SIE Module 9 Test Bank

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1. Which of the following statements is correct regarding the elements of a trust?

A. After the trust is established, the grantor has a fiduciary relationship to the beneficiaries.

B. Only real property and tangible personal property may be transferred to and held in a trust.

C. Trust provisions may include grounds for the removal and replacement of a trustee.

D. An individual must be legally competent to be the beneficiary of a trust.

2. All of the following represent advantages of a revocable trust EXCEPT:

A. Ancillary probate can be avoided if out-of-state real property is transferred to a trust established in the grantor’s state of domicile.

B. The trust assets will avoid inclusion in the grantor’s gross estate for estate tax purposes.

C. The grantor reserves the right to reclaim the property at any time before death.

D. A sole proprietorship can be transferred to the trust to prevent termination of the business at the proprietor’s death.

3. Which of the following statements is correct regarding irrevocable trusts?

A. Trust assets will be included in the grantor’s gross estate at the time of the grantor’s death.

B. If created during the grantor’s life, the trust assets will pass through probate at the grantor’s death.

C. The grantor is considered to have given a completed gift to the beneficiaries at the time the trust is created.

D. The trust assets will be subject to the claims of the grantor’s creditors during the grantor’s lifetime.

4. Which of the following statements is correct concerning a testamentary trust?

A. The trust is effective during the grantor’s lifetime.

B. The trust terms are treated as precatory language.

C. The assets in the trust are subject to probate.

D. The trust can be revocable or irrevocable.

5. All of the following statements regarding contributions to an IRA are correct EXCEPT:

A. Excess contributions made to an IRA will be subject to a 6% excise tax.

B. Contributions to an IRA can be made at any time before April 15th of the following tax year.

C. If a married person does not have any earned income, their spouse can still contribute to a spousal IRA.

D. Taxpayers who are active participants in an employer-maintained retirement plan are ineligible to make any tax-deductible contributions to an IRA.

6. Which of the following statements is correct regarding excess contributions made to an IRA?

A. Excess contributions are more common with traditional IRAs than with Roth IRAs.

B. Excess contributions are subject to a 10% excise tax.

C. Excess contributions withdrawn from an IRA will be excluded from the participant’s gross income.

D. Excess contributions withdrawn from an IRA may be subject to a premature withdrawal penalty.

7. Which of the following is a prohibited investment in an IRA?

A. U.S. platinum coins.

B. Silver bullion.

C. Precious metals mutual fund.

D. Whole life policy.

8. Conversion of a traditional IRA into a Roth IRA would be most appropriate for:

A. An individual currently in a high income tax bracket, who expects to be in a low income tax bracket during retirement.

B. An individual currently in a low income tax bracket, who expects to be in a high income tax bracket during retirement.

C. An individual currently in a low income tax bracket, who expects to be in a low income tax bracket during retirement.

D. An individual currently in a high income tax bracket, who expects to be in a high income tax bracket during retirement.

9. Which of the following statements is correct regarding qualified retirement plans?

A. In order to avoid current taxation of the earnings, qualified plan trusts must be invested in tax-deferred vehicles, such as annuities.

B. Qualified plans qualify for special tax advantages that are not available to nonqualified plans.

C. An advantage of qualified plans is that they can discriminate in favor of highly compensated employees.

D. If insurance is included in a qualified plan, the pure insurance portion of the death benefit will be taxable to the beneficiary when paid.

10. Which of the following statements is correct regarding a profit sharing plan?

A. The employer can contribute and deduct up to 25% of covered compensation.

B. In-service withdrawals by employees are prohibited.

C. The plan can invest up to 10% in employer stock.

D. The plan can provide for past service.

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11. All of the following statements are correct regarding 401(k) plans EXCEPT:

A. The plan can include employee after-tax contributions and employer matching contributions.

B. The employer can establish an automatic enrollment feature in an attempt to increase plan participation.

C. Employees may be permitted to take an in-service withdrawal of the entire account upon completing five years of plan participation.

D. Contributions made by participants must be segregated from the employer’s general assets within three months of the salary deferral.

12. Which of the following statements is correct regarding defined benefit plans?

A. The plan’s investment risk falls primarily on the employee.

B. The maximum deductible employer contribution is based upon a specified percentage of compensation.

C. The administrative, reporting, and disclosure requirements are minimal and inexpensive.

D. These plans generally provide no pre-retirement inflation protection to employees.

13. Which of the following statements is correct regarding the differences between defined benefit plans and defined contribution plans?

A. The employee assumes the risk of pre-retirement inflation with a defined benefit plan, and the employer assumes the risk of pre-retirement inflation with a defined contribution plan.

B. Defined benefit plans have predictable costs for the employer, while defined contribution plans have unpredictable costs.

C. It is easier to communicate the value of a defined benefit plan to an employee than it is to communicate the value of a defined contribution plan to an employee.

D. Defined benefit plans can provide benefits based upon an employee’s past service, while defined contribution plans cannot provide benefits for past service.

14. Which of the following actions of a 401(k) plan administrator would most likely be considered a breach of fiduciary duty?

A. Only making the plan account statements available to participants online.

B. Offering only seven core investment alternatives for the plan, each with different risk and return characteristics.

C. Conducting a review of plan expenses every eight years.

D. Only allowing participants to change their investment options monthly.

15. The minimum margin requirement for investment amounts is determined by:

A. The Department of Labor.

B. The Federal Reserve.

C. The Treasury Department.

D. Congress.

16. A customer is purchasing 200 shares of ABC Company stock at $100 per share in a margin account. ABC Company is a publicly-traded company listed on the New York Stock Exchange. Under Regulation T, how much cash must the customer deposit with the brokerage firm to purchase the stock?

A. $2,000.

B. $5,000.

C. $10,000.

D. $20,000.

17. Charlie opened a margin account with ABC Brokerage Company. He is ready to make his first margin transaction, a purchase of 100 shares of ZZZ Company Stock. Assuming the stock is currently trading at $32 per share, and the initial margin requirement is 50%, how much cash must Charlie deposit into the account?

A. $1,000.

B. $1,600.

C. $2,000.

D. $3,200.

18. A registered investment adviser may enter into an advisory contract that calculates compensation based on:

A. A portion of the capital gains in the account.

B. A flat annual dollar amount as agreed upon.

C. The net worth of the client.

D. The adviser’s experience level and educational history.

19. An advantage of an inter vivos irrevocable trust is that it provides a method of transferring property:

A. Back into the decedent’s estate at a reduced estate tax rate.

B. In an open and public forum.

C. That avoids the probate process.

D. From the beneficiaries back to the grantor.

20. Ralph’s 54-year-old father opened a Uniform Transfers to Minors Act (UTMA) account for Ralph, to help save for college. Ralph is age 15 and plans on matriculating in three years. Which of the following is an accurate statement regarding college savings vehicles?

B. Ralph’s father can use his traditional IRA to make a tax-free distribution when paying college costs.

C. A scholarship that pays for tuition, fees, room, board, books, and a travel stipend would be income tax-free.

D. Room and board are not considered qualified distributions from a Section 529 college savings plan.

A. Ralph could own bonds, cash, or securities in the UTMA account, but the income may be subject to kiddie tax.

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21. John, age 62, has a small business with three employees. The employees range in age from 21-24. John would like to establish a retirement plan for the business that will provide him with the greatest possible retirement benefit for himself. Assuming the business has substantial positive cash flow, which one of the following retirement plans would be most appropriate?

A. Money purchase plan.

B. Defined benefit plan.

C. Profit sharing plan.

D. Simplified employee pension.

22. Timmy is a sole proprietor with no employees. In the current tax year, he had the following income and deductions:
• Gross Schedule C income - $255,000
• Schedule C deductions - $40,000
• Self-employment tax deduction (50% of total self-employment tax) – $15,000
Timmy just established a simplified employee pension (SEP) plan for his business. What is the maximum deductible contribution Timmy can make to the plan for the current tax year?

A. $37,000.

B. $40,000.

C. $48,000.

D. $55,000.

23. Which of the following statements is correct regarding a simplified employee pension (SEP) plan?

A. Part-time employees working less than 1,000 hours during the year can be excluded from participation in the plan by the employer.

B. Employer contributions to the SEP are 100% immediately vested to the employee.

C. Both employer contributions and employee elective deferral contributions are allowed.

D. Plan assets can be invested in life insurance and collectibles.

24. Which one of the following represents a type of qualified retirement plan in which the employer’s annual contribution is determined by an actuary?

A. Money purchase plan.

B. Defined benefit plan.

C. Simplified employee pension.

D. Profit sharing plan.

25. Which one of the following retirement plans would permit a participant to take a loan?

A. SEP.

B. SIMPLE 401(k).

C. Roth IRA.

D. SIMPLE IRA.

26. Which one of the following is a permitted investment in a traditional IRA?

A. Maple leaf coin.

B. Real estate limited partnership.

C. Variable universal life insurance.

D. Antiques.

27. Which one of the following is a permitted investment in a SEP?

A. Variable life insurance policy.

B. Baseball cards.

C. Antiques.

D. Real estate limited partnership interest.

28. Which one of the following retirement plan distributions would be subject to an early withdrawal penalty?

A. A 34-year-old disabled man takes a distribution from his former employer’s money purchase plan to pay for home furnishings.

B. A man begins taking substantially equal periodic payments from his former employer’s profit sharing plan starting at age 45.

C. A 42-year-old woman receives a hardship withdrawal from her 401(k) plan.

D. A 60-year-old man takes a $10,000 distribution from his traditional IRA to pay for a vacation.

29. Gus, age 29, just purchased his first home. In order to fund the down payment, he took a $30,000 hardship withdrawal from his 401(k) plan. The amount of the early withdrawal penalty on the 401(k) plan distribution will be:

A. $0.

B. $1,000.

C. $2,000.

D. $3,000.

30. Which one of the following account types is used to make short sales?

A. Margin account.

B. Option account.

C. Discretionary account.

D. Cash account.

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31. Which one of the following types of accounts requires a corporate resolution specifying all persons who are authorized to open the account and all persons who are authorized to determine activity in the account?

A. Margin account.

B. Cash account.

C. Institutional account.

D. Joint account.

32. Which one of the following represents a characteristic of a discretionary account?

A. A custodian maintains custody of client assets.

B. An investor can purchase and sell put and call options.

C. An investor can purchase securities with borrowed funds.

D. A broker can buy and sell securities without the client’s consent for each trade.

33. Which one of the following statements is correct regarding Uniform Transfer to Minors Act (UTMA) accounts?

A. The account beneficiary can be changed until the minor attains the age of majority.

B. They do not permit the accounts assets to be invested in real estate.

C. Income earned by account assets may be taxed at the parents’ tax rate.

D. They are considered assets of the parents in the EFC formula.

34. Which one of the following statements is correct regarding a Coverdell Education Savings Account?

A. The account beneficiary can be changed by the custodian at any time.

B. A parent can contribute to the account regardless of their income level.

C. The maximum contribution to the account is $5,000 per year.

D. The account is considered an asset of the student for purposes of the EFC formula.

35. Which one of the following statements is correct regarding a Coverdell Education Savings Account?

A. The account can only be established by the student’s parents.

B. Contributions to the account are deductible for federal income tax purposes.

C. Funds can be withdrawn tax-free to pay for elementary school expenses.

D. The account must be distributed within 30 days of the student’s attainment of age 21.

36. Which one of the following statements is correct regarding state-run Section 529 prepaid college tuition plans?

A. They are most attractive to aggressive investors since their return typically exceeds that of equity securities.

B. They can be used for private schools as well as out-of-state schools.

C. They guarantee admission to a state college.

D. The plan balance will be forfeited if the student chooses not to go to college.

37. Each of the following individuals listed below is an employee of a company sponsoring a retirement plan. Assuming each individual will continue employment beyond age 72, which one can defer the minimum distribution required beginning date until after retirement?

A. Dave, a 2% owner of ABC Company, a company that sponsors a SIMPLE IRA.

B. Sara, a 10% owner of DEF Company, a company that sponsors a profit sharing plan.

C. Jake, an employee of a hospital that sponsors a Section 457 plan.

D. Marie, a 0% owner of XYZ Company, a company that sponsors a simplified employee pension plan.

38. Victor, age 69, has a traditional IRA with a current balance of $500,000. His wife, Abby, age 56, is the beneficiary. When he begins his minimum distributions, the appropriate denominator to use in the calculation is based on the:

A. Uniform Lifetime Table.

B. PS 58 Table.

C. Joint Life and Last Survivor Expectancy Table.

D. IRS Table I.

39. A participant in a traditional IRA must take their first required minimum distribution by:

A. October 15 of the year the individual attains age 65.

B. April 1 following the year the individual attains age 72.

C. December 31 of the year the individual attains age 59½.

D. April 15 following the year the individual attains age 55.

SIE Module 9 Test Bank

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