General Principles/Conduct/Psychology Flashcards

Question

DEC forms of discipline : Private Censure

Answer 1

An unpublished written reproach mailed by the the DEC to a censured respondent

Answer 2

A written reproach of the respondent’s behavior published in a press release

Answer 3

The termination of a respondent’s right to use the CFP marks. Respondents are permanently barred from applying for or obtaining CFP certification. No appeal is possible.

Answer 4

Respondent is prohibited from using the CFP certification marks, stating or suggesting that they are a CFP professional or holding out to the public as being certified by the CFP Board. Min. 90 days; Max 5 years

Answer 5

1. Integrity 2. Competence 3. Diligence 4. Sound and Objective Professional Judgement 5. Professionalism 6. Comply with the law 7. Confidentiality and Privacy 8. Duties when communicating with a client 9. Duties when selecting, using and recommending technology 10. Refrain from borrowing or lending money and commingling financial assets

Answer 6

1. The duties that apply when providing financial advice (without planning) 2. The practice standards for the financial planning process 3. Information to a client in writing

Answer 7

1. The Duties that apply at all times 2. Fiduciary Duty 3. Disclose and manage conflicts of interest 4. Provide information to a client 5. Duties when recommending, engaging, and working with additional persons

Answer 8

With relevant knowledge and skill to apply that knowledge. A CFP professional must bring in or advise a client go to an expert with competence in area the advisor lacks

Answer 9

A CFP professional must comply with the laws, rules and regulations governing professional services. Intentional violation of the Codes & Standards is not permitted

Answer 10

A CFP professional must keep confidential and may not disclose any non-public personal information abut any prospective, current, or former client, except to the CFP

Answer 11

Must provide professional services, including responding to reasonable client inquires in a timely and thorough manner

Answer 12

Applies to material conflicts of interest Written consent to conflict is not required (oral is acceptable)

Answer 13

Duty of Loyalty Duty of Care Duty of Following Client Instructions

Answer 14

Centered on honesty and candor

Answer 15

A CFP professional must treat Clients, prospective clients, fellow provisionals, and others with dignity, courtesy, and respect.

Answer 16

Material changes and disciplinary updates/bankruptcy must be disclosed to clients within 90 days

Answer 17

Exceptions: 1. member of the CFP’s immediate family 2. Lender is in the business of lending Never permitted Client’s financial assets may not be commingled with the CFP professionals’ assets or the firm’s assets.

Answer 18

A CFP professional must use “reasonable care and judgement” when using technology in a planning engagement. The technology must produce “reliable objects, and appropriate outcomes:

Answer 19

CFP professionals must exercise professional judgement on behalf of the client and may not solicit or accept any gift that could be expected to compromise objectivity

Answer 20

Accurate information in a manner and format that client reasonably may be expected to understand

Answer 21

Basis for recommendation must be reasonable and any conflict of interest must be properly disclosed and managed.

Answer 22

Fee only - No commission, trails, etc. Flat fee, or AUM only Fee based - primarily compensated through fees, but has some commission based products, or products that have a trail. Sales related compensation - primarily commission based

Answer 23

Act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client’s goals, risk tolerance, objectives, and circumstances.

Answer 24

1. Place the interest of the Client above the interests of the CFP professional’s firm 2. Avoid conflicts of interest or fully disclose material conflicts of interest to the client, obtain the client’s informed consent and properly manage the conflict 3. Act without regard to the financial or other interests of the CFP professional the CFP professional’s firm or any individual or entity other than the client which means a CFP professional acting under a conflict of interest continues to have a duty to act in the best interests of the Client and place the client’s interest above the CFP professsional.

Answer 25

Comply with the terms of the client engagement and follow all directions of the clients that are reasonable and lawful.

Answer 26

A. Communication that, based on its content, context, and presentation, would reasonably be viewed as a recommendation that the client take or refrain from taking a particular course of action with respect to: 1. The development or implantation of a financial plan 2. The value of or the advisability of investing in, purchasing, holding, gifting, or selling financial assets 3. Investment policies or strategies, portfolio composition, the management of financial assets, or other financial matters 4. The selections and retention of other persons to provide financial or professional services to the client B. Exercise of discretionary authority over the financial assets of a client. Exam Tip: the more individually tailored the communication, the more likely you are giving Financial Advice and are thus bound by Fiduciary Duty!

Answer 27

Collaborative process that helps maximize a client’s potential for meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.

Answer 28

Any approach to problem-solving that employs a more practical method that is not guaranteed to be optimal or rational, but is sufficient for reaching short-term goals or an approximation, such as rules of thumb, educated guesses, trial & error. Heuristics reduce the cognitive load of decision making, which allows biases to cloud objectivity.

Answer 29

Step 3: Analyzing the client's current course of action and potential alternative course(s) of action.

Answer 30

Determines the expected returns of a stock using Beta, book to market ratios, market capitalization ratios, stock momentum, the investor's likes and dislikes about the stock or company, social responsibility factors, status factors, and more.

Answer 31

``` Additional benefit (utility) received from consumption of an additional unit of a good. As the rate of consumption increases, the marginal utility derived from consuming additional units will decline. “Diminishing marginal utility” ```

Answer 32

the different values a person places on the same amount of money, based on subjective criteria, often with detrimental results (e.g., tax refund is often treated as “found” money rather than a “refund" that belonged to the taxpayer all along)

Answer 33

Measures the quantity demanded of a good in response to changes in that good’s price A good is elastic when its quantity demanded responds greatly to price changes (consumer discretionary) A good is inelastic when its quantity demanded responds little to price changes (gasoline)

Answer 34

Imports Inflation Transactions where money changes hands but no new goods or services are produced Income of US citizens working abroad Profits earned by US companies in foreign countries

Answer 35

Market value of all final goods and services produced within an economy Income of foreigners working in the US Profits that foreign companies earn in the US GDP = C + I + G + (X-M) Or GDP = C + I + G + NE Where C = consumer spending I = investments G = government spending X-M = excess of exports over imports (also referred to as NE for Net Exports)

Answer 36

1. Use reasonable care when supervising 2. Comply with lawful objectives of CFP Professional’s firm 3. Provide notice of public discipline

Answer 37

1. Refrain from adverse conduct 2. Reporting 3. Provide Narrative statement 4. Cooperation 5. Compliance with Terms and Conditions of 6. Certification and Trademark License

Answer 38

Increase in the price of one will cause an increase in the demand for the other, e.g., sharp increase in price of oil, gas, or propane would likely cause increase in price of firewood.

Answer 39

Understanding the client’s personal and financial circumstances - obtain quantitative and qualitative information - analyze information - address incomplete information

Answer 40

Identifying and selecting goals - Identify potential goals - help the clients select and prioritize goals

Answer 41

Analyzing the client’s current course of action and potential alternative course(s) of action

Answer 42

Developing the financial planning recommendations For each recommendation the financial professional must consider - Assumptions and estimates used to develop the recommendations - Basis for making the recommendation - timing and priority of the recommendation - whether the recommendation is independent or must be implemented with another recommendation

Answer 43

Presenting the financial planning recommendation(s) For each recommendation the CFP professional must: - present to the clients the selected recommendations and information that was required to consider when developing the recommendations

Answer 44

Implementing the financial planning recommendations - address implementation responsibilities - identify, analyze, and select actions, products, and services - recommend one or more actions, products, and services for implementation - select and implement actions, products, or services

Answer 45

Monitoring progress and updating - establish monitoring and updating responsibilities - monitor the client’s progress - obtain current qualitative and quantitative information - update goals, recommendations, or implantation decisions

Answer 46

1. Conduct Deemed Unacceptable 2. Conduct Deemed A Presumptive Bar 3. Other Adverse Conduct

Answer 47

Conduct deemed unacceptable Unacceptable

Answer 48

Presumptive Bar

Answer 49

Conduct deemed unacceptable unacceptable

Answer 50

Presumptive Bar

Answer 51

Conduct deemed unacceptable unacceptable

Answer 52

Conduct deemed unacceptable unacceptable

Answer 53

Presumptive Bar

Answer 54

Conduct Deemed Unacceptable Unacceptable

Answer 55

Deemed to be a presumptive bar presumptive bar

Answer 56

The individual is permanently barred from becoming certified with no possibility for appeal.

Answer 57

Customer complaints Arbitrations and other civil proceedings Felony convictions for non-violent crimes that occurred more than 5 years ago Misdemeanor convictions Employer investigations and terminations

Answer 58

An individual is barred from becoming certified unless they petition the Disciplinary and Ethics Commission (DEC) and the DEC grants the petition or permits the individual to reapply for certification later.

Answer 59

Measures economy on a quarterly basis Measures total market value of a country’s income and output of goods and services produced by all the people and companies in the US

Answer 60

Failure to answer a complaint will result in CFP Board Counsel delivering an Administrative Order of Suspension or an Administrative Order of Revocation. If conduct is unacceptable the revocation order is used, if conduct is deemed to be presumed unacceptable the order of Suspension is used. Mandatory timeframe for suspension is 1 year and 1 day.

Answer 61

CFP Board Counsel delivers complaint Either Settlement without investigation or respondent answer due within 30 days - Respondent pays hearing/settlement review fee or requests waiver. Due within 30 days of assessment Hearing documents, witness list, written statements, and stipulations - docs due 45 days after delivery of complaint - witness list due 30 days after delivery of complaint Notice of hearing from CFP Board Counsel - due not less than 30 days before hearing Hearing before hearing panel Hearing panel recommendations Disciplinary and Ethics Commission (DEC) reviews hearing panel recommendation DEC Final order Appeal to the Board of Directors’ Appeals Committee - must be filed within 30 days of issuance of DEC final order

Answer 62

The **_D**_isciplinary and _**E**_thics _**C_**ommission

Answer 63

Step 1: Understanding the Client's personal and financial circumstances

Answer 64

Step 1: Understanding the Client's Personal and Financial Circumstances

Answer 65

Step 2: Identifying and Selecting Goals

Answer 66

Step 2: Identifying and Selecting Goals

Answer 67

Step 1: Understanding the Client's personal and financial circumstances

Answer 68

House money effect - take more risk Snakebite effect - take less risk Break-evenitis - take more risk

Answer 69

Presumptive Bar examples: Real Estate license

Answer 70

The CFP Board Counsel

Answer 71

The Disciplinary & Ethics Committee (DEC)

Answer 72

30 Days or an Administrative Order or Suspension that suspends the respondent’s certification and license for one year and one day. Or a Administrative order of revocation that revokes the respondent’s certification and License.

Answer 73

Y=C + I + G+ (X-M) Where: Y = GDP C= Consumer Spending I = Investment made by industry G = Governmental Spending X-M = excess of exports over imports. Also listed as NE or Net Exports

Answer 74

Durable Goods: Cars, furniture large appliances Non-Durable Goods: Clothing, food, fuel

Answer 75

Fixed Investment Change in private inventory

Answer 76

Expansion: increasing GDP Contraction: decreasing GDP and increasing unemployment

Answer 77

Market value of all goods and services produced by labor and property in the U.S.

Answer 78

2 consecutive quarters of negative GDP growth. Not every contraction is a recession, but every recession is a contraction.

Answer 79

Peak Expansion Trough Contraction

Answer 80

long term non-inflationary increase in GDP (caused by increase in a country's productive capacity) average sustainable rate of economic growth over time

Answer 81

activity rebounds (GDP, employment) credit begins to grow rapid growth of profits low inventories, sales improving stimulative policy

Answer 82

Growth peaking Strong credit growth Profit growth peaks Neutral policy Inventories and sales grow; equilibrium reached

Answer 83

Growth is moderating Credit tightens Earnings are under pressure Policy is contractionary Inventories grow, sales growth declines

Answer 84

Falling activity Credit dries up Profits decline Policy eases Inventories and sales fall Unemployment rates rise

Answer 85

Yield curve S&P 500 new private housing starts money supply (M2) growth rate consumer confidence Manufacturers' new orders average weekly hours of production workers (manufacturing) initial claims for unemployment percentage of companies reporting slower deliveries new orders of non-defense capital goods

Answer 86

average duration of unemployment CPI commercial and industrial loans outstanding ratio of consumer installment credit outstanding to personal income ratio of trade inventories to sales change in index of labor cost per unit of output average prime rate

Answer 87

employees on non-agricultural payroll personal income minus transfer payments industrial production / average weekly hours worked in manufacturing turnover manufacturing and trade sales

Answer 88

Interventions by the federal government / Congress to influence the economy, such as: taxation (increase: reduces disposable income; decrease: increases disposable income) Government spending (increase to promote growth/recovery; decrease = tightening policy) debt management

Answer 89

Government expenditures \> revenues generated Government will sell Treasuries Treasuries will compete with other issuers of debt securities and drive values lower

Answer 90

Federal Reserve Bank (Fed) controls monetary policy to control money supply, influence lending rates, slow down or stimulate economy.

Answer 91

sustainable long term growth stable prices full employment

Answer 92

Discount rate: rate at which banks borrow from government Reserve requirement: percentage of deposits that must be held on reserve Open market activities: Fed buys and sells securities in the open market

Answer 93

increase discount rate (increases cost of borrowing) increase reserve requirements sell securities to the market

Answer 94

No third parties can be used to go around and violate the guidelines provided in the Code of Ethics & Standard of Conduct.

Answer 95

A. Duties Owed to Clients (Focus Area!) B. Financial Planning and Application of the Practice Standards for the Financial Planning Process C. Practice Standards for the Financial Planning Process (Focus Area!) D. Duties Owed to Firms and Subordinates E. Duties Owed to CFP Board F. Prohibition on Circumvention

Answer 96

* felony conviction for theft, embezzlement, or other financially based crimes * felony conviction for tax fraud or other tax related crimes * revocation of a financial professional license unless administrative in nature * felony conviction for any degree of murder or rape * felony conviction for any other violent crime within last 5 years

Answer 97

* 2 or more personal or business bankruptcies * revocation of a non-financial, professional license unless administrative in nature * suspension of a financial, professional license unless administrative in nature * felony conviction for non-violent crimes within last 5 years (including perjury) * felony conviction for violent crimes other than murder or rape more than 5 years ago

Answer 98

To investigate and file a complaint against a respondent for alleged violations against the Code of Ethics and Standards of Conduct

Answer 99

issue a final order that finds facts, determines whether a violation has occurred, and imposes discipline in the form of sanction where appropriate DEC reviews Hearing Panel's recommendation and approve or remand to Hearing Panel for further consideration within 45 calendar days of the hearing DEC must mail by certified mail to respondent a final order containing DEC's findings of fact and sanction imposed if any

Answer 100

Conduct a hearing (must consist of at least 3 persons, mostly CFP professionals and a majority must be DEC members - DEC member must serve as chair)

Answer 101

outside attorney who represents the case to the Hearing Panel as an advocate for the CFP Board

Answer 102

attorney who acts in advisory capacity in providing advice on the Standards of Professional Conduct and hearing procedures to the Hearing Panel and the DEC during ratification meeting

Answer 103

When CFP Board receives evidence that professional has engaged in conduct that poses an immediate threat to the public and the gravity of conduct significantly impinges upon stature and reputation of the marks. Professional must show cause in form of a written response why he/she should continue to have the right to use the marks while case is pending.

Answer 104

failure to respond to show cause within 20 calendar days felony conviction for any crime misdemeanor conviction for fraud, misrepresentation or crimes of moral turpitude revocation of financial professional license unless administrative Filing certificate with DEC demonstrating that criminal convictions or professional discipline has been reversed will lead to automatic reinstatement but has no effect on any proceedings pending against the professional

Answer 105

CFP Board Counsel gives 2nd request for information via certified mail, and professional has 20 calendar days to respond Failure to provide requested information gives rise to adverse inference

Answer 106

20 calendar days from the date of service of the complaint to respondent Failure to respond or failure to pay the hearing cost assessed by CFP Board lead to admission of the allegations set forth in the complaint, and CFP Board issues Administrative Order of Revocation

Answer 107

No evidence may be accepted less than 45 calendar days prior the scheduled hearing Documentation must not exceed 100 pages witnesses shall be identified no later than 45 calendar days prior to the hearing Respondent's counsel must be identified to CFP Board no later than 45 calendar days prior to hearing

Answer 108

30 calendar days after notice of order

Answer 109

1. conviction of a crime other than minor traffic offenses 2. being subject of professional discipline 3. upon notification of a change to a matter previously disclosed under 1 & 2 to CFP Board

Answer 110

Respondent must provide evidence within 30 days of receiving an order of suspension that he/she ceased all use of the marks by providing copies of documents requested by DEC.

Answer 111

Suspension for one year or less: automatic reinstatement Suspension for longer than one year: respondent must file request for reinstatement within 30 calendar days of expiration of suspension (petition DEC for a reinstatement hearing within 6 months of end of the suspension) - failure to do so leads to permanent bar from using CFP certification

Answer 112

maintained competence and learning in the are of financial planning respondent's conduct has been exemplary and beyond reproach since issuance of DEC's order respondent made restitution or settled all claims from persons injured or harmed by misconduct documentary evidence of all business activities conducted during suspension period

Answer 113

financial position at a point in time items on personal balance sheets are reported at FMV items on corporate balance sheets are reported at the lower of cost or FMV every asset on balance sheet = source for risk management assets on left side, top to border in order of liquidity liabilities and net worth on right side: ST, LT, net worth total liabilities = ST + LT liabilities balance sheet equation: Assets = Liabilities + Net Worth measures assets, liabilities, shareholder's equity starts with cash balance and ends with retained earnings

Answer 114

cash inflow and outflows during reporting period - cash movements (increases and decreases) over a period of time assists in reconciling ending cash from prior year with ending cash during reported period breaks cash into sources and uses details where cash comes from (earnings, investments, loans, gifts) starts with net income and ends with cash balance

Answer 115

Liquidity ratios: determine ability to meet ST obligations Activity ratios: determine relative efficiency of financial management Profitability ratios: measure relative profitability Debt ratios: determine ability to meet LT obligations

Answer 116

Current Ratio (Liquid Ratio): Current Assets / Current Liabilities Quick Ratio: (Current Assets - Inventories) / Current Liabilities Working Capital: Current Assets - Current Liabilities

Answer 117

Inventory Turnover: Cost of Goods Sold / Average Inventory Days to Sell Inventory: 365 / Inventory Turnover Accts Receivable Turnover: Sales (credit) / Avg. Accts. Rec. Receivable Collection Period: 365 / Accts. Rec. Turnover

Answer 118

Gross Profit Margin: Gross Profit / Sales (or Net Earnings / Total Sales) Operating Profit Margin: Operating Income / Revenue Return on Assets: EAT (Earnings after tax) / Total Assets Return on Equity: EAT / Equity Price to Earnings Ratio: Market Cap / Net Earnings

Answer 119

Debt to Equity: Total LT debt / Equity Times Interest Earned: EBIT / Interest Expense Debt Ratio: Total Debt / Total Assets

Answer 120

Monetary Assets / Monthly Living Expenses (Target = 3-6+ months - depending on HH earners; single: 6 mo; 2 earners: 3-6 mo)

Answer 121

Cash Checking and savings account Money market mutual funds T-Bills CDs Cash value life insurance Lines of credit Home equity loans Assets must be liquid and marketable! Exam tip: client with children but no will establishing guardianship - will has priority; disability insurance for single earner supersedes emergency fund!

Answer 122

Single accounts Joint accounts (2 or more persons) Revocable Trust accounts Irrevocable Trust accounts Certain Retirement accounts Corporation, Partnership, and Unincorporated Association accounts Employee Benefit Plan accounts Government accounts $250k per person, per ownership category, per bank (not per branch) RTFQ: is question testing total coverage or individual coverage?

Answer 123

Prime rate

Answer 124

Repay all outstanding debt every 4 years

Answer 125

requires debtor and attorney to draw up repayment plan based on debtor's income/wages/benefit/payments/rental income

Answer 126

liquidation procedure: eliminates consumer debt by having a trustee sell some of the debtor's personal property to repay their creditors (unsecured debt is eliminated, nonexempt assets are sold to pay off secured debt) Eligibility: income must be under a certain amount most debts are discharged after 115 days from the day of filing for Chapter 7 debts that cannot be erased: income taxes less than 3 years past due, alimony and child support, student loans, secured debts; furniture and personal belongings, cars and house are usually kept cannot stop foreclosure but delay it usually takes 4-6 months stays on credit reports for 10 years

Answer 127

generally best for businesses but also accommodates those who exceed Chapter 13 debt limitations or lack regular income reorganize debts to pay them more in line with income: unsecured debt is reorganized and paid back over time, secured debt is restructured and paid back over time Mortgage debt is frequently rewritten under Chapter 11 to give smaller payments, and there is often a “breathing spell” provided in Chapter 11 so that payments don’t have to be made for many months. Can stop foreclosure usually takes 6 mo - 2 yrs Stays on credit reports for 10 years

Answer 128

permits restructuring of farm, reorganization of debt like Chapter 13, but for farmers only, and with a higher amount of debt allowed. very strict eligibility requirements: available only to family farmers with regular annual income primary advantage: ability to reorganize debt without the complex procedures involved in a Chapter 11.

Answer 129

wage earner plan: allows debtors to keep personal assets, but obligated to repay unsecured and secured debt in full over a period Eligibility: no more than $419,275 in unsecured debt (credit cards, personal loans); no more than $1,257,850 in secured debt (incl. mortgages and car loans) good chapter to use if behind on house payments: instantly stops foreclosure good for paying state and federal taxes without having to pay interest debtor will pay more every month to make payments on overdue debt along with current monthly payments one payment each month to the court appointed trustee, who pays all creditors according to the plan. Chapter 13 can also protect people who co-signed with you usually takes 3-5 yrs stays on credit reports for 7 years

Answer 130

Consumer Credit Protection Act: right to know costs and terms of credit Equal Credit Opportunity Act: right to fair opportunity to obtain credit Fair Credit Reporting Act: right to know what is in your credit file Fair Credit Billing Act: right to have billing mistakes resolved Fair Debt Collection Practices Act: right to be protected from collection agencies Consumer Financial Protection Bureau: implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive

Answer 131

FICO scores estimate level of future credit risk, how likely a person is to repay a loan on time comprised of: 1. payment history - 35% 2. amounts owed - 30% 3. length of credit history - 15% 4. new credit - 10% 5. credit mix - 10% \<580 Poor (well below average, risky borrower) 580-669 Fair (below average, many lenders will approve loans) 670-739 Good (near/slightly above average, most lenders consider this a good score) 740-799 Very good (above average, very dependable borrower) 800+ Exceptional (well above average, exceptional borrower) Missed payment: 7 years until removed from credit report!

Answer 132

Fixed rate: when rates are low and/or home owner is going to stay in the home for a long period of time Variable rate: when rates are high (expected to go down) or homeowner is not planning on keeping the home long-term

Answer 133

borrowers can pay origination points to lower rate or improve terms otherwise points = percentage of mortgage borrowed, can be added to mortgage

Answer 134

Conventional mortgage: below $647,200 Jumbo mortgage: above $647,200 - higher interest rate

Answer 135

Down payment \< 20% PMI can be eliminated after homeowner reaches 20% equity and makes 2 years of on-time payments

Answer 136

Large portion of principal is repaid in a single payment at the end of the loan period

Answer 137

Federal Housing Administration Veterans Administration United States Department of Agriculture

Answer 138

Down Payment Terms Insurance Fixed or Adjustable Funding fees Conv. 3-20% 15-30yrs DP\<20% Either None VA 0 15-30yrs None Either 2.3-3.6% waived disab. vet. FHA 3.5-20% 15-30yrs 11yrs of loan Either None USDA 0 15-30yrs None Fixed only 1% upfront, 0.35%/yr

Answer 139

Contributions to both a 529 and a Coverdell ESA can be made in the same year for the same beneficiary 529 Plan: * no income restrictions for contributions * distributions tax free if used for qualified education expenses * non-deductible contributions (some states give state income tax deduction, some states give tax credit) * contributions = completed gifts (annual exclusion $16,000 or up to $80,000 with 5-year election) * maximum investment is established by program, many \> $400,000 per beneficiary * can change beneficiary to other family member * no time/age restrictions * for federal aid purposes counted as parental asset if owner is parent or dependent student * use for nonqualifying expenses: earnings withdrawn subject to federal tax and 10% penalty * Qualified expenses: tuition, fees, books, computers & related equipment, supplies, special needs, room & board for maximum half-time students, up to $10,000 private school tuition, up to $10,000 student loan payment

Answer 140

* non-deductible contributions, withdrawn earnings excluded from income for qualified higher education expenses and qualified K-12 expenses * contribution = completed gift, annual exclusion $16,000 * value removed from donor's gross estate * maximum contribution: $2000 per beneficiary per year from all sources * beneficiary can be changed to other family member * contributions are allowed until beneficiary reaches age 18, must use account by age 30 * contribution phase-out between $190-220K (MFJ) or $95-110K (single) * counted as parental asset for federal aid purposes * if used for non-qualifying expenses, earnings subject to federal tax and 10% penalty * Qualified expenses: tuition, fees, books, computers & related equipment, supplies, special needs, room & board for maximum half-time students, up to $10,000 private school tuition, up to $10,000 student loan payment

Answer 141

* earnings and gains taxed to minor; first $1150 of unearned income is tax exempt; unearned income over $2,300 for certain children under 24 is taxed at parents highest marginal rate * transfers = completed gift (annual exclusion applies) * value removed from donor's estate unless donor remains custodian * no maximum limit * funds can be used for any purpose * no change of beneficiary possible: irrevocable gift to child * custodianship terminates when minor reaches age of majority (18 or 21) * no income restrictions * for federal aid purposes counted as student's asset * investments as permitted under state lawas * funds must be used for benefit of minor

Answer 142

* tax deferred for federal, tax free for state; certain post-1989 Series EE and I bonds may be redeemed federal tax free for qualified higher education expenses * NO gift - qualifying bond must be owned by the parent! * value included in owner's gross estate * maximum investment: Series EE: $10,000/yr, per owner Series I: $10,000 (digital); $5000 (paper) per year, per owner * qualified expenses: tuition and fees * bond purchaser must be at least 24 years old at time of bond issuance * income phaseout: $128,650-$158,650 (MFJ), $85,800-$100,800 (single) * for federal aid purposes asset of bond owner * investments: interest-earning bond backed by full faith and credit of US Government * no penalty for use for nonqualifying expenses, interest on redeemed bonds included in federal income Calculation of tax free interest: Example: receipt of $3000 interest, $6000 principal, tuition and fees are $7650 3000 x (7650/9000) = $2550 = tax free interest; $3000 - $2550 = $450 taxable interest

Answer 143

* Roth IRA (tax free withdrawals at 59 ½ and after 5 years! - not counted as asset for federal aid, taxable portion of withdrawal prior to 59 ½ subject to 10% penalty - waived if used for qualified education expenses; value included in owner's gross estate * Traditional IRA- not counted as asset for federal aid, taxable portion of withdrawal prior to 59 ½ subject to 10% penalty - waived if used for qualified education expenses; value included in owner's gross estate * Mutual funds: earnings and gains taxed in year realized; direct payments of tuition not considered gifts; no restrictions for non-qualified education expenses

Answer 144

* Home Equity Loan * Life Insurance Cash Values (low coast loan) * Qualified Plans (may allow to borrow for educational expenses) * Defer Admission (some colleges allow students to defer admission while students work and live at home) * Community College (2-year program, then transfer to 4-year college)

Answer 145

for eligible individual with disability or who is blind, and who is designated beneficiary and owner of the account (provides for qualified disability expenses) * ABLE account may be established if blindness or disability occurred before age 26; condition must be expected to last at least 12 consecutive months; must be receiving benefits under SSI and/or SSDI or be able to obtain disability certification from a doctor * only ONE ABLE account per beneficiary * earnings in an ABLE account are not taxed unless a distribution exceeds a designated beneficiary's qualified disability expenses * Qualified expenses: any expenses incurred relating to blindness or disability, including expenses for maintaining or improving health, independence, or quality of life (no restrictions) * total annual contributions (including rolled from a 529 account) are limited to annual gift tax exclusion * Contributions are not tax deductible and must be in cash or cash equivalents * distributions may be used for any qualified expense * rollovers allowed from a section 529 tuition account or a section 529 ABLE account * upon death of beneficiary, ABLE account balance is included in his/her gross estate; amounts paid for outstanding qualified expenses and to state for claims under Medicaid program may be deductible for federal estate tax purposes * maximum investment = subject to individual state and their limit for education-based 529 savings accounts (many \> $400,000). Only the first $100,000 is exempt from the SSI $2000 limit. * beneficiary cannot be changed * for financial aid purposes, account balances **≤** $100,000 are disregarded; would also not be reported on sibling's FAFSA * use for non-qualifying expenses will result in taxation and penalties and could affect the beneficiary's eligibility for public benefits

Answer 146

**Grants**: * Pell Grants: undergraduates, exceptional financial need, not earned bachelor's, graduate, or professional degree * Federal Supplemental Educational Opportunity Grant (FSEOG): undergraduates, exceptional financial need (lowest EFC), prioritizes students who receive Pell Grants, does not need to be paid back **Scholarships**: tax-free if full- or part-time student for a degree at an accredited post-secondary institution **Loans**: **Federal Direct / Stafford Loans** (a) Direct Subsidized Loans (need-based, undergrad only): help students with financial needs; US Department of Ed pays interest on a Direct Subsidized Loan * while in school at least half-time * for first 6 months after you leave school ("grace period") * during “deferment” (b) Direct Unsubsidized Loans (need-based, undergrad, grad, & professional student) * no requirement to demonstrate financial need * students pay interest on a Direct Unsubsidized Loan during all periods **Direct PLUS / PLUS Loans:** * non-need based, undergrad, grad, & professional student ("Parent PLUS loan when made to parent; grad PLUS loan when made to graduate or professional student) * US Department of Ed is lender * CANNOT have adverse credit history * maximum PLUS loan: cost of attendance - financial aid received **Work-Study:** * funded by federal, state, and/or institutional allocations; employers must match federal and state monies * School's office of financial aid administers work-study programs

Answer 147

Financial Need Formula: * cost of attendance - EFC = Financial Need EFC = calculated based on financial resources that students and parents own: income (parents & students) + assets (parents & students) Income: * parents: AGI - allowance for taxes + living expenses (22% to 47%) * students: amount over protected amount ($7040) (50%) Assets: * Cash, savings, checking, MMKT funds, CDs * Investments (mutual funds, stocks, stock options, bonds, commodities) * Rental real estate equity, businesses, investment farms, trust funds * College savings plans, CESAs, 529s Retirement assets and home equity do NOT count towards EFC Accounts held/owned by: * parents or in dependent child's name = parent assets (5.64%) - distributions no impact to aid * independent students / spouses = student assets (20%) * others (aunts, grandparents) = excluded - distributions impact aid up to 50%

Answer 148

**AOTC** * up to $2,500 per eligible student (100% of first $2000 + 25% of next $2000) * 40% of credit is refundable (i.e., up to $1,000) * limit MAGI (MFJ): $180,000; (single, HH, qual. wid.) $90,000 * cannot claim if someone else can claim you as dependent on their return * cannot be non-resident alien * first 4 years of post-secondary education * 4 tax years per eligible student * must be pursuing degree or recognized education credential * at least half-time for at least one academic period * NO felony drug convictions * qualified expenses: tuition, enrollment fees, materials needed - does NOT cover ROOM & BOARD!!!! **LLC** * Up to $2,000 credit per return (20% of up to $10,000 in expenses) * not refundable * Limit on MAGI (MFJ): $180,000; (single, HH, qual. wid.) $90,000 * cannot claim benefit if someone else can claim you as dependent on their return * cannot be non-resident alien * all years of post-secondary education and for courses to acquire/improve job skills * benefit available unlimited number of tax years * no need to pursue degree or other recognized education credential * available for one or more courses * felony drug conviction restriction does not apply * qualified expenses: tuition and enrollment fees only 1. Start with student's level education/year of enrollment to determine which credit can be used 2. Look at types of expenses covered to ensure they are qualifying costs 3. Observe filing status and MAGI

Answer 149

affects young people from affluent households Outcomes include guilt, low motivation, a sense of entitlement, and isolation.

Answer 150

Individuals value something that they already own more than something they don't yet own. Sometimes referred to as divestiture aversion. Perceived greater value occurs only because the individual possesses the object in question. Investors tend to hold certain assets because of familiarity and comfort, even if the assets are inappropriate or become unprofitable. Endowment effect = example of emotional bias

Answer 151

one person shields another person or persons from experiencing the impact of behavioral outcomes

Answer 152

Transportation is not a qualified educational expense, therefore the portion of account gains on the $25,000 distribution is considered ordinary income. In addition, a 10% penalty is applied to the gain portion. Joaquin is in the 32% marginal tax bracket. The taxation & penalty is calculated as follows: Gains: $92,500 - $50,000 = $42,500 Percentage of Gains in Balance: $42,500 ÷ $92,500 = 0.4595 Portion of Gains in Distribution: $25,000 × 0.4595 = $11,487.50 Tax Due on Gains: $11,487.50 × 0.32 = $3,676 10% Penalty on Gains: $11,487.50 × 0.10 = $1,148.75 Tax Due + Penalty: $3,676 + $1,148.75 = $4,824.75

Answer 153

Both parents and students are offered an Income Protection Allowance as they determine the EFC on the FAFSA form. **The Asset Protection Allowance is only available to parents.** It allows parents to exclude certain portions of their assets from consideration when calculating the Expected Family Contribution (EFC).

Answer 154

Equity in a primary residence and retirement assets are non-includible in the EFC + Financial Need calculations. Thus, the home equity and IRA are omitted. * $80,000 AGI **→** Parent Income (24% rate) = $80,000 x 0.24 = $19,200 * $7,500 [Joint Checking] **→** Parent Asset (5.64%) = $7,500 x 0.0564 = $423 * $15,000 [Brokerage Acct.] **→** Parent Asset (5.64%) = $15,000 x 0.0564 = $846 * $50,000 [529] **→** Parent Asset (5.64%) = $50,000 x 0.0564 = $2,820 * $10,000 [Income] **→** Student Income (50% above protected amt.) = $10,000 - $7,040 = $2,960 x 0.50 = $1,480 * $5,000 [UTMA] **→** Student Asset (20%) = $1,000 EFC = $19,200 + $423 + $846 + $2,820 + $1,480 + $1,000 = $25,769 Cost of Attendance (COA) = $55,000 COA – EFC = Financial Need **→** $55,000 - $25,769 = $29,231

Answer 155

To calculate the adjusted basis to the donee, first calculate the gift tax adjustment: ***Step 1*****:** Calculate the ‘Appreciation Factor’ [(FMV – Basis) ÷ (FMV – Annual Exclusion)] [{$150,000 - $95,000) ÷ ($150,000 - $16,000)] = [$55,000 ÷ $134,000] = 0.4104 ***Step 2*****:** Multiply the ‘Appreciation Factor’ by the Gift Tax Paid 0.4104 x $4,250 = $1,744 Next, add the gift tax adjustment to the original basis to find the adjusted basis. $1,744 + $95,000 = $96,744

Answer 156

The disposition effect causes investors to sell winners (confirms correct choice) and to avoid selling losers (confirms incorrect choice).

General Principles/Conduct/Psychology Flashcards

(181 cards)