FINRA Series 6 — All Questions

A qualified dividend paid by a fund to an individual shareholder is generally taxed at which rates?

• a.No federal tax if the dividend is reinvested
• b.The long-term capital gains rates✓
• c.Ordinary income rates only
• d.A flat 10% rate for every taxpayer

Qualified dividends are taxed at the 0%, 15% or 20% long-term capital gains rates, subject to holding-period tests. They are not limited to ordinary rates. No flat 10% exists. Reinvestment does not exempt a dividend, since it is taxed when paid.IRC Section 1(h)(11)

A resident of Ohio owns a national municipal bond fund. Which statement about the fund's year-end distributions is correct?

• a.Capital gain distributions are exempt from tax but interest dividends are taxable
• b.All dividends are exempt from federal income tax and from Ohio state and local income taxes
• c.Interest dividends are federally exempt; capital gain distributions are taxable✓
• d.Every distribution is exempt from federal tax, because gains realized on municipal bonds keep their exempt status

A fund can pass through exempt-interest dividends, but capital gains it distributes are taxable (IRC Section 852(b)(5)). The treatment is not reversed: the interest dividends, not the gains, receive the exemption. Gains realized on municipal bonds do not keep the exemption, so the claim that every distribution is exempt is wrong. A national fund holds bonds from many states, so the state exemption depends on in-state issuers and is not automatic for an Ohio resident.IRC Section 852(b)(5)

An investor in the top bracket holds a municipal fund that owns private activity bonds. What tax risk should the representative explain?

• a.The interest is exempt from state tax only, not from federal tax
• b.Some of the interest may be an AMT preference item✓
• c.The fund must be sold within a year of purchase to keep the exemption
• d.All of the interest becomes fully taxable at ordinary rates

Interest from certain private activity bonds is a tax preference item for the alternative minimum tax, so some investors owe tax on part of it. The interest does not become fully taxable. No holding requirement forces a sale. The exemption is from federal tax, not only state tax.IRC Section 57(a)(5)

A municipal fund yields 4.2% and the investor is in the 24% federal bracket. Ignoring state tax, what taxable yield would match it?

• a.6.00%
• b.3.19%
• c.5.04%
• d.5.53%✓

The taxable-equivalent yield is the tax-free yield divided by one minus the tax rate: 4.2% divided by 0.76 is 5.53%. Multiplying 4.2% by 0.76 gives 3.19%, which converts in the wrong direction. Adding 24% of 4.2% gives 5.04% and treats the rate as an addition. A result of 6.00% would need a 30% bracket.Tax-equivalent yield

A 45-year-old owns a nonqualified deferred annuity with a cost basis of $50,000 and a value of $65,000. She withdraws $10,000 before annuitizing. What is the result?

• a.Nothing is taxable until the basis is fully recovered
• b.Only $2,308 is taxable, since the basis is recovered pro rata
• c.The full $10,000 is taxable income and may carry a 10% additional tax✓
• d.The $10,000 is a taxable gain but has no additional tax

Withdrawals from a nonqualified annuity before annuitization come out of earnings first, so the whole $10,000 is taxable because $15,000 of earnings exists. Because she is under 59 1/2, the 10% additional tax generally applies. A pro rata split and a basis-first rule both describe other types of contracts. Exempting the additional tax ignores her age.IRC Section 72(e)

A retiree pays $60,000 for an annuity with an expected total payout of $120,000 and receives $9,600 in the first year. How much is taxable that year?

• a.$4,800✓
• b.$6,000
• c.$0
• d.$9,600

The exclusion ratio is the $60,000 investment divided by the $120,000 expected return, or 50%, so half of each payment is a return of basis and $4,800 is taxable. Taxing the whole payment ignores the basis. The $6,000 figure has no basis in the ratio. Each payment is split by the exclusion ratio, so none is wholly tax-free this year.IRC Section 72(b)

Which exchange qualifies as a tax-free exchange under Section 1035?

• a.A life insurance policy for shares of a closed-end fund
• b.A variable annuity contract for a life insurance policy
• c.A variable annuity contract for shares of a mutual fund
• d.A variable annuity for another annuity contract✓

Section 1035 allows a nonrecognition exchange of annuity for annuity, life policy for life policy, or life policy for annuity. Moving from an annuity into a life policy is not covered, and moving from an annuity into fund shares is a taxable surrender. Exchanging an insurance policy for closed-end fund shares is not covered either.IRC Section 1035

A variable life policy fails the seven-pay test. What is the consequence?

• a.Cash value growth loses its tax deferral inside the policy each year
• b.The policy is cancelled and all premiums paid are returned to the owner
• c.It becomes a modified endowment contract (MEC)✓
• d.The death benefit becomes taxable income to the policy beneficiary

A policy that fails the seven-pay test becomes a modified endowment contract, so loans and withdrawals are taxed earnings first, with a 10% additional tax before age 59 1/2. The death benefit stays income-tax-free to the beneficiary. The policy remains in force and is not cancelled. Inside buildup stays tax-deferred.IRC Section 7702A

A grandmother wants to contribute the largest amount to a grandchild's 529 plan in one year without using any lifetime gift exemption, using the five-year election. Using the 2026 annual exclusion of $19,000, what is the amount?

• a.$19,000
• b.$95,000✓
• c.$76,000
• d.$114,000

The election spreads a contribution over five years, so the donor may give five times the annual exclusion, $19,000 times 5, or $95,000. A single exclusion of $19,000 ignores the election. A figure of $76,000 uses only four years. An amount of $114,000 uses six years, which the election does not allow.IRC Section 529(c)(2)

An investor sells fund shares at a $1,200 loss and buys substantially identical shares 10 days later for $8,800. What is the basis in the new shares?

• a.$9,000
• b.$10,000✓
• c.$7,600
• d.$8,800

A repurchase within 30 days triggers the wash sale rule, so the $1,200 loss is disallowed and added to the cost of the new shares, making the basis $8,800 plus $1,200, or $10,000. The price alone ignores the disallowed loss. Subtracting the loss gives $7,600, which moves the wrong way. $9,000 has no basis in the facts.IRC Section 1091

Which cost basis method is available for mutual fund shares but not for individual stocks?

• a.First in, first out
• b.Last in, first out
• c.Specific identification
• d.Average cost✓

Average cost may be used for shares of a regulated investment company, which is why funds report it. First-in-first-out is the default for stock when no lot is identified, and specific identification is allowed for stock. Last-in-first-out is not a recognized method for either.Treas. Reg. 1.1012-1(e)

An investor owns lots of 100 shares bought at $10, $14 and $18. She sells 100 shares at $20 and identifies the $18 lot. What is her gain?

• a.$1,400
• b.$600
• c.$1,000
• d.$200✓

Specific identification lets her pick the highest-cost lot, so the gain is $2,000 less $1,800, or $200. Selling the $10 lot gives a gain of $1,000. The $14 lot gives $600. A figure of $1,400 does not match any lot.Treas. Reg. 1.1012-1(c)

A son inherits fund shares his father bought for $10,000 that were worth $25,000 at death. He sells them for $26,000. What is the gain?

• a.$1,000, treated as long-term✓
• b.$15,000, treated as short-term
• c.$1,000, treated as short-term
• d.$16,000, treated as long-term

Inherited property takes a stepped-up basis equal to its value at death, $25,000, so the gain is $1,000 and is automatically long-term. Using the father's basis would give $16,000. A short-term label ignores the automatic long-term rule. $15,000 is the unrealized gain at death, which was never taxed.IRC Section 1014

A mother gives her daughter fund shares with a basis of $5,000 and a value of $8,000. The daughter sells for $9,000. What is her gain?

• a.$9,000
• b.$4,000✓
• c.$1,000
• d.$3,000

A gift carries over the donor's basis, so the gain is $9,000 less $5,000, or $4,000. Using the value at the gift date would give $1,000 and apply a step-up that only applies at death. $3,000 is the gain accrued before the gift. The proceeds of $9,000 are not the gain.IRC Section 1015

A fund with $400 million of average net assets reports $4.4 million of operating expenses for the year. What is its expense ratio?

• a.1.10%✓
• b.4.40%
• c.0.11%
• d.11.0%

The expense ratio is expenses divided by average net assets: $4.4 million over $400 million is 1.10%. The 0.11% and 11.0% results misplace the decimal. The 4.40% result divides by only $100 million instead of $400 million.Fund expense analysis

A fund's NAV rose from $25.00 to $26.50 during the year, and it paid $0.60 in dividends and $0.40 in capital gain distributions. What is the total return, assuming no reinvestment?

• a.10.0%✓
• b.8.4%
• c.6.0%
• d.4.0%

Total return adds the NAV change of $1.50 to the $1.00 of distributions, giving $2.50 over a starting NAV of $25.00, or 10.0%. The NAV change alone gives 6.0%. Leaving out the capital gains gives 8.4%. A figure of 4.0% counts only the distributions.Total return

How is a fund's standardized SEC yield calculated?

• a.Net income earned over the latest 30 days, after expenses, annualized✓
• b.Distributions paid over the last twelve months divided by the current offering price
• c.The latest quarter's total return multiplied by four
• d.Dividends paid over the latest seven days divided by the sales charge, annualized

The standardized yield uses income earned in the most recent 30 days, after expenses, annualized, which makes funds comparable. Distributions over a year are a distribution rate and not the standard yield. Annualizing a quarter's total return mixes in price changes. A seven-day period belongs to money market funds, and the sales charge is not a denominator.SEC Form N-1A; Rule 482

A customer wants to invest $48,000 in a front-end load fund whose sales charge falls at $50,000. What should the representative do?

• a.Disclose the breakpoint and explain how a letter of intent can reach it✓
• b.Process the order as written because the customer chose the amount
• c.Advise buying $48,000 now and waiting a full year before adding any more
• d.Suggest splitting the order across two fund families to keep each below $50,000

Rule 2342 prohibits selling just below a breakpoint, so the representative must disclose the discount available at $50,000 and how a letter of intent or a small increase captures it. Processing without disclosure deprives the customer of the discount. Splitting between families defeats the aggregation. Waiting a year gives up the lower charge and treats the customer's amount as fixed.FINRA Rule 2342

Which test defines a diversified management company?

• a.All assets spread equally among at least ten issuers, each capped at 10% of assets
• b.At least 40% of assets in government securities, with no limit on any one issuer
• c.At least 50% of assets in a single industry, with no limit on any one issuer
• d.75% of assets with a cap of 5% per issuer and 10% of voting stock✓

A diversified company must hold at least 75% of total assets in cash, government securities, other investment companies and other securities, with each issuer limited to 5% of the fund's assets and 10% of the issuer's voting securities. Concentrating half the assets in one industry is the opposite of diversification. Equal weighting among ten issuers is not the statutory test. A large government securities position does not lift the limits on other holdings.Investment Company Act Section 5(b)(1)

To be taxed as a regulated investment company, a fund must generally distribute at least what portion of its investment company taxable income?

• a.100%
• b.50%
• c.75%
• d.90%✓

A fund qualifies for pass-through treatment by distributing at least 90% of its investment company taxable income, and any amount retained is taxed at the fund level. 50% and 75% fall below the requirement. The rule does not demand 100%, although distributing less than that leaves the retained portion taxable.IRC Section 852(a)

An investor buys 500 fund shares at $20 just before the fund pays a $1.00 per share capital gain distribution. What is the result?

• a.He owes tax on $500, and the NAV drops by about $1.00 a share✓
• b.He owes no tax because the shares were just purchased
• c.He owes tax on $500, but the NAV stays at $20 per share
• d.He owes tax only when he later sells the shares at a gain

Capital gain distributions go to whoever holds shares on the record date, so he is taxed on $500 even though the gains built up before he bought. The NAV falls by roughly the distribution. A recent purchase does not avoid the tax. NAV staying put contradicts how distributions work. Deferral until sale applies only to unrealized gains.Tax considerations of year-end purchases

A 78-year-old retiree needs access to her money for living costs and asks about a variable annuity with an 8-year surrender schedule. What concern should the representative raise?

• a.Death benefits end once the owner passes age 75, by law
• b.Surrender charges could restrict her access to cash✓
• c.The annuity would lose its tax deferral once the owner reaches age 78
• d.Variable annuities cannot be sold to anyone over 75 under FINRA rules

Surrender charges that last for years conflict with a short time horizon and a need for liquidity, which makes the product a poor match. Tax deferral does not end at a given age. No age cap bars the sale, although age is a factor in suitability. Death benefits are not generally terminated at age 75.FINRA Rule 2111; Regulation Best Interest

A customer proposes to buy a variable annuity inside her IRA mainly for tax deferral. What should the representative point out?

• a.The annual IRA contribution limit rises when the contract is bought inside it
• b.The IRA already defers tax, so extra cost needs another reason✓
• c.The annuity doubles the tax deferral that the IRA already provides
• d.The annuity makes withdrawals from the IRA tax-free

An IRA already defers tax, so the annuity adds expense without adding deferral; only features such as guarantees can justify the cost. The deferral is not doubled. The annuity does not raise the contribution limit. Withdrawals from a traditional IRA stay taxable regardless of the wrapper.Variable annuity in a retirement account

A 62-year-old made her first Roth IRA contribution three years ago and now withdraws the earnings. How is the withdrawal taxed?

• a.Earnings are taxable, with no 10% additional tax at her age✓
• b.Taxable, plus a 10% additional tax on the earnings withdrawn
• c.Tax-free, because she is over 59 1/2 and made the contribution years ago
• d.Tax-free, because her contributions were made from after-tax income

A qualified distribution requires both the five-year period and age 59 1/2 or another event, and she has only three years, so the earnings are taxable. The 10% additional tax applies only before age 59 1/2. Age alone does not make the distribution tax-free. Contributions are after-tax, but the earnings are not.IRC Section 408A(d)

A customer converts $40,000 from a Traditional IRA of fully pretax money to a Roth IRA. What is the tax result for the year of conversion?

• a.The full $40,000 is added to her ordinary income✓
• b.The $40,000 is taxed, plus an additional 10% tax
• c.Only the earnings are taxed at capital gains rates
• d.Nothing is taxed until she withdraws from the Roth

A conversion of pretax money is included in income in the year converted, so $40,000 is taxable at ordinary rates. Deferral until withdrawal describes a Traditional IRA, not a conversion. Capital gains rates are never used. The 10% additional tax does not apply to a conversion because no early distribution occurs.IRC Section 408A(d)(3)

A single filer has modified adjusted gross income of $230,000, including $50,000 of net investment income. The threshold is $200,000. What is the net investment income tax at 3.8%?

• a.$1,900
• b.$1,140✓
• c.$8,740
• d.$11,400

The tax applies to the lesser of net investment income ($50,000) or the excess of income over the threshold ($30,000), so 3.8% of $30,000 is $1,140. Using $50,000 gives $1,900, which ignores the threshold limit. $11,400 misplaces the decimal. $8,740 taxes the full $230,000 income.IRC Section 1411

A variable annuity payout is based on a 4% assumed interest rate, and the separate account returns 7% for the year. What happens to the annuity unit payment?

• a.It decreases because returns exceeded the assumed rate
• b.It stays the same because payments are guaranteed
• c.It converts to a fixed payment
• d.It increases for the next period✓

When the separate account earns more than the assumed interest rate, the annuity unit value and the payment rise. A flat payment describes a fixed annuity. A drop would occur if the return were below the rate. The payout does not convert to a fixed type on its own.Variable annuity payout; assumed interest rate

A fund with $200 million in average assets bought $75 million and sold $60 million of securities during the year. What is the turnover ratio?

• a.30%✓
• b.67.5%
• c.7.5%
• d.37.5%

Turnover is the lesser of purchases or sales divided by average net assets: $60 million over $200 million is 30%. Using purchases gives 37.5%. Adding purchases and sales gives 67.5%. The 7.5% figure uses only the $15 million difference between purchases and sales.Portfolio turnover

A fund keeps $1,000 of long-term capital gains allocable to a shareholder and pays $210 of tax on it for her, as shown on Form 2439. How does this change her basis in the fund shares?

• a.It rises by $1,000, the full amount of gain she must include in income
• b.It does not change, because the fund sent her no cash or new shares
• c.It rises by $210, the amount of tax the fund paid on her behalf
• d.It rises by $790, the gain she reports less the tax credit✓

A shareholder of a fund that keeps its long-term gains reports her share as a long-term capital gain and claims a credit for the tax the fund paid on it, both shown on Form 2439. Her basis increases by the gain reported less the credit: $1,000 - $210 = $790. Adding the full $1,000 ignores that $210 of it went to the government rather than staying invested for her. Leaving basis unchanged would tax the same gain a second time when she later sells. Adding only the $210 mixes up the credit with the net amount the fund retained.IRS Pub. 550, Undistributed capital gains of mutual funds and REITs (Form 2439)

A customer buys 1,000 shares of a municipal bond fund at $50. Four months later, after receiving $1,200 of exempt-interest dividends, she sells at $47. How much of her $3,000 loss can she deduct?

• a.$3,000, since the exempt-interest dividends were never taxed and so do not affect the loss
• b.$1,200, the amount of the exempt-interest dividends she received while she held the shares
• c.$1,800 as a short-term loss, because the $1,200 of dividends reduces the loss✓
• d.$4,200, because the tax-free dividends are added to the loss she suffered

When fund shares held six months or less are sold at a loss, the loss is disallowed to the extent of exempt-interest dividends received on them. Her loss is 1,000 x ($50 - $47) = $3,000, and $3,000 - $1,200 = $1,800 is deductible. It is short-term because she held the shares under a year. Deducting the full $3,000 would let her receive tax-free income and also deduct the decline that income offset. The $1,200 is the disallowed part, not the deductible part. Adding the dividends to the loss runs the rule in the wrong direction.IRC Section 852(b)(4)(B); IRS Pub. 550, Exempt-interest dividends on mutual fund stock

To be qualified to pay exempt-interest dividends, a regulated investment company must hold at least what portion of its total assets in tax-exempt municipal obligations at the close of each quarter?

• a.At least 75%, the share of assets a REIT must hold
• b.At least 90%, the share of income a fund must distribute
• c.At least 80%, the share set by the fund-naming rule
• d.At least 50% of the value of the fund's total assets✓

Under the Internal Revenue Code, a regulated investment company can pay exempt-interest dividends only if, at the close of each quarter of its taxable year, at least 50% of the value of its total assets consists of tax-exempt municipal obligations. The 80% figure belongs to a different rule, the one that requires a fund whose name suggests a particular type of investment to invest at least 80% in that type. The 90% figure is the share of investment company taxable income a fund must distribute to be taxed as a regulated investment company, which is a distribution test and not an asset test. The 75% figure is the real estate asset test for a REIT, an entity with different qualification rules.IRC Section 852(b)(5)

A shareholder owns 1,000 fund shares. Per share, the fund distributes $0.30 of net investment income, $0.20 of net short-term gains and $0.50 of net long-term gains. How is the $1,000 reported on Form 1099-DIV?

• a.$300 of ordinary dividends, $200 of short-term capital gain and $500 of long-term capital gain
• b.$300 of ordinary dividends and $700 of capital gain distributions, since all gains are long-term
• c.$1,000 of ordinary dividends, because every fund payout is simply an ordinary dividend
• d.$500 of ordinary dividends and $500 of capital gain distributions, taxed as long-term✓

A mutual fund's net realized short-term gains are not treated as capital gain distributions. They are reported as ordinary dividends along with net investment income, so ($0.30 + $0.20) x 1,000 = $500 is ordinary dividends. Only the net long-term gains of ($0.50 x 1,000) = $500 are capital gain distributions, taxed as long-term gain. Calling every gain a capital gain distribution would put the short-term gain at long-term rates it does not earn. Treating the entire amount as ordinary dividends ignores the long-term character a fund passes through. Splitting out a separate short-term gain category misreads the form, which has no such box for fund distributions.IRS Pub. 550, Capital gain distributions; IRC Section 852(b)(3)

A customer's basis in her fund shares is $1,200 and she has held them for years. The fund pays $1,500 that Form 1099-DIV reports as a nondividend distribution in box 3. What is the tax result?

• a.She reports $300 as ordinary dividend income and basis falls to zero
• b.She reports a $300 long-term capital gain and her basis falls to zero✓
• c.She reports nothing now, and her basis becomes a negative $300 carried forward
• d.She reports $1,500 of ordinary dividend income and her basis stays at $1,200

A nondividend distribution is a return of capital. It is not taxed when received, and it reduces basis, but only until basis reaches zero. Here $1,200 of the $1,500 reduces basis to zero, and the extra $300 is reported as a capital gain, long-term because she held the shares more than a year. Treating the whole $1,500 as ordinary dividends ignores that box 3 is a return of her own money. Basis cannot go below zero, so a negative basis carried forward is not allowed. The excess is a capital gain, not an ordinary dividend, because it is the sale-type gain on her investment rather than fund earnings.IRS Pub. 550, Nondividend distributions (Form 1099-DIV, box 3)

A fund declares a dividend on December 15, payable to shareholders of record on December 29. The fund pays it on January 20. In which tax year does a cash-basis shareholder report the dividend?

• a.The year declared, because it is treated as received on December 31 of that year✓
• b.The year declared only if the fund pays it by December 31, and otherwise the year paid
• c.Either year, whichever the shareholder chooses when filing the return
• d.The year paid, because a cash-basis taxpayer reports income only when the money arrives

If a mutual fund declares a dividend in October, November or December, payable to shareholders of record on a date in one of those months, and pays it in January of the next year, the shareholder is treated as having received it on December 31 and reports it in the year it was declared. The cash-basis rule is overridden for this case, so waiting for the money does not move the income. The rule does not depend on payment by December 31, since late payment in January is exactly the situation it covers. The shareholder has no election to choose the year.IRS Pub. 550, Dividends received in January

A mother bought 100 fund shares at $10 three years ago and gave them to her son when they were worth $18. He sells them two months later at $20. How is his gain taxed?

• a.$200 long-term, measured from the $18 value but using the mother's holding period
• b.$1,000 short-term, because his own holding period began on the day after the gift
• c.$200 short-term, measured from the $18 value on the date of the gift
• d.$1,000 long-term, with his basis and holding period carried over from his mother✓

When a gift is sold at a gain, the recipient takes the donor's adjusted basis, here $10, and the holding period also carries over from the donor. The gain is ($20 - $10) x 100 = $1,000, and the mother's three years make it long-term. The $18 gift-date value matters only for figuring a loss, and only when it is below the donor's basis. Restarting the holding period at the gift applies only when basis is determined by fair market value, which is not the case here. Using the $18 value for a gain would understate the gain, and pairing it with the mother's holding period mixes two rules that never go together.IRS Pub. 550, Property received as a gift (basis and holding period)

A customer wants to make a 2026 traditional IRA contribution. By what date must it be made to count for 2026, even if she files for an extension of her tax return?

• a.December 31, 2026, the last day of the 2026 tax year
• b.October 15, 2027, the extended due date of the return
• c.April 15, 2027, the due date of the return without extensions✓
• d.April 15, 2027 only if she has already filed her 2026 return

IRA contributions for a tax year can be made any time during the year and up to the due date for filing that year's return, not including extensions. For 2026 that is April 15, 2027. An extension of time to file does not extend the contribution deadline, so October 15 is too late. Waiting until after December 31 is allowed, so that date is too early. Filing the return first is not a condition, although she should tell the custodian which year the contribution is for.IRS Pub. 590-A, When Can Contributions Be Made

A married couple under age 50 files jointly. Only the husband works, earning $9,000, and he puts $7,500 into his own IRA for 2026. What is the most his wife can contribute to her own IRA for 2026?

• a.$1,500, which is the couple's compensation less his IRA contribution✓
• b.$0, because a spouse with no compensation cannot contribute at all
• c.$9,000, the husband's compensation reported on the joint return
• d.$7,500, the full 2026 IRA limit, since each spouse has a separate limit

Under the spousal IRA rule, a non-working spouse may contribute up to the smaller of the regular limit ($7,500 for 2026, under age 50) or the couple's combined compensation less the working spouse's IRA contributions. Here $9,000 - $7,500 = $1,500, which is smaller than $7,500. The separate-limits idea ignores the compensation cap on the couple's combined deposits. The $9,000 figure forgets to subtract his contribution. A spouse without income is exactly who the rule allows to contribute, so $0 is wrong.IRS Pub. 590-A, Kay Bailey Hutchison Spousal IRA limit; IRS 2026 limits notice (IRA limit $7,500)

A customer has $20,000 of basis from nondeductible IRA contributions. At year end her traditional IRAs are worth $90,000 after she withdrew $10,000 during the year. How much of the withdrawal is taxable?

• a.$7,778, found by dividing basis by the year-end value alone
• b.$0, since the first $10,000 withdrawn comes out of her basis
• c.$8,000, because 20% of the withdrawal is a tax-free return of her basis✓
• d.$10,000, because every IRA distribution is taxed as ordinary income

Withdrawals from an IRA with nondeductible basis are partly taxable. The tax-free fraction is total basis divided by the year-end IRA value plus the year's distributions: $20,000 / ($90,000 + $10,000) = 20%. So 20% x $10,000 = $2,000 is tax-free, and the remaining $8,000 is taxable. Basis does not come out first, so the tax-free amount is not the whole withdrawal. Ignoring basis taxes all $10,000. Dividing basis by the year-end value alone gives 22.2%, and $7,778 results, which omits the distributions from the denominator.IRS Pub. 590-B, Worksheet 1-1 (nondeductible contributions, pro rata rule)

A single IRA owner turns 77 this year. His traditional IRA was worth $458,000 on December 31 of last year. Using the Uniform Lifetime Table divisor of 22.9 for age 77, what is his required minimum distribution?

• a.$17,283, found by using the age 73 factor of 26.5
• b.$20,000, found by dividing $458,000 by 22.9✓
• c.$20,818, found by using the age 78 factor of 22.0
• d.$22,900, found by reading the divisor as dollars

The RMD is the prior December 31 account balance divided by the distribution period for the owner's age this year. At 77 the factor is 22.9, so $458,000 / 22.9 = $20,000. Using the age 73 factor of 26.5 gives $17,283 and understates the amount, and the age 78 factor of 22.0 gives $20,818, which overstates it. Both reach the wrong figure by picking the wrong row of the table. Reading the divisor as dollars confuses a factor with an amount.IRS Pub. 590-B, Table III (Uniform Lifetime); IRC Section 401(a)(9)

An IRA owner born in 1953 reaches age 73 in 2026 and chooses to delay his first RMD, for 2026, until April 1, 2027. By when must he take his RMD for 2027?

• a.April 1, 2028, since each RMD may be delayed until the next April 1
• b.December 31, 2027, the same year as the delayed first RMD✓
• c.December 31, 2028, one year after the year it is for
• d.April 1, 2027, because both RMDs are due on the delayed date

The April 1 extension applies only to the first RMD, the one for the year the owner reaches the applicable age. The RMD for each later year must be taken by December 31 of that year. Delaying the first one therefore means two RMDs in 2027: the 2026 amount by April 1 and the 2027 amount by December 31. Pushing every RMD to the next April 1 is not allowed. Making both due on April 1 would shorten the 2027 deadline. Waiting until the end of 2028 would skip the 2027 requirement entirely.IRS Pub. 590-B, When Must You Withdraw Required Minimum Distributions

An owner is 76. Last December 31 her two traditional IRAs held $300,000 and $200,000, and the Uniform Lifetime divisor for her age is 23.7. What must she withdraw for the year?

• a.$12,658, figured on the larger IRA alone with the smaller one left out
• b.$10,549 in total, found by averaging the two accounts' separate RMDs
• c.$21,097 in total, taken from either IRA or split between them as she chooses✓
• d.$21,097 in total, but with $12,658 taken from the first and $8,439 from the second

An owner with several traditional IRAs figures the RMD for each separately and may then take the total from any one or more of them. The total is $300,000 / 23.7 + $200,000 / 23.7 = $12,658 + $8,439 = $21,097. Requiring each account to supply its own share is wrong, because the totals can be pooled. Using only the larger IRA drops $8,439 of the requirement. Averaging the two amounts understates it by half the total.IRS Pub. 590-B, Multiple IRAs (aggregation of RMDs)

A single customer under age 50 is covered by a workplace plan and has 2026 modified AGI of $86,000. The deduction phase-out for her is $81,000 to $91,000. How much of a $7,500 traditional IRA contribution can she deduct?

• a.$0, because her income is above the bottom of the range
• b.$5,000, because only the $5,000 above the range start is disallowed
• c.$3,750, because she is halfway through the phase-out range✓
• d.$7,500, because her income is below the top of the range

Within the phase-out range the deduction shrinks in proportion to how far income has moved through it. Her income is $5,000 above $81,000, in a $10,000 range, so the reduction is $7,500 x $5,000 / $10,000 = $3,750, and the deduction is $7,500 - $3,750 = $3,750. The full deduction applies only below $81,000, and none applies at or above $91,000. Subtracting the dollars above the start of the range from the contribution is not the formula, since the reduction is a fraction of the limit.IRS Pub. 590-A, Worksheet 1-2; IRS 2026 limits notice (single, covered: $81,000-$91,000)

A single customer under age 50 has 2026 modified AGI of $157,500. The Roth IRA phase-out for single filers is $153,000 to $168,000. How much can she contribute to a Roth IRA for 2026?

• a.$3,750, because her income is halfway through the range
• b.$2,250, which is the reduction itself and not what remains
• c.$7,500, because her income is below the $168,000 top of the range
• d.$5,250, since 30% of the $7,500 limit is lost to the phase-out✓

Her income is $4,500 above $153,000 in a $15,000 range, so 30% of the limit is lost: $7,500 x $4,500 / $15,000 = $2,250. The allowed contribution is $7,500 - $2,250 = $5,250. The full limit is available only below $153,000. The $2,250 figure is the reduction, not what remains. The halfway answer would apply at an income of $160,500, which is not her situation.IRS Pub. 590-A, Worksheet 2-2; IRS 2026 limits notice (single Roth: $153,000-$168,000)

A customer's fund investment grows from $10,000 to $12,100 over exactly two years with no withdrawals or additions. What is her compound annual return?

• a.10.5% a year, found by dividing the 21% cumulative gain by two
• b.21.0% a year, since the gain on the original amount is 21%
• c.10.0% a year, since $10,000 growing at 10% for two years is $12,100✓
• d.11.0% a year, found by adding 1% for the effect of compounding

A compound annual return is the single yearly rate that turns the starting value into the ending value: $10,000 x 1.10 x 1.10 = $12,100, so the rate is 10%. Dividing the 21% cumulative gain by two ignores that the second year's gain is earned on a larger base. Quoting 21% as the yearly figure confuses a two-year total with a yearly rate. Adding a point for compounding has no basis in the calculation, because compounding is already inside the 10%.

A fund gains 20% in its first year and loses 20% in its second year. Compared with the starting amount, what is the investor's result after the two years?

• a.A 20% loss, since the second year's decline is the lasting result
• b.A 4% loss, because the 20% decline applies to a larger base✓
• c.No change, because the 20% gain and the 20% loss cancel
• d.A 4% gain, because the 20% gain came first and is the larger move

Returns multiply rather than add. A $10,000 investment becomes $12,000 after a 20% gain, and a 20% loss on that larger base takes away $2,400, leaving $9,600, or 4% below the start. The two percentages cancel only when added, and that is not how a holding grows. A 20% overall loss would require the second-year decline to apply to the original amount only. A gain is impossible here, because the dollar loss in year two exceeds the dollar gain in year one.

A customer is deciding between two funds with similar holdings. One has an expense ratio of 1.10% and the other 0.15%. On an $80,000 investment, about how much more does the higher-cost fund take each year?

• a.About $120 a year, the lower fund's whole 0.15% of $80,000
• b.About $880 a year, the higher fund's whole 1.10% of $80,000
• c.About $760 a year, the 0.95% gap applied to the $80,000✓
• d.About $1,000 a year, the two ratios added and rounded to 1.25%

The extra annual cost is the gap between the two ratios applied to the amount invested: 1.10% - 0.15% = 0.95%, and 0.95% x $80,000 = $760. The $880 figure is the higher-cost fund's whole expense, not the difference between the funds. The $120 figure is the lower fund's whole expense. Adding the two ratios counts the same investment's cost twice and then rounds up, and it answers a question nobody asked.

A married couple files a joint return. One spouse earns $90,000 and the other has no earned income. What applies to the nonworking spouse's IRA contribution?

• a.The nonworking spouse may contribute up to the annual limit, based on the couple's joint earned income✓
• b.The nonworking spouse may not contribute, because an IRA contribution requires the owner's own earned income
• c.The nonworking spouse may contribute only to a Roth IRA, and only if the working spouse does not contribute
• d.The nonworking spouse may contribute, but only half of the annual limit, because the income belongs to the other spouse

Under the spousal IRA rule, a nonworking spouse can contribute to an IRA based on the working spouse's earnings when the couple files jointly. Each spouse is subject to the annual limit, and the couple's combined contributions cannot exceed the taxable compensation on the joint return. Own earned income is the test for a single filer, not for a joint filer. The contribution can go to a traditional or a Roth IRA, and both spouses can contribute in the same year. The limit is not halved.Internal Revenue Code Section 219(c): spousal IRA

A customer in the 24% federal bracket compares a taxable bond fund yielding 4.8% with a national municipal bond fund yielding 3.6%. Which gives the higher after-tax yield, and by how much?

• a.The taxable fund, by 1.2 points, the gap between quoted yields
• b.The taxable fund, by 0.05 point at the 24% bracket✓
• c.The municipal fund, by 1.2 points, because it is tax-free
• d.The municipal fund, by 0.05 point, since tax-free income wins

The taxable fund's after-tax yield is 4.8% x (1 - 0.24) = 3.648%, against 3.6% for the municipal fund, a lead of about 0.05 point. Equivalently, the municipal fund's taxable-equivalent yield is 3.6% / 0.76 = 4.74%, just under 4.8%. The 1.2-point gap is the difference before tax, which is the wrong comparison. Tax-free income does not win automatically, because its lower yield must be weighed against the bracket, and at 24% it falls just short.

A closed-end fund has a net asset value of $24.00 per share and trades in the market at $21.60. At what premium or discount to NAV does it trade?

• a.A 90.0% discount, found by dividing the price by the fund's NAV
• b.An 11.1% discount, the $2.40 gap divided by the market price
• c.A 10.0% discount, the $2.40 gap divided by the $24.00 NAV✓
• d.A 10.0% premium, since the shares sell below their asset value

A closed-end fund's premium or discount is measured against NAV: ($21.60 - $24.00) / $24.00 = -10%, so the shares trade at a 10.0% discount. Dividing the $2.40 gap by the $21.60 market price gives 11.1% and uses the wrong base. Calling it a premium reverses the sign, because a market price below NAV is a discount. The 90.0% figure is the price as a percentage of NAV and not the discount itself.

A variable annuity with $100,000 of account value charges 1.25% for mortality and expense risk, 0.15% for administration and a $50 annual contract fee. Its subaccount's expense ratio is 0.80%. What are the total annual costs?

• a.$2,200, which leaves the $50 contract fee out of the total
• b.$2,250, which is 2.20% of the account value plus the $50 contract fee✓
• c.$1,450, which leaves out the subaccount's own expenses
• d.$1,250, which counts the mortality and expense charge alone

The costs stack: 1.25% + 0.15% + 0.80% = 2.20%, and 2.20% x $100,000 = $2,200, plus the $50 contract fee for $2,250. The $2,200 total misses the flat fee. The $1,450 total, 1.40% plus the fee, omits the underlying fund's expenses, which are charged inside the subaccount but still borne by the owner. The $1,250 total counts only the mortality and expense charge.