Series 7: Chapter 16 Practice Question Answers

Chapter 16 Practice Question Answers

1. 1. Answer: C. Only cash or cash equivalents can be deposited into an IRA. But once in the account, the funds can be used to buy most kinds of securities and some non-securities. Collectibles, such as works of art and stamps, and life insurance can never be purchased in an IRA.  Writing naked calls is prohibited inside an IRA because naked calls expose the investor to unlimited risk. It is not recommended to purchase a variable annuity inside of an IRA, but it is permissible.
2. 2. Answer: B. ERISA requirements apply to tax-qualified retirement plans. Deferred compensation plans are not tax-qualified, and so they do not need to comply with ERISA. Government and church retirement plans are excluded from ERISA requirements by law. In other words, ERISA regulates retirement plans in the private sector only. A section 457 plan is a retirement plan for state and local government workers. ERISA contains rules pertaining to beneficiary designation, participation requirements, vesting requirements, and disclosure requirements.
3. 3. Answer: B. As long as the retiree is a least 59 1/2 years old and has had the money in a Roth for at least five years, withdrawals come out tax-free. Money received from any of the other choices is 100% taxable as ordinary income.
4. 4. Answer: A. The regulation requires recipients to continue the SEPP for five years or until the age of 59 1/2, whichever comes last. Payments starting at age 57 would have to continue for five years. 
5. 5. Answer: D. The required minimum distribution (RMD) rules for the IRS require an individual to begin taking funds from her traditional IRAs by April 1 after the year she turns 72.
6. 6. Answer: C. IRS Rule 72(t) allows an investor to withdraw substantially equal periodic payments over a minimum of five years and, in doing so, avoid the 10% early withdrawal tax penalty.
7. 7. Answer: C. General living expenses while unemployed (except health insuranc