NASAA Series 65 — All Questions

An investor sells a municipal bond for more than its purchase price. The gain is:

• a.Taxed as ordinary income regardless of the holding period involved
• b.Subject to federal capital gains tax, unlike the bond's interest✓
• c.Exempt from federal tax, just as the bond's interest payments are
• d.Exempt from federal tax only if the bond was issued inside the state

The federal exemption for municipal bonds covers INTEREST, not price appreciation. If the bond is sold above cost, the difference is a capital gain, long-term or short-term based on the holding period, and it is fully taxable federally. In-state issuance affects state and local taxation, not the federal treatment of a capital gain.

For a distribution of earnings from a Roth IRA to be both tax-free and penalty-free, the owner generally must:

• a.Be at least 55 and have owned a Roth IRA for five years
• b.Have held the account for at least ten years regardless of age
• c.Be at least 59 1/2 and have contributed to the account in each of the last five years
• d.Be at least 59 1/2 and have held a Roth IRA for five tax years✓

A qualified Roth IRA distribution comes after the five-tax-year period that starts with the first year any Roth IRA contribution was made, and on or after age 59 1/2 (or on account of disability, death, or a first-home purchase up to $10,000). Contributions can always be withdrawn tax-free, but earnings taken before both tests are met are taxable and may carry the 10% additional tax. Age 55 is a workplace-plan separation rule, not an IRA rule. Ten years of ownership is not the test and does not replace the age requirement. The five years are counted from the first contribution year, not from a streak of annual contributions.IRS Pub. 590-B, Roth IRAs: What Are Qualified Distributions?

Catch-up contributions to an IRA or a 401(k) plan may generally begin in the year the participant reaches age:

• a.59 1/2
• b.55
• c.65
• d.50✓

The Internal Revenue Code permits additional catch-up contributions above the regular annual limit starting in the calendar year the participant turns 50, letting savers accelerate late in their careers. Age 55 relates to the separation-from-service exception for employer plans, 59 1/2 is when the 10% early distribution penalty generally ends, and 65 is a common but not universal normal retirement age.

A retiree's traditional IRA held $600,000 on the prior December 31, and the applicable IRS life expectancy factor is 25.0. The required minimum distribution is:

• a.$15,000
• b.$60,000
• c.$25,000
• d.$24,000✓

The required minimum distribution equals the prior year-end account balance divided by the applicable life expectancy factor: $600,000 / 25.0 = $24,000. The distribution is ordinary income to the retiree, and failing to take the full amount triggers an excise tax on the shortfall. As the factor shrinks in later years, the required percentage of the account rises.

Under current federal law, the owner of a traditional IRA must generally begin required minimum distributions after reaching age:

• a.73✓
• b.59 1/2
• c.80
• d.70 1/2

The SECURE 2.0 Act raised the required beginning age to 73, and it is scheduled to rise to 75 in 2033. Age 70 1/2 was the old rule and remains a common distractor, and 59 1/2 is when the early distribution penalty generally ends, not when distributions become mandatory. Roth IRAs are not subject to lifetime required distributions.

Which withdrawal from a traditional IRA before age 59 1/2 is generally exempt from the 10% early distribution penalty?

• a.A distribution used to purchase a vacation home at a lake resort
• b.A distribution taken to pay off outstanding credit card balances
• c.A distribution moved into the owner's taxable brokerage account
• d.A distribution taken because the owner became permanently disabled✓

Statutory exceptions to the 10% penalty include death, permanent disability, qualified higher education expenses, a first-time home purchase up to $10,000, certain medical expenses, and substantially equal periodic payments. Ordinary consumption, debt repayment, and a second or vacation residence do not qualify. Note that the exception removes the penalty only; the distribution is still ordinary income.

Under ERISA's minimum participation standards, a qualified plan generally may not exclude an employee who has reached age 21 and has completed:

• a.One year of service with the employer✓
• b.Five years of service with the employer
• c.Ten years of service with the employer
• d.Three months of service with the employer

ERISA sets floors, not ceilings, on eligibility. A plan may not impose conditions stricter than age 21 and one year of service, though it is free to be more generous. Separate vesting schedules then govern when employer contributions become nonforfeitable. These minimum standards exist to keep employers from using service requirements to exclude rank-and-file workers.ERISA

ERISA Section 404(c) offers relief from fiduciary liability for a participant-directed retirement plan when the plan:

• a.Restricts every participant to a single diversified balanced fund option
• b.Is a defined benefit plan in which the trustee chooses investments for all participants
• c.Offers a broad range of options and lets participants direct their accounts✓
• d.Lets participants change their elections just once a year, however volatile the options

Section 404(c) and the Labor Department's regulation shift responsibility for investment results to participants when an individual account plan gives them the opportunity to exercise control and a broad range of investment alternatives, meaning at least three diversified options with materially different risk and return characteristics, plus sufficient information and the ability to change instructions with a frequency suited to market volatility (at least quarterly for the core options). A single balanced fund is not a broad range, a plan where the trustee picks the investments is not participant-directed, and once-a-year changes are too infrequent. The plan fiduciary remains responsible for prudently selecting and monitoring the menu.ERISA s.404(c); 29 CFR 2550.404c-1

A SIMPLE IRA may generally be established by an employer that has:

• a.No more than 100 employees, even if it also maintains another qualified plan
• b.No more than 100 employees and maintains no other qualified plan✓
• c.No more than 500 employees and at least two years of operating history
• d.Any number of employees, as with a SEP IRA, if it sponsors no 401(k) plan

A SIMPLE IRA is open to an employer with no more than 100 employees who earned at least $5,000 in the preceding year, and generally the employer may not contribute to another retirement plan for the same year (the one-plan requirement). Keeping another qualified plan alongside it generally defeats eligibility. A 500-employee ceiling and an operating-history test are not part of the rules, and unlimited size is a feature of the SEP IRA, not the SIMPLE IRA. Employer contributions are mandatory, either a match or a nonelective contribution, and employee deferrals vest immediately.IRS SIMPLE IRA Plan FAQs (100-employee limitation; one-plan requirement)

Compared with a qualified retirement plan, a nonqualified deferred compensation plan generally:

• a.Provides the employer an immediate tax deduction for the amounts deferred
• b.May be offered selectively to chosen executives rather than to all workers✓
• c.Shields the deferred amounts from the claims of the employer's creditors
• d.Must cover every employee who satisfies the plan's age and service tests

The trade-off in a nonqualified plan is discrimination in exchange for security. The employer may pick and choose participants, but the deferred amounts remain an unfunded promise and stay subject to the employer's general creditors if the company fails. The employer's deduction is postponed until the employee actually includes the compensation in income.

A key consequence of funding an irrevocable trust rather than a revocable trust is that the grantor:

• a.May amend the trust terms at any time until a beneficiary objects
• b.Retains control, and the assets are generally inside the taxable estate
• c.Avoids probate but continues to report all trust income personally
• d.Gives up control, and the assets are generally outside the taxable estate✓

A revocable trust avoids probate but changes nothing for taxes, because the grantor can still take the property back, so the assets remain in the taxable estate. Surrendering that power through an irrevocable trust is what removes the assets from the estate and shifts income taxation, and the price is that the grantor generally cannot amend or revoke the arrangement.

A testamentary trust differs from a living trust because a testamentary trust:

• a.Is funded during the grantor's lifetime and therefore avoids probate
• b.Is created by the decedent's will and therefore passes through probate✓
• c.Must distribute all of its income to charity in the first taxable year
• d.May be revoked by the beneficiaries once the grantor has died

A testamentary trust springs into existence only at death, under the terms of the will, so the property must first pass through the probate court that admits the will. A living (inter vivos) trust is created and funded while the grantor is alive, and assets titled in it bypass probate entirely. Privacy and speed are the usual reasons clients prefer the living trust.

Securities held in a joint tenancy with right of survivorship account:

• a.Pass to the deceased tenant's estate for distribution under the will
• b.Must be liquidated by the broker-dealer within ten days of a death
• c.Are divided among all named heirs under state intestacy statutes
• d.Pass directly to the surviving tenant outside of the probate process✓

Survivorship is a feature of the account title itself, so the deceased tenant's interest transfers to the survivor by operation of law and never enters probate or the will. In a tenants in common account the opposite is true: the decedent's fractional share goes to the estate and is distributed under the will or state intestacy law.

The federal unlimited marital deduction allows a decedent to:

• a.Exclude from income all assets inherited by any immediate family member
• b.Deduct the surviving spouse's living expenses from the taxable estate
• c.Transfer up to $1 million each year to a spouse without any gift tax
• d.Transfer any amount to a surviving U.S. citizen spouse free of estate tax✓

Property passing outright to a surviving spouse who is a U.S. citizen qualifies for an unlimited marital deduction, so no federal estate tax is due at the first death. The tax is deferred rather than eliminated, because whatever remains is taxable in the survivor's estate. Special rules and a qualified domestic trust apply when the surviving spouse is not a U.S. citizen.

Under the Uniform Prudent Investor Act, a trustee's investment decisions are evaluated:

• a.Against a fixed statutory list of legally permitted trust investments
• b.Solely by whether each individual holding produced a positive return
• c.In the context of the total portfolio rather than security by security✓
• d.By comparing results with the best-performing mutual fund each year

The prudent investor standard adopts modern portfolio theory: a holding that would look speculative in isolation may be entirely appropriate as part of a diversified whole, so the trustee is judged on the overall strategy and its risk-return objectives. The older legal list approach has been abandoned, and trustees are expected to diversify and may delegate investment functions prudently.

A charitable lead trust differs from a charitable remainder trust because the charitable lead trust:

• a.May be revoked by the donor once the charity receives one payment
• b.Pays income to the donor first and leaves the remainder to charity
• c.Pays income to charity first and leaves the remainder to the family✓
• d.Distributes the entire principal to charity in the first taxable year

The names describe who is in line. In a charitable LEAD trust, the charity leads: it receives the income stream for a term, and the remaining principal then passes to noncharitable beneficiaries such as children. In a charitable REMAINDER trust, the donor or another individual takes the income and the charity receives what remains. Both are irrevocable split-interest arrangements.

An investor who donates long-term appreciated stock directly to a qualified public charity generally:

• a.Receives no deduction unless the shares are sold before the transfer
• b.Deducts fair market value and avoids tax on the unrealized appreciation✓
• c.Recognizes the gain at once and deducts only the after-tax proceeds
• d.Deducts the original cost basis and pays tax on the unrealized gain

Gifting appreciated securities held more than one year produces a double benefit: subject to adjusted-gross-income percentage limits, the donor deducts the full fair market value, and neither donor nor charity pays capital gains tax on the built-in appreciation. Selling the shares first and donating cash wastes that advantage by triggering the gain. Property held one year or less is generally limited to a basis deduction.

The death benefit paid to a named beneficiary of a life insurance policy is generally:

• a.Taxed as a long-term capital gain in the year the claim is paid
• b.Taxed to the beneficiary on all amounts above the premiums paid
• c.Received free of federal income tax by the named beneficiary✓
• d.Taxed as ordinary income to the beneficiary in the year received

Life insurance proceeds paid by reason of the insured's death are excluded from the beneficiary's gross income. Interest earned after death, such as on a settlement option that holds the proceeds, is taxable. Income tax treatment is separate from estate tax: if the insured held incidents of ownership, the proceeds may still be includable in the insured's gross estate.

A growth investment style typically emphasizes companies with:

• a.Small market capitalizations, heavy debt loads, and shrinking gross margins
• b.Above-average earnings expansion, high price-earnings ratios, low payouts✓
• c.Below-average price-to-book ratios, high dividend yields, and stable sales
• d.High current income, low price volatility, and long dividend track records

Growth managers pay up for companies whose revenue and earnings are expanding faster than the market, and those firms usually reinvest cash rather than pay large dividends, so multiples are high and yields are low. Value managers do the reverse, buying low multiples and higher yields. Style matters for suitability because growth portfolios are typically more volatile and less income-producing.

A portfolio manager using a top-down approach begins the analytical process by:

• a.Analyzing the macroeconomy and then selecting the favored sectors✓
• b.Reviewing each holding's chart patterns and trading volume history
• c.Screening individual company financial statements for undervaluation
• d.Ranking securities strictly by their historical dividend payout ratios

Top-down analysis moves from the general to the specific: first the economic and interest rate outlook, then the industries expected to benefit, and only then individual securities within those industries. Bottom-up analysis reverses the order, starting with company fundamentals and largely ignoring the macro view. Chart and volume work is technical analysis, a different discipline entirely.

Tracking error in an index fund measures the:

• a.Total volatility of the benchmark index over the same measured period
• b.Divergence between the fund's return and its benchmark index's return✓
• c.Portion of the fund's return that is attributable to manager skill
• d.Difference between the fund's market price and its net asset value

An index fund aims to replicate a benchmark, so the relevant quality measure is how closely it does so. Tracking error captures the dispersion of the fund's returns around the index's returns and arises from expense ratios, cash balances, sampling rather than full replication, and trading costs. Price-versus-net-asset-value gaps describe premiums and discounts on exchange-traded products, not tracking error.

Under a tolerance-band rebalancing policy, a portfolio is rebalanced when:

• a.An asset class drifts beyond a preset percentage from its target weight✓
• b.The client deposits or withdraws any amount of cash from the account
• c.A fixed calendar interval such as the end of each quarter has elapsed
• d.The manager's economic forecast changes for the coming twelve months

Tolerance-band (percentage-of-portfolio) rebalancing triggers on drift: if equities have a 60% target and a 5-point band, a move past 65% or below 55% prompts trades. Calendar rebalancing trades on the date regardless of drift. Bands respond to actual market moves and can reduce unnecessary trading and taxes, but they require ongoing monitoring rather than a simple schedule.

The Capital Asset Pricing Model (CAPM) calculates the expected return of a security as which of the following?

• a.The risk-free rate plus the security's standard deviation times the market's excess return
• b.The risk-free rate plus beta times the market risk premium✓
• c.The market return multiplied by beta, with no adjustment for the risk-free rate
• d.The security's dividend yield plus its expected earnings growth rate, as in the dividend growth model

CAPM states that a security's expected return equals the risk-free rate plus its beta multiplied by the market risk premium (the market return minus the risk-free rate). It links expected return to systematic risk as measured by beta. Using standard deviation, which measures total risk, in place of beta is not CAPM. Multiplying beta by the market return alone omits the risk-free rate, and dividend yield plus growth is the dividend growth model, which does not use beta.

When two risky assets are combined, the portfolio's standard deviation is reduced the most when the assets have:

• a.Equal weights in the portfolio, whatever their correlation
• b.The lowest possible correlation with each other✓
• c.A correlation of +1.0, so that they move together
• d.A beta of exactly 1.0 relative to the market index

The lower, or more negative, the correlation between two assets, the greater the risk reduction from diversification, and a correlation of +1.0 provides none. Equal weights do not remove the effect of correlation, and a beta of 1.0 only describes market sensitivity. Portfolio risk is not a simple weighted average precisely because of correlation effects.

An investor selling part of a position in a taxable account can generally minimize the current tax by using which cost-basis method?

• a.Average cost per share, the IRS default method for individual stocks
• b.Specific identification of the highest-cost shares, if properly identified at the time of sale✓
• c.First-in, first-out, the default that sells the oldest, usually lowest-cost, shares first
• d.Last-in, first-out, applied automatically because the newest shares carry the highest cost

By specifically identifying and selling the highest-cost lots at the time of sale, an investor realizes the smallest gain and the lowest current tax. If the shares sold are not adequately identified, the basis of the shares acquired first is used (first-in, first-out), which usually means the oldest, lowest-cost shares and a larger gain. Average cost is available only for certain mutual fund shares, not individual stocks, and last-in, first-out is not an automatic default.IRS Publication 550, Stocks and Bonds (identifying stock or bonds sold)

Under SECURE 2.0, the owner of a traditional IRA who was born in 1955 must generally begin required minimum distributions after reaching age:

• a.73✓
• b.59 1/2
• c.75
• d.70 1/2

SECURE 2.0 set the required beginning age at 73 for people who reach 72 after 2022 and 73 before 2033, which covers a person born in 1955. The age rises to 75 only for those born in 1960 or later. Age 70 1/2 was the rule before 2020, and 59 1/2 is when the early-distribution penalty generally stops applying, not when distributions become mandatory. Roth IRAs have no lifetime required distributions.IRC 401(a)(9)(C)(v) (SECURE 2.0 Act s.107)

Under ERISA's minimum participation standards, a pension plan generally may not make an employee wait for participation beyond age 21 and completion of:

• a.One year of service with the employer✓
• b.Three years, the cliff-vesting maximum
• c.Five years, the defined benefit cliff limit
• d.Two years, even with only gradual vesting

Section 202 of ERISA bars a plan from conditioning participation on more than the later of age 21 or one year of service (a year of service is 1,000 hours in a 12-month period). A plan may be more generous. Two years is permitted only if the plan gives immediate 100 percent vesting, so it does not work with gradual vesting. Cliff-vesting periods of three and five years govern when employer contributions become nonforfeitable, not when an employee may join.ERISA s.202(a)(1) (29 U.S.C. 1052(a)(1))

In a year when an unmarried investor has $15,000 of net capital losses and no capital gains, the loss deductible against ordinary income is:

• a.$15,000 in full
• b.$3,000, with the rest carried forward✓
• c.$0, since losses offset only gains
• d.$1,500, with the rest lost

Net capital losses exceeding gains can offset up to $3,000 of ordinary income per year ($1,500 for married filing separately), and the excess carries forward. Deducting the whole amount or none of it misstates the limit.IRC 1211(b)

A client inherits stock that the decedent bought for $20 and that was worth $50 at death. The client sells it eight months later for $55. The client reports:

• a.A $35 short-term gain per share
• b.A $35 long-term gain per share
• c.A $5 short-term gain per share
• d.A $5 long-term gain per share✓

Inherited property takes a basis equal to the value at death ($50) and is treated as long-term, so the gain is $55 - $50 = $5. Using the decedent's $20 basis gives $35. The eight-month holding does not make the gain short-term.IRC 1014

A client receives a gift of stock that the donor bought at $10 per share and that was worth $40 at the time of the gift. The client later sells it for $55. The client's gain per share is:

• a.$30
• b.$45✓
• c.$15
• d.$55

For a gain, the donee takes the donor's basis of $10, so the gain is $55 - $10 = $45. Using the $40 gift-date value gives $15. $30 subtracts the gift value from the donor's basis in the wrong direction, and $55 is the proceeds with no basis.IRC 1015

A client invests $20,000 today at 5% compounded annually and makes no other deposits. After 10 years the account will be closest to:

• a.$32,578✓
• b.$33,000
• c.$31,250
• d.$30,000

FV = $20,000 x 1.05^10 = $20,000 x 1.62889 = about $32,578. Simple interest would give $30,000. The $33,000 and $31,250 figures are rounded guesses that do not compound five percent over ten years.

A retiree spends $60,000 a year in today's dollars. If inflation averages 3% a year, the spending needed in 20 years is closest to:

• a.$60,000
• b.$96,000
• c.$120,000
• d.$108,400✓

$60,000 x 1.03^20 = $60,000 x 1.8061 = about $108,400. Simple (non-compounded) inflation of 60% gives $96,000. Leaving spending unchanged ignores inflation, and doubling it overstates it.

A client's target allocation is 60% stocks and 40% bonds. After a stock rally the portfolio is 70% stocks and 30% bonds. To rebalance, the adviser should:

• a.Sell some stocks and buy bonds to return to the target mix✓
• b.Sell bonds, to hold more in the best-performing asset
• c.Buy more stocks, since they are performing well
• d.Leave the portfolio, since the target has been exceeded

Rebalancing restores the agreed risk level by trimming the overweight asset and adding to the underweight one. Buying more stocks increases the drift. Ignoring the drift leaves the client with more risk than planned, and selling bonds worsens it.

A client invests $500 each month in a fund and buys at prices of $10, $8, $12 and $10. The client's average cost per share, compared with the average price of $10, is:

• a.About $10.20, above the average price
• b.Exactly $10.00, the same as the average price
• c.About $8.00, the lowest price paid
• d.About $9.80, below the average price✓

The $2,000 buys 50 + 62.5 + 41.67 + 50 = 204.17 shares, so the average cost is $2,000 / 204.17 = $9.80. Fixed dollar amounts buy more shares at low prices, so the cost sits below the average price. It does not equal the lowest price paid.

A client needs $40,000 in 18 months for a down payment and has a low tolerance for loss. Which choice is most suitable for that money?

• a.Short-term Treasury bills and insured deposits✓
• b.A diversified stock fund, for long-run growth
• c.A long-term corporate bond fund, for higher yield
• d.A small-cap value fund, for the premium it has earned

Money needed within 18 months must be protected from loss, so short-term Treasury bills and insured deposits fit. Equity funds can fall sharply in that window. Long-term bonds have interest rate risk, and small-cap funds are more volatile still.

A client has a fixed obligation of $100,000 due in exactly five years and wants to remove interest rate risk. The best fit is a bond portfolio whose:

• a.Coupons are as high as possible regardless of maturity
• b.Duration is about five years, matching the date of the obligation✓
• c.Holdings are all in a single issuer
• d.Maturity is as long as possible to maximize yield

Matching portfolio duration to the liability date immunizes it, because price and reinvestment effects offset one another. A long maturity adds price risk, coupon size by itself does not control risk, and concentration adds default risk.

For a client with both taxable and tax-deferred accounts, which approach is generally the most tax-efficient asset location?

• a.Hold taxable bonds in the tax-deferred account and broad index stock funds in the taxable account✓
• b.Hold index stock funds in the tax-deferred account and taxable bonds in a brokerage account
• c.Hold municipal bonds in the tax-deferred account and high-turnover funds outside it
• d.Split each asset class evenly between the two accounts so every holding is taxed the same way

Interest from taxable bonds is taxed at ordinary rates each year, so bonds belong in the tax-deferred account, while broad index stock funds produce few taxable events and mostly qualified dividends and deferred gains in the taxable account. Reversing the placement puts the heavily taxed income in the taxable account. Municipal bonds in a tax-deferred account waste their exemption, high-turnover funds throw off the most taxable distributions in a taxable account, and splitting every asset class evenly gives up the benefit of matching each asset to the account that taxes it least.

A client in the 24% bracket weighs a Roth IRA against a traditional IRA. The client expects to be in a higher bracket in retirement. The Roth is generally better because:

• a.Withdrawals are taxed at 24% in retirement
• b.Contributions are taxed now at 24% and qualified withdrawals are tax-free later✓
• c.Contributions can be made only after age 59 1/2
• d.Contributions are deductible now and withdrawals are tax-free

A Roth locks in today's lower rate by taxing contributions now and allowing qualified withdrawals tax-free. Roth contributions are not deductible. Taxable withdrawals describe a traditional IRA, and Roth contributions have no minimum age.

A client over the required beginning age failed to take a required minimum distribution from a traditional IRA. The excise tax on the shortfall is:

• a.10%, with no further reduction
• b.6% of the account balance each year
• c.50%, with no correction period
• d.25%, reduced to 10% if corrected within two years✓

The IRS states the excise tax on a missed RMD is 25% of the shortfall, reduced to 10% if the client corrects it within two years. A flat 50% with no cure period, a 10% rate with no reduction, and a 6% annual tax on the balance are not the rule.IRC 4974

An IRA owner named a niece as beneficiary on the custodian's form, but the will leaves everything to a charity. At the owner's death, the IRA goes to:

• a.Both equally, because of the conflict
• b.The estate, to be divided by the executor
• c.The charity, because the will is the later document
• d.The niece, because the beneficiary designation controls the account✓

IRAs pass by contract under the beneficiary designation, not under the will, so the niece receives the account. The date of the will does not override the form, and there is no equal split.

A parent opens a UTMA custodial account for a child and contributes $5,000. Who has the right to the assets once the child reaches the age of majority?

• a.The custodian, who can keep managing it
• b.The parent's estate, if the parent dies first
• c.The parent, who can reclaim the account
• d.The child, because the gift is irrevocable✓

Assets placed in a UTMA account are an irrevocable gift to the minor and belong to the child at the age set by state law. The parent cannot reclaim them, the custodian's role ends, and the parent's death does not change ownership.

A client wants a 7% return but states she cannot tolerate losses greater than 5% in a year. A reasonable course for the adviser is to:

• a.Promise that broad diversification will achieve both of her goals together
• b.Set the loss limit aside as unrealistic for a client with her goal
• c.Explain the conflict and help the client choose which goal to adjust✓
• d.Recommend the high-risk portfolio since the return goal governs

When return needs and risk tolerance conflict, the adviser must show the trade-off and let the client revisit the goals. Overriding the tolerance would be unsuitable, discarding it is dishonest, and promising both results is a guarantee.

Two years before retirement, a client's portfolio falls 30% just as withdrawals begin. This danger, which depends on the order of returns rather than the average, is called:

• a.Purchasing-power risk
• b.Liquidity risk
• c.Reinvestment risk
• d.Sequence-of-returns risk✓

Early losses combined with withdrawals shrink the base, and later gains cannot rebuild it, even if the average return is unchanged. Reinvestment risk concerns lower rates on proceeds, liquidity risk concerns trouble selling, and purchasing-power risk concerns inflation.

A client holds stock bought years ago for $3,000 and now worth $10,000. The client wants to give $10,000 to a public charity. Compared with selling the stock and giving cash, giving the stock itself generally:

• a.Allows no deduction, because gifts of securities are not deductible
• b.Allows a deduction of the full $10,000 value and avoids tax on the $7,000 gain✓
• c.Allows a deduction of only the $3,000 basis and avoids gain tax
• d.Allows a $10,000 deduction but triggers tax on the $7,000 gain

Long-term appreciated stock given to a public charity is generally deductible at fair market value, within the usual AGI limits, and the gain is never realized. A basis-only deduction does not apply to stock held long term and given to a public charity. Triggering the gain describes selling first. Gifts of securities are deductible.IRC 170(e)

An account names a woman's three children as beneficiaries per stirpes. One child dies before the owner, leaving two children of her own. At the owner's death, the deceased child's share goes to:

• a.The owner's estate, to pass under the owner's will
• b.The deceased child's spouse, who inherits it outright
• c.Her two children, who divide her share equally✓
• d.The two surviving children, who split it between them

Per stirpes means a deceased beneficiary's share passes down to that person's descendants, so the grandchildren divide their parent's one-third. Giving it to the surviving siblings is the per capita approach. The estate and the spouse are not the designated takers.

A client deposits $5,000 at the end of each year for three years into an account that earns 6% a year. The balance right after the third deposit is closest to:

• a.$5,955
• b.$15,000
• c.$16,873
• d.$15,918✓

Future value of an ordinary annuity = $5,000 x (1.06^3 - 1) / 0.06 = $5,000 x 3.1836 = $15,918. The $15,000 figure ignores interest. $16,873 treats the deposits as made at the start of each year, and $5,955 compounds only a single deposit for three years.

For 2026, what is the elective deferral limit for a 401(k) participant under age 50?

• a.$23,500
• b.$8,600
• c.$7,500
• d.$24,500✓

The 2026 limit under Internal Revenue Code Section 402(g) is $24,500 for participants under 50. The $23,500 limit applied in 2025. The $7,500 and $8,600 figures are the 2026 IRA limits for people under 50 and 50 and older.IRS retirement limits

For 2026, what is the maximum employee salary deferral to a SIMPLE IRA for a participant under age 50?

• a.$8,600
• b.$16,500
• c.$17,000✓
• d.$7,500

The 2026 SIMPLE IRA deferral limit is $17,000. The $16,500 limit applied in 2025. The $7,500 and $8,600 figures are the 2026 IRA limits.IRS retirement limits

For 2026, what is the maximum total contribution a person under age 50 may make to traditional and Roth IRAs combined?

• a.$7,000
• b.$7,500✓
• c.$24,500
• d.$8,600

The 2026 IRA limit is $7,500 for individuals under 50. The $7,000 limit applied in 2024 and 2025. The $24,500 figure is the 2026 401(k) deferral limit. The $8,600 figure is the 2026 limit for age 50 and older, which adds a $1,100 catch-up.IRS retirement limits

For 2026, what is the basic exclusion amount for federal estate tax for a single decedent?

• a.$13,990,000
• b.$15,000,000✓
• c.$5,000,000
• d.$1,000,000

The basic exclusion amount for 2026 is $15,000,000 per person, as set by the 2025 tax legislation. The $13,990,000 figure was the 2025 amount. The $5,000,000 figure was the base amount before the 2018 doubling, and $1,000,000 was the exclusion in 2002 and 2003.Estate tax