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Danko + MJG > General Principles > Flashcards

General Principles Flashcards

1
Q

How many CE hours per reporting period are required?

A

30 hours

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2
Q

The CFP Commission can order a license suspension not to exceed ___ years.

A

5

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3
Q

Responses to complaints shall be in writing and

submitted within ___ calendar days.

A

30

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4
Q

Evidence in support of an investigation may be submitted up to ___ days prior to the scheduled hearing.

A

45

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5
Q

Use of Initials

Registered Investment Advisor and

Certified Financial Planner

A

NO:

  • RIA
  • C.F.P.

YES:

  • Registered Investment Advisor
  • CFP®
  • CERTIFIED FINANCIAL PLANNER™
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6
Q

When can a CFP® licensee release client information to other persons?

A
  • When an attorney or court subpoenas the information
  • At the client’s request
  • As a defense against charges of wrongdoing
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7
Q

Determining the Release of an Emergency Fund

(Use 3 or 6 months if…)

A

3 months if:

  • Single with 2nd source of income
  • Married, both work
  • Married, only 1 spouse works, but have a second source of income ​

6 months if:

  • Single wage earner
  • Married and only 1 spouse works
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8
Q

How much consumer debt is considered acceptable?

A

≤20% of NET income

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9
Q

How much Total Monthly Debt is considered acceptable?

A

≤36% of GROSS income

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10
Q

How much PITI is considered acceptable?

A

≤28% of GROSS income

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11
Q

Current Ratio

A

Current Assets ÷ Current Liabilities

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12
Q

Current Assets

A
  • Cash Equivalents
  • Marketable Securities
  • Accounts Receivable
  • Inventory
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13
Q

Current Liabilities

A
  • Accounts Payable
  • Credit Card Debt
  • Taxes Payable
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14
Q

Securities Act of 1933

A

The Securities Act of 1933 required that new issues purchasers be provided a detailed prospectus before the purchase was completed.

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15
Q

Securities Act of 1934

A

The Securities Act of 1934 was passed to regulate the secondary market (the trading of issued securities). The act also created the SEC to enforce securities laws.

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16
Q

Investment Company Act

of 1940

A

Investment Company Act of 1940 authorized the SEC to regulate Unit Investment Trusts (UIT) and managed investment companies (closed- and open-end funds) and variable products.

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17
Q

Securities Investors Protection Act of 1970

A

Securities Investors Protection Act of 1970 established the SIPC to supervise securities firms that get into financial difficulties. The SIPC insures investors against losses arising from the failure of a brokerage firm.

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18
Q

529 Keys

A
  • Lump sum gift up to $75,000
  • Donor can retain control
  • K-12 distribution allowed up to $10,000/yr.
  • Up to $10K/person distribution for student loans
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19
Q

Deductible Housing Interest

A

All mortgages cannot exceed:

  • $750K combined (MFJ)
  • $375K (single/MFS)
  • Home equity interest is only deductible if used for home renovation/improvement.
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20
Q

Federal Reserve Open Market Operations

A
  • Repos - Fed buys securities = expansionary/easy money policy
  • Reverse Repos - Fed sells securities = contractionary/tight money policy
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21
Q

Gross Domestic Product (GDP)

A

Total dollar value of all goods and services produced within the US only.

  • GDP counts economic activity without regard to yearly price fluctuations.
  • The GDP does not include any income generated outside the US or adjustments for foreign currencies.
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22
Q

Business Cycle

A
  • Expansion
  • Peak
  • Recession/Contraction
  • Trough
  • Recovery/Expansion
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23
Q

Recession vs. Depression

A

Recession - Two consecutive quarters of economic decline (negative GDP)

Depression - Six consecutive quarters economic decline (negative GDP)

24
Q

Exceptions to Filing as an Investment Adviser

A
  • Banks that are not also investment companies.
  • Lawyers, accountants, teachers where advice is incidental.
  • Broker/dealers or registered reps whose performance is incidental and who get no special compensation for advice.
  • Publishers of bona fide newspapers.
  • Those who give advice solely relating to US government securities.
25
Q

7How does an Investment Adviser register with the SEC?

A
  • Initially, file ADV part I and II with the SEC.
  • Pay minimum filing fee of $150
  • RIA must submit part I of ADV and schedule I annually.
26
Q

Financial Industry Regulatory Authority (FINRA)

Initial Registration Process

A
  • The individual associates with a broker/dealer.
  • Registers with FINRA through broker/dealer on form U-4.
  • Takes and passes appropriate exams.
  • Is issued a CRD number (Central Registration System)
27
Q

Financial Industry Regulatory Authority (FINRA)

Key Examinations/Licenses

A
  • Series 6 - Mutual funds, UITs, and variables (only new UITs)
  • Series 7 - General securities (including UITs on secondary market)
  • Series 63 - Uniform Securities Agent State Law Exam
  • Series 65 - Uniform Investment Adviser Law Exam
  • Series 66 - Uniform Combined State Law Exam (combines 63 & 65 exams)
28
Q

Basic Components of a Legal Contract as Applied to Insurance

A
  • Offer and Acceptance - Two parties, offerer and acceptor
  • Consideration - Something of value (money)
  • Legal Object - Legal in purpose
  • Competent Parties - Principle must have legal capacity to execute contract:
    • Intoxicated adults have limited or no capacity
    • Minors only have capacity to contract for necessities (food, clothing, shelter)
  • Legal Form - Contract must meet requirements
29
Q

Law of Agency (Insurance)

A
  • Express Authority - Written, explicit direction from principal to agent
  • Implied Authority - Is that which the public believes the individual holds and includes signage, rate books, etc.
    • Implied is actual authority that the agent has to carry out the principal’s business
  • Apparent Authority - Arises out of negligence of the principal in allowing the agent to appear to have authority because of certain actions of the agent in the past. This typically affects terminated agents.
30
Q

Which debts are not cancelable by Bankruptcy?

A
  • Student Loans
  • Child Support
  • Alimony
  • Government Loans
  • Wage Withholding
  • Rollovers from qualified plans are exempt (unlimited) and non-rollover IRAs up to $1 million are exempt
  • Income Taxes Due
  • FICA Taxes

SCAGWRIF

31
Q

Differences Between Chapter 7, 11, and 13 Bankruptcies

A
  • 7 = Dischargingo debt
  • 11 = Reorganizing debt
  • 13 = Wage garnishment (debtor keeps property, but can convert to chapter 7 or 11 from 13)
32
Q

Pell Grants

A
  • Outright gifts from the government based on the student’s need and the cost of attending the chosen school
  • Only undergraduate students who have not previously received a bachelor’s degree are eligible
  • The maximum award changes each year depending on program funding
  • Largest need-based student aid program
33
Q

What are CFP adverse actions?

A
  • Felony or Relevant Misdemeanor conviction, or admission into a program that defers or withholds the entry of a judgment of conviction for a Felony or Relevant Misdemeanor
  • A Finding in a Regulatory Action or a Civil Action that the CFP® professional engaged in fraud, theft, misrepresentation, or other dishonest conduct;
  • A personal bankruptcy or business bankruptcy filing or adjudication where the CFP® professional was a Control Person of the business, unless the CFP® professional can rebut the presumption that the bankruptcy demonstrates an inability to manage responsibly the CFP® professional’s or the business’s financial affairs;
  • A federal tax lien on property owned by the CFP® professional, unless the CFP® professional can rebut the presumption that the federal tax lien demonstrates an inability to manage responsibly the CFP® professional’s financial affairs; or
  • A non-federal tax lien, judgment lien, or civil judgment that has not been satisfied with in a reasonable amount of time unless the CFP® professional can rebut the presumption that the non- federal tax lien, judgment lien, or civil judgment demonstrates an inability to manage responsibly the CFP® professional’s financial affairs.
34
Q

Name specifics of Coverdell Education Savings Accounts (CESAs)

A
  • Beneficiary has to be less than 18 to contribute to them
  • Must distribute account 30 days after the beneficiary turns 30, less they have a 10% penalty
  • Can be used for things beyond tuition for K-12 such as uniforms
35
Q

What kind of tax applies to UTMAs and UGMAs?

A
  • Kiddie tax
  • They are irrecovable gifts to minor and owned by minor
36
Q

What are the coordination rules for AOTC and LLC?

A
  • If two or more children in the same household incur qualified expenses in the same year, the parents may claim
    • Lifetime Learning Credit for the family;
    • American Opportunity Tax Credit for each child; or
    • Lifetime Learning Credit for one child and an American Opportunity Tax Credit for the other.
  • Only one credit is allowed per child per year; in other words, the American Opportunity Tax Credit and the Lifetime Learning Credit may not both be claimed in the same year for the same studen
37
Q

PLUS Loan provisions

A
  • Allow the parents of undergraduate students to borrow up to the total cost of education less other financial aid awards
  • Loan are not made on the basis of financial need, but borrowers must show that they have satisfactory credit history
  • Repayment of the loan must begin within 60 days of disbursement
  • Loans of graduate and independent undergraduate students are placed into deferment while students are enrolled at least half-time and for an additional six months after students cease to be enrolled at least half-time
38
Q

What are the differences between subsidized and unsubsidized Stanford loans?

A

Subsidized Federal Stafford Loans:

  • Based on financial need
  • The government pays the interest while the student is enrolled in college
  • Repayment of the loan may take up to 10 years and is deferred until six months after the student graduates, leaves school, or drops below half-time status

Unsubsidized Federal Stafford Loans

  • Available for students who do not qualify for subsidized loans or require additional funds
  • For unsubsidized loans, the government does not pay the interest during the college years; however, the interest may be capitalized. Repayment rules are the same as Subsidized Federal Stafford Loans (see previous section).
  • Both types of Stafford loans are available to undergraduate and graduate students
39
Q

What are the only two student loans that are NOT needs based?

A
  • PLUS Loans
  • UNSUBSIDIZED Stanford loans
40
Q

What are key components of the Employer Educational Assistance Program?

A
  • Benefits not taxed
  • $5,250 limit if schooling unrelated to employer
  • Unlimited if schooling is related
  • Covers tuition and supplies
  • Undergrad and grad
  • No phaseout limits
41
Q

What types of IRAs do qualified education expenses apply (i.e. no 10% penalty)?

A

ALL IRAs

42
Q

How much student loan interest is deductible per year?

A
  • $2,500
  • If student loans are forgiven, they are counted as taxable income

Phaseout Limits for deductability:

  • Single = $70,000–$85,000
  • Married filing jointly $140,000–$170,000
43
Q

What are the components of Expected Family Contribution (EFC)?

A

EFC =

  • Parental Income 22-47%
  • Parental Assets 5.64% max
  • Student income 50%
  • Student assets 20%

MONEY PAID TO THE STUDENT VIA ANOTHER PERSON’S 529 PLAN (e.g. grandparents) COUNTS AS INCOME TO THEM

44
Q

What are the important notes of series EE bonds and educational expenses?

A
  • Under normal circumstances, the accumulated interest on Series EE and I bonds that are cashed in is taxable income. However, if the bonds are cashed in during a year in which the taxpayer or taxpayer’s family member has qualified higher education expenses, this interest avoids taxation (within limits).
  • Face values start as low as $25 and increase up to $10,000
  • Purchased electronically at full face value and have varying interest rates
  • They must be purchased after 1989 to be eligible for special tax treatment
  • Qualified higher education expenses include rolling over proceeds from the savings bonds into a qualified tuition program (IRC Section 529 Plan) or a CESA
  • To attain tax-free status, EE bonds must be purchased in the name of one or both parents of the student/child
  • The parent(s) are considered the owners of the bond and must be at least 24 years old before the first day of the month of the issue date of the bond
  • Owners must redeem the bonds in the same year that the student/child’s qualified higher education expenses are paid
  • The exclusion is subject to a phaseout in the years in which the bonds are cashed and the tuition is paid. The modified adjusted gross income phaseouts for 2020 are $123,550–$153,550 for joint returns and $82,350–$97,350 for single returns. Married taxpayers filing separately do not qualify for the exclusion.
  • Series I bonds have the same tax benefits as EE bonds for purposes of qualified higher education expenses
45
Q

What are the five instances when the transfer of a policy will cause the death benefit to retain its tax-free status?

A
  1. Insured
  2. Partner of the insured
  3. Partnership in which the insured is a partner
  4. Corporation in which the insured is an officer or shareholder
  5. Transferee whose basis in the policy is determined by reference to the transferor’s basis (tax-free exchange or gift)

In Partner’s Partnership Can Transfer

46
Q

What are the adjustments to income?

A
  • Expenses of carrying on a trade or business including most rental activities (other than as an employee)
  • Certain business expenses of teachers, reservists, performing artists, and fee-basis government officials,
  • Health savings account deductions,
  • Certain moving expenses
  • One-half of self-employment tax,
  • Allowable contributions to certain retirement arrangements (SEP IRA, SIMPLE IRA, and qualified plans) and Individual Retirement Accounts (IRAs),
  • Penalties imposed by financial institutions and others on early withdrawal of savings,
  • Alimony paid (which the recipient must include in gross income),
  • College tuition, fees, and student loan interest (with limitations and exceptions),
  • Jury duty pay remitted to the juror’s employer,
  • Domestic production activities deduction, and
  • Certain other items of limited applicability.
47
Q

What are below-the-line (itemized) deductions?

A
  • Charitable contributions
  • Medical expenses
  • Mortgage interest
  • Casualty losses in a federally declared disaster area.
  • Taxes paid

“Ch Me Mo Ca Te”

48
Q

What is section 1202 stock (Qualified Small Business Stock?

A
  • Noncorporate investors can exclude up to 50% of the gain they realize on qualified small business stock. Any remaining gain is taxed at the 28% capital gains rate. The gain on qualified small business stock if acquired after September 28, 2010, is 100% excludable if a five-year holding period is met.
  • The stock must be issued after August 10, 1993.
  • The stock must be held more than five years.
  • Exclusion is limited to greater of $10 million or 10 times the taxpayer’s basis in the stock.
  • A portion of the excluded amount of gain is a tax preference item for alternative minimum tax (AMT) purposes.
  • There is a 75% exclusion for stock acquired after February 17, 2009, and before September 27, 2010.
  • For qualified small business stocks acquired after September 27, 2010, 100% of the gain is excluded from a noncorporate taxpayer’s income for both regular and AMT purposes (according to the Small Business Jobs Act of 2010). This change was made permanent by the PATH Act of 2015
49
Q

How is section 1244 stock taxed?

A
  • Generally any security loss is capital in nature, but Section 1244 allows ordinary loss treatment if the loss is sustained by an individual who acquires the securities directly from the corporation (which must meet certain requirements).
  • Section 1244 losses are limited to $50,000 annually ($100,000 for joint filers).
    • Any losses in excess of the limits are capital losse.
  • In order to qualify for Section 1244 treatment, the corporation must receive less than $1 million in capital for stock at time of issue.
  • Section 1244 applies only to losses on the investment, not to gains
50
Q

What are the miscellaneous itemized deductions?

A
  • Federal estate tax on IRD
  • Gambling losses to extent of gambling winnings (includes gambler’s related expenses)
  • Unrecovered investment in annuity contract when annuity ceases because taxpayer died
  • Impairment-related work expenses of handicapped taxpayer

I.G.A.W.

51
Q

How should money in a checking account be counted for emergency fund purposes?

A

In checking, subtract one month’s expenses before counting funds for emergency funds

52
Q

How do CDs and lines of credit work for emergency funds?

A
  • CDs that come due in 90 days are countable
  • Lines of credit are NOT allowed for emergency funds
53
Q

What is a percentage of income for building savings?

A

10% of GROSS income

54
Q

How are IRAs, ERISA plans, and life insurance treated in bankruptcy?

A
  • Rollover IRAs are protected 100%
  • Cash value life insurance 100%
  • ERISA plans are all 10% protected
  • Traditional are protected up to $1.363 million
55
Q

How do you calculate the value of property using the Net Operting Income (NOI) approach?

A
56
Q

What is the Emergency Fund Ratio?

A

Emergency fund ratio (EFR) = current assets ÷ nondiscretionary monthly expenses

57
Q

HO Forms Table

A

Danko + MJG (7 decks)

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