MASTER SERIES 7 EXAM PRACTICE QUESTIONS

A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes the market has reached its peak, he switches into AC Income Fund within the AC family of funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax effect? A) Any gain or loss is deferred until he liquidates the AC Income Fund. B) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase. C) It is a tax-free exchange. D) The tax basis of AC Income Fund is adjusted to reflect the gain in AC Growth Fund. Your answer, Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase., was correct!. The exchange is treated as a sale of the growth fund shares followed by a purchase of the income fund shares. The gain or loss is determined by comparing the cost basis of the growth fund shares with the net asset value at the time of exchange. Any difference is a capital gain or loss, even though the proceeds were immediately used to purchase the income fund. Reference: 10.7.5.4.1 in the License Exam Manual. Which of the following statements regarding qualified retirement plans are TRUE? Contributions are made with pretax dollars. Contributions are made with after-tax dollars. Distributions are 100% taxable. Distributions are taxable only to the extent of earnings. A) I and IV. B) II and IV. C) II and III. D) I and III. Your answer, I and III., was correct!. With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax-deferred, distributions, which consist of tax-deferred earnin