
A) Waiver of premium charges
B) Annuitization surcharges
C) Mortality expense charges
D) Surrender charges

Answer 35

D

Answer Explanation
Surrender charges apply when money is withdrawn from an annuity within a certain period of the purchase payments.

Textbook Reference
Please see textbook section 12.3.3.4

Question 36

Jeff owns three Traditional IRAs. How many must he use for purposes of calculating the Required Minimum Distribution (RMD) for each year?
A) All
B) The largest
C) The smallest
D) Any one

Answer 36

A

Answer Explanation
If a person owns multiple Traditional IRAs, the RMD may be taken from any one, or any combination. But the RMD amount must be calculated by combining the prior December 31 value of all Traditional IRAs.

Textbook Reference
Please see textbook section 12.2.1.4

Question 37

How are Interest payments from bonds held in a traditional IRA account taxed?
A) Taxes are deferred until withdrawal
B) Interest is partially taxable and partially tax-free on a current basis
C) Currently, as ordinary income
D) Interest is received income tax-free

Answer 37

A

Answer Explanation
Interest payments from bonds held in a traditional IRA account accrue on a tax-deferred basis and will be fully taxed upon withdrawal.

Textbook Reference
Please see textbook section 12.2.1.2

Question 38

Which distributions from a 529 plan are federally income tax-free?
A) All used to pay for the beneficiary’s qualified college costs
B) Non-deductible contributions
C) All
D) Those held in the plan for at least five years

Answer 38

A

Answer Explanation
Distributions from a 529 Plan that are used to pay for the beneficiary’s qualified college education costs are federally income tax-free. These include fees for room and board.

Textbook Reference
Please see textbook section 12.4.1.4

Question 39

Investors in Roth IRA’s may make
A) pre-tax contributions and receive tax-free distributions
B) pre-tax contributions and receive distributions that are only taxed when retirement age is reached.
C) after-tax contributions and receive tax-free distributions.
D) after-tax distributions and receive distributions taxed at federal but not state level.

Answer 39

C

Answer Explanation
Roth IRA contributions are made with after-tax dollars, with the distributions being tax-free if certain conditions are met.

Textbook Reference
Please see textbook section 12.2.2.1

Question 40

Which one of the following is not an exception to the 10% penalty on IRA withdrawals prior to age 59 ½?
A) Loss of a full-time job
B) Total and permanent disability
C) Higher education expenses
D) Qualified first-time homebuyer

Answer 40

A

Answer Explanation
Loss of a job is not one of the exceptions to the 10% penalty. However, a withdrawal to pay health insurance premiums while unemployed is an exception.

Textbook Reference
Please see textbook section 12.2.1.3

Question 41

Assuming that the customer does not qualify for an exception, when would withdrawals made from a Traditional IRA be subject to an additional 10% penalty?
A) Withdrawals are made before age 59½.
B) Withdrawals are made before the customer retires.
C) If withdrawals exceed an annual limit.
D) If the contributions were made on a pre-tax basis income tax.

Answer 41

A

Answer Explanation
Withdrawals made from a Traditional IRA before age 59 ½ are subject to ordinary income tax plus an additional 10% penalty, unless they qualify for an exception.

Textbook Reference
Please see textbook section 12.2.1.3

Question 42

A customer makes a contribution to his IRA brokerage account on March 12, 2012. For tax purposes, for which year will this contribution be made?
A) 2012
B) 2011
C) He may designate the contribution as being for either 2011 or 2012.
D) Tax treatment is consistent with past-year contributions.

Answer 42

C

Answer Explanation
For any IRA contribution made between January 1 and April 15, the taxpayer must designate which year the contribution is for - the year past or the current year.

Textbook Reference
Please see textbook section 12.2.1

Question 43

What is the age limit for making contributions to an IRA?
A) 70 ½ in a Traditional IRA; no limit in a Roth
B) 70 ½ in a Roth; no limit in a Traditional IRA
C) 70 ½ in both a Roth IRA and a Traditional IRA
D) There is no age limit in either a Roth or Traditional IRA

Answer 43

D

Answer Explanation
There is no longer an age limit for contributing to a Traditional IRA. This is a rule change under the Secure Act passed in December 2019. Note that there used to be an age limit for opening a Traditional IRA of 70 ½. Candidates should be familiar with both the new and the old rule. There is no age limit for opening a Roth IRA brokerage account.

Textbook Reference
Please see textbook section 12.2.2

Question 44

When must an elderly person stop making contributions to a Traditional IRA?
A) When IRA distributions begin
B) At normal retirement age
C) When Social Security begins
D) There is no limit

Answer 44

d

Answer Explanation
There is no longer an age limit for contributing to a Traditional IRA. This is a rule change under the Secure Act passed in December 2019. Note that there used to be an age limit for opening a Traditional IRA of 70 ½. Candidates should be familiar with both the new and the old rule. There is no age limit for opening a Roth IRA brokerage account.

Textbook Reference
Please see textbook section 12.2.1

Question 45

After the owner of a Traditional IRA reaches age 72, how often are Required Minimum Distributions (RMDs) required?
A) Once per quarter
B) Once per year
C) Once every three years
D) Twice per year

Answer 45

B

Answer Explanation
RMDs must be taken at least annually after the owner of a Traditional IRA reaches age 72, starting by April 1 of the following year.

Textbook Reference
Please see textbook section 12.2.1.4

Question 46

In a self-directed retirement plan, such as a 401(k), what is an “elective deferral?”
A) A waiting period
B) An employee contribution
C) An employer contribution
D) An IRS required amount

Answer 46

B

Answer Explanation
In a participant-directed plan, the employer chooses the plan and a menu of investment options. Each eligible employee then may choose to make elective deferrals of wages into the plan, up to limits.

Textbook Reference
Please see textbook section 12.1.1.3

Question 47

On what basis are deductible contributions to a Traditional IRA made?
A) Pre-tax
B) Tax-free
C) Tax-deferred
D) Post-tax

Answer 47

A

Answer Explanation
One benefit of a Traditional IRA is the opportunity to contribute pre-tax money. Pre-tax contributions are also called “deductible.”

Textbook Reference
Please see textbook section 12.2.1.2

Question 48

Andrew is taking a new job with a company that offers a defined contribution plan. He is age 22. When can he expect to become eligible to participate in the plan, under ERISA’s general eligibility standard?
A) When he turns 25
B) After two years of work service
C) When he turns 24
D) After one year of work service

Answer 48

D

Answer Explanation
ERISA’s general eligibility standard has age (21) and work service (one year with the employer) components. A plan can select less restrictive eligibility criteria, but not more restrictive.

Textbook Reference
Please see textbook section 12.1.1.1

Question 49

All of the following statements regarding the establishment of a Section 529 College Savings Plan are true EXCEPT
A) The account owner can change investment options one time per year, or when a rollover takes place
B) Non-relatives may not establish plans for a beneficiary
C) The designated beneficiary can be changed to another family member without tax consequences
D) Contributions to the plan are not tax deductible.

Answer 49

B

Answer Explanation
Any individual may establish a Section 529 College Savings Plan for a beneficiary.

Textbook Reference
Please see textbook section 12.4.1.1

Question 50

All of the following statements about an insurer’s separate account are true EXCEPT
A) Its assets are purchased with purchase payments from variable product purchases
B) It is mostly invested in conservative investments like U.S. Treasury securities and highly rated corporate bonds
C) If actively managed, it must be registered as a mutual fund under the Investment Company Act of 1940
D) Units in the separate account fluctuate in value based on the performance of the underlying assets

Answer 50

B

Answer Explanation
The separate account of an insurance company supports variable products, which are designed to offer growth to their owners. The investments in the account include equities like common stock, mutual funds and equity ETFs to keep pace with the rate of inflation.

Textbook Reference
Please see textbook section 12.3.1

Question 51

The maximum annual contribution of earned income to an IRA is
A) $6,000
B) $7,000
C) $3,000
D) $5,000

Answer 51

A

Answer Explanation
The annual IRA contribution limit is $6,000. This contribution must come from earned income. For an individual over the age of 50, an additional $1,000 may be contributed, making the total contribution $7,000. As a point of reference, the previous IRA contribution was $5,500.

Textbook Reference
Please see textbook section 12.2.1

Question 52

A separate account that is actively managed by the insurance company is
A) Is not registered under the Investment Company Act of 1940
B) Registered as an open-end investment company under the Investment Company Act of 1940
C) Registered as a closed end investment company under the Investment Company Act of 1940
D) Registered as a unit investment trust under the Investment Company Act of 1940

Answer 52

B

Answer Explanation
When the assets of the separate account of an insurance company are managed by the insurance company’s investment company, the account is registered as an open-end investment company. When the investment management of the insurer passes the responsibility of management to subaccount fund managers the separate account must be registered as a unit investment trust.

Textbook Reference
Please see textbook section 12.3.1

Question 53

Which two of the following types of securities are municipal fund securities?

I. VRDOs
II. 529 Plans
III. LGIPs
IV. CLN funds
A) I and II
B) II and III
C) I and III
D) II and IV

Answer 53

B) II AND III

Answer Explanation
Under MSRB and SEC rules, municipal fund securities include local government investment pools (LGIPs) and higher Section 529 plans.

Textbook Reference
Please see textbook section 12.4

Question 54

In which case does a gain on mutual fund shares held in an IRA qualify for long-term capital gains treatment?
A) When the IRA is held for more than five years
B) When the shares are held for a year or more
C) Never
D) When one mutual fund is traded for another

Answer 54

C) Never

Answer Explanation
The owner of an IRA never qualifies for favorable long-term capital gains tax treatment. Distributions from Traditional IRAs (other than non-deductible contributions) are taxed as ordinary income.

Textbook Reference
Please see textbook section 12.2.1

Question 55

A Roth IRA holder, aged 50, wishes to make a withdrawal from his account opened 3 years ago due to a recent disability. Which of the following statements is true?
A) A penalty will be assessed on the withdrawal but there would be no tax liability incurred.
B) The withdrawal will be exempt from income taxes and penalties.
C) The withdrawal will be subject to income taxes but no penalty.
D) Both taxes and penalties will be assessed on any withdrawals.

Answer 55

C

Answer Explanation
Withdrawals before age 59.5 may be made penalty-free from a Roth IRA for various reasons. Eligible reasons include death of the account owner, disability, first time home purchase, qualified education expenses, as well as major medical expenses). Note that in this situation the earnings in the plan are subject to taxes unless the plan has been opened for at least five years.

Textbook Reference
Please see textbook section 12.2.1.3

Question 56

A variable annuity calculates the value of its separate account units:
A) Monthly
B) Daily
C) Weekly
D) Annually

Answer 56

B

Answer Explanation
Like a mutual fund’s NAV, a VA’s separate account unit value is calculated daily.

Textbook Reference
Please see textbook section 12.3.3.1

Question 57

Henry starts his first Roth IRA on May 10, 2012. He will turn 60 on October 14, 2018. What is the first day he is eligible to take a qualified (tax-free) Roth distribution?
A) 1-Jan-18
B) 14-April-18
C) 14-Oct-18
D) 1-Jan-17

Answer 57

B

Answer Explanation
He will meet the five-year holding period requirement on January 1, 2017. But his 59 ½ birthday is not until April 14, 2018 (six months before his 60th birthday). He can’t take a qualified Roth distribution until the later of these two dates.

Textbook Reference
Please see textbook section 12.2.2

Question 58

Jim wants to know if he can take a penalty-free withdrawal from his Traditional IRA at age 50 to pay for his child’s college tuition.
A) Not unless he qualifies for a hardship
B) Yes, if the expenses are qualified
C) Yes, if the child attends a four-year college
D) Not if he has other funds available to meet the need

Answer 58

B

Answer Explanation
The exception to the 10% penalty for higher education expenses is fairly liberal. Expenses must only be qualified – i.e., used to pay for tuition, fees, books, supplies or equipment required to attend an eligible institution.

Textbook Reference
Please see textbook section 12.2.1.3

Question 59

The major long-term risk that customers face in fixed annuities is
A) business risk.
B) inflation.
C) default risk.
D) unpredictable returns.

Answer 59

B

Answer Explanation
The greatest risk of a fixed annuity is purchasing power risk, as the fixed payments may not keep up with inflation.

Textbook Reference
Please see textbook section 12.3.2

Question 60

A tax deduction for contributions to a 529 plan may be available at the
A) Federal level only.
B) State level only.
C) Federal and state level.
D) Neither the federal nor state level.

Answer 60

B

Answer Explanation
Many states offer state income tax deductions to their own residents for contributions to 529 savings plans. The limits on deductions are set by each state and vary from state to state.

Textbook Reference
Please see textbook section 12.4.1.6

Question 61

To sell fixed annuities, a professional must have
A) neither a securities nor an insurance license.
B) both a securities and an insurance license.
C) an insurance license only.
D) a securities license only.

Answer 61

C

Answer Explanation
Fixed annuities are not securities. Individuals selling these products only require an insurance license, not a securities registration.

Textbook Reference
Please see textbook section 12.3.2

Question 62

An investor is purchasing a variable annuity contract and has been presented with various payout options to choose from. If the investor is seeking the option which will deliver the highest payout, they should select the
A) joint and last survivor option.
B) discounted option.
C) life option.
D) premium option.

Answer 62

C

Answer Explanation
A life annuity will make payments for the investor’s lifetime. Upon their death, no payouts will be made to any beneficiaries. This option is expected to have a shorter duration and is therefore riskier to the investor, resulting in a higher payout. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes.

Textbook Reference
Please see textbook section 12.3.3.2

Question 63

In a participant-directed retirement plan, what type of employer contribution is based on the amounts each employee chooses to defer into the plan?
A) Matching
B) Executive bonus
C) Profit-sharing
D) Restricted

Answer 63

A

Answer Explanation
Employers may add two types of contributions. Profit-sharing contributions are a percentage of each employee’s wages. Matching contributions are based on the amounts each employee chooses to defer into the plan.

Textbook Reference
Please see textbook section 12.1.1.3

Question 64

Non-deductible contributions to a Traditional IRA are made with
A) Tax qualified dollars
B) Tax-free dollars
C) Pre-tax dollars
D) After-tax dollars

Answer 64

D

Answer Explanation
Non-deductible contributions are made with after-tax money. There is no current tax benefit, as there is when making a pre-tax, deductible contribution.

Textbook Reference
Please see textbook section 12.2.1.2

Question 65

Which of the following may be suitable for an investor who wants guaranteed income for life that begins 10 years from now and continues for life?
A) An immediate annuity with 10-year period certain
B) A deferred life only annuity
C) A deferred annuity with 10-year period certain
D) An immediate life only annuity

Answer 65

B

Answer Explanation
In a deferred annuity, payments begin in the future. They will last for the life of the annuitant if a life only option is selected.

Textbook Reference
Please see textbook section 12.3

Question 66

Louis turns age 72 on November 1, 2021. By which date must he begin taking Required Minimum Distributions?
A) 15-Apr-22
B) 1-Apr-22
C) 31-Dec-22
D) 31-Dec-21

Answer 66

B

Answer Explanation
His Required Beginning Date is April 1 of the following year, 2022. Under required minimum distribution (RMD) rules, withdrawals from a Traditional IRA must begin by age 72. Individuals have until the following April 1st to make the first distribution.

Textbook Reference
Please see textbook section 12.2.1.4

Question 67

Variable annuity contracts must be registered with which of the following regulatory organizations?

I. SEC
II. State insurance departments
III. FDIC
A) I and III only
B) I and II only
C) II and III only
D) I, II and III

Answer 67

B) I and II only

Answer Explanation
Variable annuity contracts must be registered with the SEC and with the insurance department of each state in which they are to be offered. They are not registered with banking regulators like the FDIC.

Textbook Reference
Please see textbook section 12.3.3

Question 68

Karen made a $2,000 contribution to her Traditional IRA in November. After she looked at her 1099 wage statement the following February, showing annual compensation of $78,000, she wished that she had made a larger contribution. Can she?
A) Only with the permission of her employer
B) Yes, up until her tax filing deadline
C) Only with the permission of the IRS
D) No, it is too late

Answer 68

B

Answer Explanation
All IRA contributions must be made by the due date of the individual’s federal income tax return, which usually is the next April 15.

Textbook Reference
Please see textbook section 12.2.1

Question 69

The guarantees of fixed annuities are provided by
A) the Pension Benefit Guaranty Corporation.
B) SIPC.
C) the FDIC.
D) the issuing insurance company.

Answer 69

D

Answer Explanation
The insurance company, not the investor, bears the investment risk in a fixed annuity, meaning that no matter how the market is performing, the insurance company must always pay the investor the guaranteed fixed rate.

Textbook Reference
Please see textbook section 12.3.2

Question 70

Which of the following instruments does not offer tax-deferred growth to the investor?
A) Variable annuity
B) Individual retirement account
C) Blue chip stock
D) Non-qualified retirement plan

Answer 70

C

Answer Explanation
The dividends paid by a blue chip stock are not tax-deferred, and appropriate income taxes must be paid for the year in which they are received. The other choices in this question all feature tax-deferred growth.

Textbook Reference
Please see textbook section 12.1

Question 71

Withdrawals from an IRA can be subject to regular income tax plus a 10% penalty if they are made before what age?
A) 59.5
B) Normal retirement age
C) 55
D) 62

Answer 71

A

Answer Explanation
Earnings accumulate in a Traditional IRA on a tax-deferred basis, and withdrawals are fully taxable. Any withdrawals made before age 59 ½ may be subject to an additional 10% penalty, unless they qualify for an exception.

Textbook Reference
Please see textbook section 12.2.1.3

Question 72

What type of money is contributed to a 529 plan, for federal income tax purposes?
A) Post-tax
B) It depends on the age of the beneficiary
C) It depends on the state of residence
D) Pre-tax

Answer 72

A

Answer Explanation
All money contributed to a 529 plan is post-tax for federal purposes. However, some states offer income tax deductions, for state income tax purposes.

Textbook Reference
Please see textbook section 12.4.1.1

Question 73

What part of the basis portion of a gross distribution from a 529 plan is taxable?
A) All
B) Taxable portion divided by the gross distribution
C) None
D) Adjusted qualified education expenses divided by the gross distribution

Answer 73

C

Answer Explanation
None of the basis portion of a gross distribution from a 529 plan is taxable. Only the earnings portion is subject to income tax if the money is taken out for non-qualified expenses (e.g. not for education).

Textbook Reference
Please see textbook section 12.4.1.5

Question 74

Individuals may have the option of purchasing a 529 college saving plan from an adviser, as opposed to the state itself. These plans are known as
A) Adviser-sold plans
B) Intermediary plans
C) Direct-sold plans
D) Third-party plans

Answer 74

A

Answer Explanation
These are examples of adviser-sold plans. Many states permit this type of arrangement.

Textbook Reference
Please see textbook section 12.4.1.3

Question 75

Jill is a non-working spouse whose husband works. They file a joint tax return. Can she make a catch-up contribution to a Traditional IRA?
A) Yes, if she is age 55 or over
B) Yes, if she is age 50 or over
C) No, because she doesn’t work
D) Only if she has some compensation

Answer 75

B

Answer Explanation
A non-working spouse can contribute to a Traditional IRA if he/she is married to a worker with compensation. He/she also can make a catch-up contribution at age 50 or over.

Textbook Reference
Please see textbook section 12.2.1

Question 76

Which two of the following statements are true about Traditional IRAs?

I. The catch-up provision begins at age 55

II. The maximum contribution is $6,000 per year

III. Withdrawals can begin at age 59 1/2

IV. Withdrawals can begin at age 59 1/2, with a minimum of 5 years of contributions
A) II and III
B) I and IV
C) II and IV
D) I and II

Answer 76

A) II and III

Answer Explanation
The maximum contribution to an IRA is $6,000. The IRS allows catch-up contributions of $1,000 for individuals age 50 or above. Additionally, withdrawals can begin after the investor reaches the age of 59 ½. Note that the contribution limit was increased to $6,000 from $5,500 on January 1st, 2019.

Textbook Reference
Please see textbook section 12.2.1

Question 77

Tim participates in a 401(k) with a Roth account. He allocates $5,000 of his deferrals to the regular 401(k) and $3,000 to the Roth account. What is the tax treatment?
A) $5,000 post-tax; $3,000 pre-tax
B) $5,000 pre-tax; $3,000 post-tax
C) $8,000 pre-tax
D) $8,000 post-tax

Answer 77

B) $5,000 pre-tax; $3,000 post-tax

Answer Explanation
Employee deferrals to the regular 401(k) are pre-tax. Deferrals allocated to the Roth account are post-tax.

Textbook Reference
Please see textbook section 12.1.1.3

Question 78

What happens to the part of a Traditional IRA contribution that is non-deductible?
A) It stays in the IRA and is treated the same as deductible contributions
B) It must be returned to the IRA owner
C) It stays in the IRA and is treated differently than deductible contributions
D) It must be forfeited

Answer 78

C) It stays in the IRA and is treated differently than deductible contributions

Answer Explanation
A non-deductible contribution stays in the IRA and receives different tax treatment than deductible contributions. In most cases, non-deductible contributions will be distributed tax-free.

Textbook Reference
Please see textbook section 12.2.1.2

Question 79

What is the minimum work service requirement that an ERISA plan may choose to adopt for eligibility purposes?
A) Six months
B) One month
C) None
D) One year

Answer 79

C) None

Answer Explanation
ERISA’s general standard is one year of work service. Each ERISA plan can adopt less restrictive standards than ERISA requires, but not more restrictive. For example, some plans choose to require no work service to become eligible.

Textbook Reference
Please see textbook section 12.1.1.1

Question 80

A variable annuity is best described as a(n)
A) Contract with an insurance company that is designed to help investors prepare for retirement
B) Insurance product that guarantees growth with full liquidity for investors that are planning for retirement
C) Insurance contract which guarantees that beneficiaries will receive no less than the amount of the purchase payments, but more if the market performs well
D) Investment program for persons who are not comfortable with market volatility

Answer 80

A

Answer Explanation
A variable annuity is a contract with an insurance company, and is designed to provide retirement benefits. A death benefit that guarantees a return of purchase payments is not always included, but can be purchased. Growth is not guaranteed, although riders can be purchased to ensure minimum benefits are available for the lifetime of the annuitant(s). Variable annuity contracts are subject to market volatility; fixed annuities are not.

Textbook Reference
Please see textbook section 12.3.3