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Exam 34: Taxes and Investment Planning

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Question 21

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Which of the following characteristics belong(s) to the Exempt Model?

A) Only after-tax dollars are invested.
B) Only tax-free dollars are invested.
C) Earnings on the investment are exempt from explicit taxation.
D) both A and C

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Question 22

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Pass-through entities include all of the following types of entities except

A) partnerships.
B) C corporations.
C) S corporations.
D) limited liability companies (LLCs) .

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Question 23

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Sylvia makes a one-time $2,000 deductible contribution into a deductible traditional IRA account,which will earn 8% annually before taxes.Twenty-five years later,at age 65,she withdraws all of the accumulation from the IRA when she is in the 15% marginal tax bracket.What is the total of her after-tax accumulated proceeds from the IRA?

The Pension Model has all of the following characteristics except for

An investment in a growth stock which does not pay dividends is an example of the Exempt Model.

Miles invests $20,000 in a taxable bond for 5 years that earns 5% interest per year.His marginal tax rate is 15%.What is his after-tax accumulated investment at the end of year 1?

When given a choice between making a contribution to a Roth IRA or to a nondeductible traditional IRA,the taxpayer should choose the Roth IRA.

At the beginning of year 1,Sandeep invests $10,000 in a money market fund that pays a 3% annual return before taxes.Sandeep's marginal tax rate is 25%,and he allows the after-tax earnings to remain in the money market fund.That is,he withdraws only enough cash to pay the taxes on the earnings.What is his after-tax accumulation at the end of year 2?

In weighing whether to convert a traditional IRA to a Roth IRA,the expectation of lower tax rates at retirement is likely to bias the decision towards retaining the traditional IRA.

If a fully-taxable bond yields a BTROR of 10% (R_b = 10%) and a tax-exempt bond of similar risk earns a BTROR of 7.5% (R_f = 7.5%) ,then the implicit tax rate is

Will invests $20,000 of after-tax dollars (AT$) in tax-exempt municipal bonds which yield 5% per year.He reinvests the interest in the same bonds and holds the bonds for two years.Will's marginal tax rate is 25%.What is his after-tax accumulation at the end of two years?

The Roth IRA is an example of the Pension Model.

Kate can invest $4,000 of after-tax dollars (AT$) directly in a taxable bond outside an IRA,or she can contribute the $4,000 to a nondeductible IRA and invest in the same bond through the IRA vehicle.In either case,the bond yields an annual 3% before-tax rate of return (BTROR) .Kate's marginal tax rate is 15%,and she expects it to remain so for the entire investment horizon of 25 years.What is the after-tax accumulation for the "bond outside the IRA" after 25 years (assume that bond interest is reinvested at the same rate) ?

One characteristic of the Pension Model is the fact that,like the Current and Deferred Models,only after-tax dollars are invested.

In evaluating whether to convert a current traditional IRA to a Roth IRA,a taxpayer will utilize the Deferred and Exempt Models.

A taxpayer has a traditional IRA and is considering converting it to a Roth.Which of the following factors does not bias the decision towards the Roth conversion?

As long as the rollover from a traditional IRA to a Roth IRA is completed within 60 days,no tax is due.

The difference between the BTRORs of fully-taxable and tax-favored investments is called

Jan can invest $4,000 of after-tax dollars (AT$) directly in a taxable bond outside an IRA,or she can contribute the $4,000 to a nondeductible IRA and invest in the same bond through the IRA vehicle.In either case,the bond yields an annual 4% before-tax rate of return (BTROR) .Jan's marginal tax rate is 15%,and she expects it to remain so for the entire investment horizon of 25 years.What is her annualized after-tax rate of return (annualized ATROR) for the "bond inside the IRA"?

The source of funds used to pay the taxes upon conversion of a traditional IRA to a Roth IRA can influence the decision.Use of funds from the IRA to pay the conversion tax is likely to bias the decision towards converting.