Retirement Plans and Suitability — Series 7 FINRA practice questions

A 401(k) participant separates in the year she turns 55 and takes a distribution. The 10% penalty:

1. Applies unless she rolls it over to an IRA
2. Applies unless she is at least 59.5 years old
3. Applies but is refundable via IRS Form 5329
4. Does not apply under the Rule of 55

Answer: D — Does not apply under the Rule of 55

A) Rolling to an IRA loses the Rule of 55 exception. B) Rule of 55 applies at 55, not 59.5. C) The penalty is not refundable via that form. D) Correct — Rule of 55 exempts qualified plan distributions after separation.

Under SECURE 2.0, the Required Beginning Date for Traditional IRA RMDs is April 1 following age:

1. 70.5 (per pre-SECURE rules)
2. 72 (per original SECURE Act)
3. 73 (per SECURE 2.0 Act now)
4. 75 (per future SECURE 2.0 phase)

Answer: C — 73 (per SECURE 2.0 Act now)

A) Pre-SECURE age. B) Original SECURE Act age. C) Correct — SECURE 2.0 sets the current age at 73. D) Moves to 75 in 2033, not now.

A SEP-IRA is generally funded by:

1. Only employee salary deferrals
2. Employer contributions only
3. Government match dollars only
4. Only Roth after-tax dollars

Answer: B — Employer contributions only

A) Employees do not defer under SEP. B) Correct — employer contributions. C) No government match applies. D) SEP is pretax, not Roth.

To avoid mandatory 20% tax withholding on a 401(k) rollover, the participant should use a:

1. Direct trustee-to-trustee transfer between accounts
2. Partial withdrawal followed by a 60-day rollover
3. Written waiver of federal withholding on the payment
4. Conversion to a Roth IRA in the same tax year

Answer: A — Direct trustee-to-trustee transfer between accounts

B) Withholding applies to distributions paid to the participant. A) Correct — direct transfers avoid the 20% withholding requirement. C) No withholding waiver exists for these distributions. D) Roth conversion of a distribution also triggers withholding.

A 403(b) plan is most commonly offered by:

1. Publicly traded manufacturing corporations
2. Federal government agencies and departments
3. Public schools and 501(c)(3) organizations
4. Investment banks and broker-dealers exclusively

Answer: C — Public schools and 501(c)(3) organizations

A) Manufacturers typically use 401(k). B) Federal government uses TSP. C) Correct — 403(b)s are for public schools and certain tax-exempt employers. D) Broker-dealers use 401(k).

A Coverdell Education Savings Account allows contributions of:

1. Up to $2,000 per year per beneficiary
2. Up to $5,500 per year per beneficiary
3. Up to $15,000 per year per beneficiary
4. Unlimited amounts per year per beneficiary

Answer: A — Up to $2,000 per year per beneficiary

A) Correct — $2,000 annual limit per beneficiary. B) Higher than the Coverdell cap. C) Confuses with gift-tax annual exclusion. D) No unlimited option exists.

A Roth 401(k), compared to a traditional 401(k), features:

1. After-tax contributions and tax-free qualified withdrawals
2. Pre-tax contributions and taxable qualified withdrawals
3. No annual contribution limit of any kind
4. Mandatory employer matching contributed in Roth dollars

Answer: A — After-tax contributions and tax-free qualified withdrawals

A) Correct — Roth 401(k) contributions are after-tax, and qualified withdrawals are tax-free. B) That describes the TRADITIONAL 401(k), the reverse structure. C) Roth 401(k)s share the same annual contribution limits as traditional 401(k)s. D) Employer matches are generally deposited pre-tax even in a Roth 401(k), not as Roth dollars.

Contributions to a 529 plan are:

1. Federally income deductible
2. Fully taxable at deposit
3. Only deductible if itemized
4. Not federally deductible

Answer: D — Not federally deductible

A) No federal deduction is allowed. B) Deposits are not taxed as income. C) Itemizing does not create a deduction. D) Correct — tax-free growth, no deduction.

Under Reg BI, a firm must disclose material facts about the recommendation's:

1. Firm conflicts of interest
2. Historical performance data
3. Peer benchmark comparisons
4. Portfolio manager biography

Answer: A — Firm conflicts of interest

A) Correct — Reg BI disclosure obligation applies. B) Historical performance not the focus. C) Peer data is not required. D) Manager bio is not the focus.

A customer opening a margin account must receive a:

1. Margin disclosure statement under Rule 2264
2. Confirmation that no margin risk exists on account
3. Guarantee against future maintenance calls forever
4. Refund on any interest paid on debit balances always

Answer: A — Margin disclosure statement under Rule 2264

A) Correct — Rule 2264 requires a margin disclosure statement plus signed margin/credit agreement. B) Margin does carry risk. C) No guarantees are provided. D) No refund entitlement exists.

What is asset allocation?

Dividing a portfolio among different asset classes (stocks, bonds, cash, alternatives) based on risk tolerance, time horizon, and objectives.

A conservative investor with a short time horizon asks about an aggressive growth fund. What should you do?

Explain that aggressive growth funds are not suitable given their risk tolerance and time horizon. Suggest more conservative alternatives that align with their objectives.

What is a Keogh plan?

A qualified retirement plan for self-employed individuals and unincorporated businesses. Can be defined benefit or defined contribution.

Your customer, age 40, has a 401(k) and 529 plans for her children. She wants to invest a recent bonus to increase retirement savings. Which account is most suitable?

A Roth IRA — she already has a 401(k), so a Roth provides tax diversification for retirement with tax-free qualified withdrawals.