FINRA Series 6 — All Questions

A broker-dealer carries customer accounts. How often must its anti-money laundering program be independently tested?

• a.Every two years, on a calendar-year basis
• b.Annually, on a calendar-year basis✓
• c.Only when requested by regulators
• d.Every three years, on a rolling basis

Rule 3310 requires annual independent testing on a calendar-year basis for firms that carry customer accounts or execute customer transactions. Every two years is allowed only for firms that do not execute customer transactions, hold customer accounts or act as an introducing broker. Three years has no support in the rule, and testing is not examiner-triggered.FINRA Rule 3310(c)

A broker-dealer detects suspicious activity involving $7,000 and identifies a suspect. By when must it file a suspicious activity report?

• a.Within 15 calendar days of the transaction
• b.Within 90 days, after an internal investigation is finished
• c.Within 60 calendar days, even though a suspect is identified
• d.Within 30 calendar days of initial detection✓

A SAR is required for suspicious transactions of at least $5,000 and is due within 30 days of initial detection when a suspect is identified. The 60-day period is available only when no suspect is identified. Fifteen days is not a rule requirement, and an internal investigation does not extend the clock.31 CFR 1023.320

After filing a suspicious activity report on a customer, a representative is asked by that customer whether a report was filed. What is the correct response?

• a.Decline to confirm or deny the filing✓
• b.Say that none was filed, to avoid alerting the customer
• c.Confirm it, but give no further details
• d.Confirm it, since the customer is entitled to know

SARs and any information that would reveal their existence are confidential, so the representative must neither confirm nor deny. Confirming, even without details, is a prohibited disclosure. Lying that none was filed is deceptive and creates its own problems. Declining to discuss it protects the investigation.31 CFR 1023.320(e)

A FINRA rule requires a firm to preserve a record but does not set a retention period, and no SEC rule does either. What is the minimum retention period?

• a.Three years
• b.Six years✓
• c.Four years
• d.Ten years

Rule 4511(b) sets a default of at least six years when neither FINRA nor Exchange Act rules specify a period. Three years applies to some specific SEC records, not to the default. Four years is tied to specific items such as written complaints under other FINRA rules. Ten years has no basis in the default.FINRA Rule 4511(b)

A firm reasonably believes an 80-year-old customer is the victim of financial exploitation and places a temporary hold on a disbursement. For how long may the hold initially last?

• a.Up to 30 calendar days
• b.Up to 5 business days
• c.Up to 15 business days✓
• d.Until the customer signs a release

Rule 2165 allows an initial temporary hold of up to 15 business days, with extensions available if the firm's review supports the belief or if it reports to authorities. Five business days is too short. Thirty calendar days is not the standard measure. A hold cannot wait for the customer, whose own signature may be the suspected problem.FINRA Rule 2165

Which of the following requires the firm to give a customer the opportunity to opt out under Regulation S-P?

• a.Sharing data with the customer's own accountant at the customer's request
• b.Sending data to the transfer agent to process the customer's requested trade
• c.Sharing customer data with a nonaffiliated marketing firm✓
• d.Responding to a valid subpoena from a regulator or court

Reg S-P requires an opt-out before nonpublic personal information goes to a nonaffiliated third party for its own marketing. Processing a requested transaction, legal compulsion, and disclosures made at the customer's direction fall within the exceptions, so no opt-out is needed. The common thread is that the customer gets a choice only when the sharing serves someone else's commercial interest.SEC Regulation S-P

Which action by an open-end fund generally requires approval by a vote of its shareholders?

• a.Changing from diversified to non-diversified status✓
• b.Adding a second portfolio manager to the management team
• c.Replacing the fund's custodian bank with a different bank
• d.Declaring the regular quarterly dividend to shareholders

Changing a fundamental policy such as diversification status requires a shareholder vote under the Investment Company Act. Operational matters such as the custodian, the individual manager or the dividend are board or management decisions. The shareholders' vote is reserved for changes that alter the nature of the investment they bought.Investment Company Act of 1940, Section 13(a)

What does the know-your-customer obligation require when an account is opened?

• a.Collecting only the customer's name and home address
• b.Reasonable efforts to learn essential facts✓
• c.Obtaining the customer's tax returns for the prior three years
• d.Requiring a minimum opening deposit before the account is approved

Rule 2090 requires reasonable diligence at the account's opening to know the essential facts about every customer and about anyone authorized to act on the account. Tax returns are not required. A name and address alone is far too little to know the customer. Minimum deposits are a firm business decision, not part of know-your-customer.FINRA Rule 2090

A new customer declines to provide a trusted contact person. What does Rule 4512 require?

• a.Ask for one; the account can still open✓
• b.Refuse to open the account until one is provided
• c.Name a trusted contact itself on the customer's behalf
• d.Obtain the name from the customer's employer

Rule 4512 requires reasonable efforts to obtain the name and contact information of a trusted person, but the customer's refusal does not stop the account from opening. The firm may not choose a contact for the customer, and the employer is not a source. The contact exists to help the firm protect the customer, not to qualify the account.FINRA Rule 4512

A mutual fund board adopts a redemption fee for short-term trading. What is the maximum fee under SEC rules?

• a.5% of the amount redeemed
• b.8.5% of the amount redeemed
• c.2% of the amount redeemed✓
• d.1% of the amount redeemed

Rule 22c-2 permits a redemption fee of up to 2%, aimed at market timing and short-term trading. One percent is within the limit but is not the maximum. Five percent exceeds it. The 8.5% figure is the old sales-charge ceiling under FINRA rules, a different charge for a different purpose.SEC Rule 22c-2

After its initial term, who must approve the continuation of a fund's advisory contract each year?

• a.The adviser alone, which sets its own fee yearly
• b.The board, with a majority of independents✓
• c.The SEC, which examines each renewal case by case
• d.The fund's custodian bank, after a fee review

Section 15(c) requires annual approval of continuation by the board, including a majority of the directors who are not interested persons, or by a vote of the shareholders. The custodian only safeguards assets and has no role in renewal. The SEC does not approve individual advisory contracts. Letting the adviser approve its own fee would be the conflict the independent-director requirement is meant to prevent.Investment Company Act of 1940, Section 15(c)

A fund's advertisement under Rule 482 must include which legend?

• a.A statement that the fund is insured by the FDIC for each shareholder
• b.A statement that the SEC has approved the fund's reported performance
• c.A prompt to read the prospectus before investing✓
• d.A statement that returns are guaranteed for the first full year

Rule 482 advertisements must tell investors to consider objectives, risks, charges and expenses and to read the prospectus carefully before investing. FDIC insurance does not apply to funds. Guarantees of returns are prohibited. The SEC never approves or endorses performance, and implying so is misleading.SEC Rule 482

Under the conflict of interest obligation of Reg BI, a firm must eliminate which practice?

• a.Offering both load and no-load funds to customers
• b.Time-limited contests tied to specific products✓
• c.Paying representatives any commission whatsoever
• d.Telling customers about the firm's fee schedule

The SEC specified that firms must eliminate sales contests, quotas, bonuses and non-cash compensation based on sales of specific securities or specific types within a limited period. Ordinary commissions are allowed if managed. Disclosure is encouraged, not prohibited. Offering a variety of share classes is acceptable if recommendations remain in the customer's best interest.SEC Regulation Best Interest

A representative recommends a variable annuity with annual charges well above those of a comparable contract from another insurer. Both offer the same features, and the customer's goals fit either. Which Reg BI obligation is most directly at issue?

• a.No obligation, since a commission always serves the customer
• b.The compliance obligation, which concerns only the firm's procedures
• c.The care obligation, which looks at cost and available alternatives✓
• d.The disclosure obligation, which is met once the fees are in the prospectus

The care obligation requires the representative to understand the product's costs and consider reasonably available alternatives, and an identical contract at a higher cost is hard to defend. Disclosure alone does not satisfy the care obligation. The compliance obligation is about firm procedures, not individual recommendations. Commission-based recommendations are not presumed to be in the customer's best interest.SEC Regulation Best Interest

A 78-year-old retiree with modest savings and no other liquid assets wants to put 80% of them in a variable annuity with an eight-year surrender schedule. What is the central concern?

• a.Surrender period conflicts with liquidity needs✓
• b.Subaccount fees are lower than those of mutual funds
• c.Variable annuities cannot be sold to customers over age 65
• d.Surrender charges disappear once the owner reaches 59½

A long surrender schedule locks up money she may need for health costs and daily living, so the product and the amount do not fit her horizon. No law bars annuity sales to seniors. Surrender charges are contract terms and do not end at 59½, which relates only to the tax penalty. Subaccount and contract fees are typically higher than those of an ordinary mutual fund.

A customer age 45 with an IRA proposes buying a variable annuity inside it, mainly to get tax deferral. What should the representative point out?

• a.The annuity makes withdrawals before 59½ penalty-free
• b.An IRA already defers tax, so deferral adds nothing✓
• c.Tax deferral inside the annuity doubles the IRA's deferral benefit
• d.Annuity purchases inside an IRA are prohibited by the Code

An IRA already shelters earnings, so the annuity adds cost without more deferral; only its guarantees or income features could justify it. Deferral does not stack. Annuities are permitted inside IRAs. The 10% additional tax before 59½ still applies to the IRA's distributions, whatever the underlying investment.

A client says he can tolerate large losses, but he must pay for his daughter's tuition in two years. Which factor should govern the recommendation?

• a.His short time horizon, which limits risk capacity✓
• b.The potential return, since tuition costs rise every year
• c.His age, since younger investors always take more risk
• d.His stated risk tolerance, since willingness is the only factor

Willingness and ability to take risk are separate, and a near-term obligation reduces ability, so the horizon should limit the risk level. Treating tolerance as the only factor ignores the cash need. Age is not the issue here. Chasing return to keep up with tuition inflation would expose the very money needed in two years.

A client already owns $35,000 of a fund family's Class A shares and invests another $20,000 in the same family. The first breakpoint is $50,000. How is the new purchase priced?

• a.At the reduced charge, but only after a 13-month letter of intent
• b.At the reduced charge, because the $35,000 already held counts✓
• c.At the full sales charge, because $20,000 is below the breakpoint
• d.At NAV with no charge, because the client is a repeat buyer

Rights of accumulation add the existing holdings to the new purchase, giving $55,000, which clears the $50,000 breakpoint. Ignoring the existing shares gives the full charge. Repeat buyers do not get NAV pricing. A letter of intent covers future purchases, but rights of accumulation apply without one.

A representative recommends that a client sell Fund A and buy Fund B, a similar fund in a different family that charges a new front-end load. There is no difference in objective or performance. What is the problem?

• a.The representative did not first obtain a letter of intent
• b.It triggers a new sales charge with no clear client benefit✓
• c.The switch violates the client's rights of accumulation
• d.Mutual fund switches between fund families are prohibited

Recommending a switch that costs the client a fresh load with no offsetting benefit fails the care standard, and it is the type of fund switching regulators target. Rights of accumulation are not violated by a switch. Different families are allowed. A letter of intent is a voluntary pricing tool, not a requirement for a switch.

A married couple filing jointly with a modified adjusted gross income of $230,000 asks to contribute directly to a Coverdell education savings account. What should the representative say?

• a.They can contribute the full amount, since the limit covers only single filers
• b.Their income is above the phase-out, but a 529 has no income limit✓
• c.They can contribute only half of the usual limit
• d.They can contribute directly if they use a custodian

Coverdell contributions phase out between $190,000 and $220,000 of modified AGI for joint filers, so $230,000 bars direct contributions, while 529 plans impose no income limit. The limits apply to joint filers as well. A custodian does not change the income test. The phase-out is complete above $220,000, so no partial contribution remains.IRC Section 530

A client with $500,000 to invest for retirement 20 years away is offered Class C shares of a fund. Why might Class A shares be more appropriate?

• a.Class C carries a higher front-end load than Class A
• b.Class A has breakpoint discounts and lower annual fees✓
• c.Class C shares must be converted to Class A after one year
• d.Class A has no 12b-1 fee and no sales charge

For a large, long-held purchase, breakpoint discounts and lower annual fees make Class A cheaper overall than the level 12b-1 fees that compound in Class C. Class C does not carry a front-end load; its charge is typically a small back-end charge for a short period plus the ongoing level fee. Conversion of Class C to Class A, where offered, takes years rather than one. Class A does carry a front-end load, though it shrinks at breakpoints, and it may carry a 12b-1 fee as well.

A customer's trusted contact calls and instructs the representative to sell the customer's fund shares and send the proceeds to the contact. What should the representative do?

• a.Execute it if the contact can supply the account number
• b.Execute it if the contact promises written authorization later
• c.Execute the trade, since the customer named the contact
• d.Decline; a trusted contact has no trading authority✓

A trusted contact exists so the firm can reach someone about the customer's wellbeing or to address suspected exploitation. That person has no trading or withdrawal authority. Naming the contact is not a power of attorney. Possessing the account number proves nothing, and a promise of later paperwork cannot authorize action now.FINRA Rule 4512

A customer says, "Buy 500 shares of that ETF whenever you think the price is right, any day this week." There is no written discretionary agreement. What is the issue?

• a.Timing discretion lasts only the day it is granted✓
• b.A verbal instruction is enough for any length of time
• c.Discretion of any kind is allowed only for mutual funds
• d.Timing discretion has no time limit once given orally

Authority over only the time or price of a transaction the customer has chosen is valid for the day it is given unless written discretionary authority is on file. A week exceeds that. Without a time limit, the authority would be full discretion. The permission is not confined to mutual funds, and verbal authority does not last indefinitely.

A customer owns a variable annuity with a $200,000 guaranteed minimum death benefit, though the account value is $120,000. A representative suggests a Section 1035 exchange into a new contract. What is a key concern?

• a.The guaranteed death benefit carries over automatically
• b.The new guarantee would likely reset near $120,000, losing $80,000✓
• c.The new contract is not allowed to offer a death benefit
• d.The exchange would trigger tax on all gains in the old contract

A guarantee is a feature of the old contract, and the new contract typically sets its guarantee at the transferred value, here about $120,000, so the $80,000 difference is lost. A proper exchange is tax-free. Benefits do not transfer automatically. Most new contracts do offer a death benefit, just not the old one.IRC Section 1035

A representative promotes a variable annuity that credits a 5% bonus on each premium. Which point must be explained to the customer?

• a.The bonus is exempt from income tax when withdrawn
• b.The bonus is a guaranteed return that the insurer can never take back
• c.The bonus removes the surrender charge on that premium
• d.Higher charges or a longer surrender period may offset the bonus✓

Bonus credits are usually paid for through higher expenses or longer surrender periods, and insurers may recapture them if the owner withdraws early or dies within a set time. The credit is not a guaranteed, permanent return. It is taxed like other annuity earnings when withdrawn. A bonus does not remove surrender charges.

A 35-year-old with two young children and a mortgage asks about variable life insurance. What should the representative establish before recommending it?

• a.Whether permanent coverage with investment risk fits his needs✓
• b.Only whether the customer holds a securities license
• c.Only the balances in the customer's current accounts
• d.Nothing, since life insurance is exempt from suitability review

A variable life recommendation needs a basis in the customer's need for coverage, ability to keep paying premiums, and interest in cash-value investment risk. Licensing of the customer is irrelevant. Life products are subject to the same review as other recommended securities. Account balances alone say nothing about insurance needs.

A 55-year-old investor with a moderate risk profile places 90% of her portfolio in a single sector fund. Which concern applies?

• a.Liquidity risk, since sector funds cannot be redeemed
• b.Concentration risk, since the portfolio is not diversified✓
• c.No concern, since sector funds are diversified across all industries
• d.Inflation risk alone, since nothing else is involved

A sector fund is diversified within one industry but not across industries, and 90% in one sector is far from a moderate profile. Sector funds are not diversified across all industries. Inflation risk is not the main concern. Open-end sector funds are redeemable at NAV.

A customer wants brokerage assets to pass to a niece at death without going through probate. Which registration fits best?

• a.A partnership account in both their names
• b.A tenants in common account with her
• c.An individual account plus a will naming her
• d.Transfer on death registration✓

A transfer on death registration names a beneficiary who receives the assets directly at the owner's death, outside probate. A will does not avoid probate, because the estate must administer the assets first. Tenants in common leaves the deceased owner's share to the estate rather than the survivor. A partnership account is for a business and does not create a nonprobate transfer.

A grandfather opens a UTMA account for his grandson and funds it, then asks to withdraw the money for his own use two years later. What is the answer?

• a.He cannot, since the gift to the minor is irrevocable✓
• b.He can, since the donor keeps ownership of the account
• c.He can, after paying a 10% early withdrawal penalty
• d.He can, if the custodian agrees to the request

A UTMA contribution is an irrevocable gift, and the assets belong to the minor even though a custodian manages them. The donor does not keep ownership. A custodian's consent cannot unwind a completed gift. A 10% penalty exists for certain retirement plan distributions, not for custodial accounts.

A representative tells a prospect that a variable annuity's subaccounts will "earn a guaranteed 7% a year." What is wrong with this statement?

• a.Subaccount returns carry market risk and cannot be promised✓
• b.Seven percent exceeds the legal maximum for annuity returns
• c.Nothing, as long as the prospect signs the application
• d.The claim is fine if the insurer carries a high rating

Subaccounts carry market risk, and promising a return is a misrepresentation; only features like a death benefit are guaranteed by the insurer. A signature does not cure a false statement. No law caps annuity returns. The rating of the insurer matters for its guarantees but does not make subaccount returns certain.

A trustee instructs a representative to open a trust account and begin trading. What should the firm obtain first?

• a.A corporate resolution from the trustee's employer
• b.Nothing, since any trustee has unlimited authority
• c.The trust document or a certification of trustee powers✓
• d.The beneficiary's signature on every order placed

The firm must confirm the trustee's authority and any limits, usually from the trust document or a certification of trust. Beneficiary signatures are not required for each order. A corporate resolution applies to a corporate account. Trustee authority depends on the document, so it is not unlimited.

A representative recommends a leveraged ETF to a retiree who plans to hold it for several years. What is the concern?

• a.Leveraged ETFs cannot be sold to retirees under federal law
• b.Daily resets can make multi-year results diverge sharply✓
• c.Leveraged ETFs pay no dividends under any circumstances
• d.Leveraged ETFs carry no market risk because they are hedged

FINRA has warned that leveraged and inverse ETFs reset daily and compounding can make multi-day results differ sharply from the index, so they are typically unsuitable for retail investors who hold them longer than a day. No law bars sales to retirees. Dividends are not the issue. These funds amplify market risk.FINRA Regulatory Notice 09-31

A client asks whether Reg BI makes her broker a fiduciary. What is the accurate answer?

• a.No, because Reg BI is only a disclosure requirement
• b.Yes, it is identical to the Advisers Act fiduciary duty
• c.Yes, and it requires ongoing monitoring of the account
• d.No; it is a best-interest standard, not a fiduciary duty✓

Reg BI imposes a best-interest standard that goes beyond suitability and disclosure, yet the SEC did not make it identical to the Advisers Act fiduciary duty. It does not require ongoing monitoring unless agreed. It is more than a disclosure rule, since the care and conflict obligations require action.SEC Regulation Best Interest

A customer phones and asks the firm to wire $20,000 to a third party whose name the firm has never seen. What is the best practice?

• a.Refuse every third-party wire request without exception
• b.Process it after replying to the email that came with the request
• c.Verify it by calling the number already on file✓
• d.Process it right away, since the caller knew the account number

A callback using established contact information confirms the instruction came from the customer and protects against fraud. Knowing an account number is not proof of identity. Replying to an email that arrived with the request could confirm only the fraudster. Third-party wires are permitted when verified, so a blanket refusal is unnecessary.

A customer wants a way to give money for a grandchild's education while keeping control over withdrawals and the right to take the money back. Which account fits?

• a.A UGMA custodial account in the child's name
• b.An outright gift of fund shares to the grandchild
• c.A UTMA custodial account in the child's name
• d.A 529 plan, in which the owner keeps control✓

A 529 account owner keeps control over distributions and can even take the money back, with tax and penalty on earnings. UTMA and UGMA accounts are irrevocable gifts, and the child takes control at the age of majority. An outright gift also gives up ownership entirely, which is the opposite of what the grandparent wants.

How often must a broker-dealer furnish customers with an account record for review and correction?

• a.Within 30 days of opening, then at least every 36 months✓
• b.Within 30 days of opening, then only when requested
• c.Within 30 days of opening, then at least every 24 months
• d.Within 30 days of opening, then at least every 12 months

Rule 17a-3(a)(17) requires the account record to go to the customer within 30 days of opening and at least every 36 months afterward, for accounts where suitability applies. An annual cycle is stricter than the rule. Twenty-four months is also shorter than required. Sixty months would exceed the 36-month maximum.SEC Rule 17a-3(a)(17)

A variable annuity owner wants the death benefit to reach her children without going through probate. What should she do?

• a.Name her estate as the beneficiary
• b.Name the insurance company as beneficiary
• c.Leave the beneficiary line blank
• d.Name them as beneficiaries on the contract✓

Proceeds of an annuity or life policy payable to a named beneficiary pass by contract, outside probate. Naming the estate sends the proceeds through probate. A blank beneficiary line usually defaults to the estate. The insurer would keep the proceeds, which defeats her purpose.

A client needs current income and preservation of principal over the next three years. Which investment is most consistent with that objective?

• a.A short-term fund of investment-grade bonds✓
• b.A leveraged ETF concentrated in a single sector
• c.A commodity-linked note with issuer credit risk
• d.A small-cap growth fund focused on appreciation

A short-term investment-grade bond fund focuses on income, with lower price swings, which matches a three-year horizon and a principal-preservation goal. A leveraged sector ETF magnifies volatility. A small-cap growth fund emphasizes appreciation, not income. A commodity-linked note carries commodity price and issuer credit risk.

A 62-year-old owns a nonqualified variable annuity with a cost basis of $60,000 and a current value of $100,000. She withdraws $15,000 without annuitizing. How much is taxable as ordinary income?

• a.$15,000✓
• b.$9,000
• c.$6,000
• d.$40,000

Nonqualified annuity withdrawals before annuitization follow last-in, first-out treatment: earnings come out first, and the $40,000 of earnings covers the entire $15,000, so all of it is ordinary income. A pro rata calculation would give $6,000, and the $9,000 figure is the basis share under that method, which does not apply. The $40,000 figure taxes the entire gain although only the amount withdrawn is taxed. At 62, no 10% additional tax arises.IRC Section 72(e)

A retiree annuitizes a nonqualified annuity. Her investment in the contract is $60,000, and her expected return is $100,000. Each monthly payment is $1,000. How much of each payment is taxable?

• a.$400✓
• b.$1,000
• c.$600
• d.$0

The exclusion ratio is $60,000 divided by $100,000, or 60%, so $600 of each payment is a tax-free return of basis and $400 is taxable. Using 60% as the taxable portion reverses it. Full taxation applies only to qualified plan payments with no basis. Principal-first treatment is how withdrawals before annuitization are not taxed, and the opposite is true there.IRC Section 72(b)

A nonqualified variable annuity bought for $100,000 is worth $160,000 when the owner dies. The son, as beneficiary, takes a lump sum. How much is taxable to him?

• a.$0, since the basis steps up at death
• b.$60,000, as long-term capital gain
• c.$160,000, as ordinary income
• d.$60,000, as ordinary income✓

Annuity beneficiaries receive no step-up in basis, so the $60,000 of deferred earnings is taxed as ordinary income when received. Step-up is a feature of assets held outside annuities. Annuity earnings are never capital gains. The $100,000 basis is a return of capital and is not taxed again.IRC Section 72

Which exchange does Section 1035 not allow on a tax-free basis?

• a.A life policy for another life policy
• b.A life policy for an annuity contract
• c.A variable annuity for a variable life policy✓
• d.An annuity contract for another annuity contract

Section 1035 allows life to life, life to annuity and annuity to annuity, but never annuity to life insurance, because deferred annuity earnings would then escape ordinary income tax. The other three directions all qualify when the same owner and insured are used.IRC Section 1035

A life insurance owner surrenders a variable life policy with cash value of $80,000. Premiums paid total $50,000, and a $40,000 loan is outstanding. What is the taxable amount?

• a.$0
• b.$80,000
• c.$40,000
• d.$30,000✓

On surrender, the loan is treated as paid out, so the owner is taxed on cash value less premiums paid: $80,000 minus $50,000 is $30,000. Taxing only the loan ignores the basis recovery. Taxing the whole cash value ignores the $50,000 of premiums. Loans escape tax only while the policy remains in force.IRC Section 72(e)

What is the consequence when a life insurance policy fails the seven-pay test and becomes a modified endowment contract?

• a.The policy is canceled by the insurer automatically
• b.Withdrawals are taxed on a first-in, first-out basis
• c.Loans and withdrawals are taxed earnings first, plus 10% before 59½✓
• d.The death benefit becomes taxable income to the beneficiary

A MEC loses the favorable ordering of regular policies: loans and withdrawals come out earnings first and carry a 10% additional tax before 59½. The death benefit remains generally income tax free. Nothing is canceled. First-in, first-out treatment is what regular policies offer, which is what the MEC loses.IRC Section 7702A

In 2026, a beneficiary uses $18,000 from a 529 plan to pay private high school tuition. How is the withdrawal treated?

• a.Qualified, with no dollar limit on the amount
• b.Qualified; K-12 tuition is allowed up to $20,000 a year✓
• c.Nonqualified; only postsecondary costs qualify
• d.Qualified, though capped at $10,000 per beneficiary a year

Beginning in 2026, qualified K-12 tuition withdrawals are capped at $20,000 per beneficiary per year, so $18,000 is within the limit. The $10,000 cap applied before 2026. Treating K-12 as nonqualified is out of date, and an unlimited allowance ignores the cap.IRC Section 529(c)(7)

A 529 account holds $60,000 of contributions and $20,000 of earnings. The owner takes a $10,000 nonqualified withdrawal. What are the tax consequences?

• a.$2,500 of income plus a $250 additional tax✓
• b.$2,500 of income and no additional tax
• c.$10,000 of income plus a $1,000 additional tax
• d.$2,500 of income plus a $1,000 additional tax

Earnings are 25% of the $80,000 account, so $2,500 of the $10,000 withdrawal is earnings. Only earnings are taxed, and the 10% additional tax applies to that $2,500, which is $250. Taxing the whole $10,000 treats basis as income. Leaving out the additional tax ignores the nonqualified-withdrawal penalty, and applying 10% to the whole withdrawal repeats the first error.IRC Section 529(c)(6)

In 2026, with the annual gift tax exclusion at $19,000, what is the most a single donor can contribute to one beneficiary's 529 plan using the five-year election without using lifetime exemption?

• a.$190,000
• b.$100,000
• c.$95,000✓
• d.$19,000

The election spreads a gift over five years, so five times $19,000 is $95,000 for a single donor. A single year's exclusion is only $19,000. The $190,000 figure assumes a married couple splitting gifts. A round $100,000 is not the product of any rule.IRC Section 2503(b); Section 529(c)(2)

Which statement describes the rollover of 529 funds to the beneficiary's Roth IRA?

• a.The 529 must be open 5 years, with no lifetime cap
• b.The 529 must be open 15 years, with no lifetime cap
• c.The 529 must be open 15 years, with a $10,000 lifetime cap
• d.The 529 must be open 15 years, with a $35,000 lifetime cap✓

SECURE 2.0 permits a rollover to the beneficiary's Roth IRA if the 529 has been open 15 years, subject to a $35,000 lifetime cap and the annual IRA contribution limit. A shorter period or no limit would make the provision a bypass of the IRA limits, and $10,000 is the figure for student loan repayment.IRC Section 529(c)(3)(E)

In one year, two grandparents and a parent each contribute $2,000 to a Coverdell account for the same child. What is the excise tax on the excess if it remains in the account for the year?

• a.$0, since each donor has a separate limit
• b.$360, which is 6% of all $6,000
• c.$120, which is 6% of $2,000
• d.$240, which is 6% of the $4,000 excess✓

The limit is $2,000 per beneficiary from all contributors combined, so $4,000 of the $6,000 is excess, and the excise tax is 6% of that, or $240, each year it stays. Taxing $2,000 or $6,000 uses the wrong base. Separate donors do not each get their own limit.IRC Section 530

A Coverdell ESA beneficiary turns 30 with funds still in the account and no special needs. What must happen?

• a.The balance may stay open if the owner pays a 6% excise tax
• b.The account continues tax-free for as long as the owner wishes
• c.Distribute or roll over within 30 days, or face tax and a penalty✓
• d.The balance is forfeited to the plan sponsor immediately

A Coverdell must be distributed within 30 days after the beneficiary reaches 30 unless rolled over to a family member, and an unrolled balance is taxed on earnings with an additional 10%. Indefinite deferral is not permitted. Funds are never forfeited. The 6% excise tax applies to excess contributions, not to leaving an account open.IRC Section 530(d)(8)