CPCU 556 Practice Questions with Correct Answers

Which one of the following is the main difference between a traditional IRA and a Roth IRA? A. Eligible investment options. B. Dollar amount of allowed contributions. C. Accumulation of investment income. D. Tax treatment of contributions and distributions. D. Tax treatment of contributions and distributions. Roth IRA contributions are always nondeductible, while a traditional IRA has contributions that may be deductible. Distributions from a Roth IRA are tax-free if certain conditions are satisfied, while distributions of earnings from a traditional IRA are always taxable. Which one of the following actions occurs during the fourth step of the estate planning process (Execute and Monitor the New Estate Plan)? A. Estate shrinkage is estimated. B. A determination is made if property is included in the probate estate. C. Legal documents are drawn up. D. The estate owner's intentions are stated. C. Legal documents are drawn up. A is incorrect. Estate shrinkage is estimated during the "Formulate and Test a New Estate Plan" phase. B is incorrect. A determination is made if property is included in the probate estate under the "Evaluate the Existing Estate Plan" phase. D is incorrect. The estate owner's intentions are stated during the "Gather Facts" phase. Tom contributed the maximum allowable pre-tax amount to his 401(k) plan in the current year to lower his current tax liability. Tom has implemented the tax planning strategy of: A. Tax deferral. B. Tax avoidance. C. Tax evasion. D. Tax development. A. Tax deferral. Tax deferral represents the delay of income taxation until a later date. By contributing to the 401(k) plan, Tom will lower his current tax liability. However, when Tom takes a distribution from his 401(k) plan in the future, he will pay income tax at that time. Five years ago, Sara purchased stock in a publicly traded company for $50,000. The stock has paid a dividend to Sara of $2,000 over the years. Today, she sold the stock for $45,000. Sara has a: A. Realized capital loss of $5,000. B. Realized capital loss of $3,000. C. Unrealized capital gain of $5,000. D. Unrealized capital loss of $3,000. A. Realized capital loss of $5,000. Sara sold the stock, and as a result has a realized gain or loss. Since she sold the stock for $45,000, and purchased the stock for $50,000, she has a realized loss of $5,000. The dividends received by Sara were taxed to Sara when she received them, and since she retained the cash (as opposed to reinvesting the cash), the dividends will not affect her gain or loss.