CRPC EXAM ACTUAL EXAM QUESTIONS AND CORRECT DETAILED ANSWERS WITH RATIONALES (VERIFIED ANSWERS) |ALREADY GRADED A+

CRPC EXAM ACTUAL EXAM QUESTIONS AND CORRECT DETAILED ANSWERS WITH RATIONALES (VERIFIED ANSWERS) |ALREADY GRADED A+ Diversification - ANSWER Acquiring assets with low or negative correlations to each other with the goal of lowering overall risk Correlation - ANSWER - a relative measure of the degree to which the returns of two assets move together - range from +1.0 to -1.0 - in practice negative correlations are rare - the further a correlation is from +1.0, the more diversified Asset allocation - ANSWER - the apportioning of available funds among a number of asset classes in a way that meets the needs of a particular client, dampens the effects of periodic market fluctuations, and meets investment goals Four steps in the asset allocation process - ANSWER 1) select asset classes to be represented 2) determine the percentage that each asset class should represent in the total portfolio 3) Select individual securities 4) Review and rebalance Strategic Asset Allocation - ANSWER - determine asset mix that provides optimal balance of expected risk and ROR - asset classes selected and % weight determined - Used to develop long-term allocation policy - utilizes rebalancing to maintain targeted weight Tactical Asset Allocation - ANSWER - used to develop short term strategies to exploit changes in market conditions - ofter viewed as a contrarian strategy - periodic revisions of asset mix; moving funds from over valued investments to undervalued investments - market timing strategy Core-Satellite asset allocation - ANSWER 70-80% invested in broad index fund or etfs - remaining satellite consists of actively managed MF's in niches such as sector funds or alt investments like hedge funds Contrarian Strategy - ANSWER Dollar-Cost averaging - ANSWER - investing regular amounts at regular intervals - reduce market timing risk, improve cost per share Low P/E strategy - ANSWER Ratio of 1= fair value Ratio 1= overvalued Ratio 1= undervalued ** The long-term average P/E for stocks is 16 Bond Investment strategies (2) - ANSWER 1) Ladder: Owning equal amounts of bonds along with maturities of equal intervals; ex. 50k of bonds with 10k each in 2,4,6,8,10 year maturities 2) Barbell: Owning short-term and long-term bonds, each with a ladder; ex. 100k of bonds with 10k each in 1,2,3,4,5 year maturities and in 16,17,18,19,20 year maturities Systematic Risk - ANSWER P-purchasing power risk R- reinvestment risk I- interest rate risk M- market risk E- exchange rate risk Social Security- Fully insured - ANSWER - having 10 years of employment covered by social security; expressed as "40 quarters of coverage" - Must be fully insured for retirement benefits - fully insured workers are also eligible for disability if he has earned at least 20 work credits in last 10 years Social Security- currently insured - ANSWER - individual must has at least 6 quarters of coverage in the 13-quarter period proceeding the event for which eligibility is sought - child's benefit, mother/fathers benefits, and lump-sum death benefit are available if a worker is only currently insured at death Components of SS calculation - ANSWER - age he starts - earnings history SS calculation before full retirement age - ANSWER - Payment reduced by 5/9th of 1% for each month filed before FRA, up to 36 months - Payment is reduced by 5/12ths of 1% for each month filed early in excess of 36 months SS calculation after full retirement age - ANSWER - Payment increases by about 8% each year they delay, until maximum year 70 - actual math is 2/3 for each month Social Security milestones - ANSWER Ages 50: disabled survivors can start receiving benefits 60: nondisabled survivors can start receiving 62: earliest one can start receiving benefits at reduced rate 65-67: FRA, depending on birth year 70: delayed retirement age Social Security income cap - ANSWER $15,720 - Those who are under FRA and working will lose $1 SS benefit for every $2 they earn above $15,720 - At FRA it is reduced to $1 for every $3 earned After FRA there is no reduction Max provisional income for SS - ANSWER Single or head of househouse: Tax-free if provisional income is less than 25k Filing jointly: Tax free if provisional income is less than 32k Provisional income - ANSWER Provisional income=AGI(excluding SS) +Nontaxable interest(muni bonds) + 1/2(SS benefit) Single provisional income SS taxable % - ANSWER 25k-34k: 50% 34k+: 85% Jointly provisional income SS taxable % - ANSWER 32k-44k: 50% 44k+:85% maximum taxable SS amount - ANSWER 85% of Total SS benefit Spousal benefit - ANSWER - Pay spouse a maximum of 50% of earners PIA What tax funds the Social Security Trust Fund - ANSWER Payroll taxes; FICA What is the FICA tax; how is it split up - ANSWER 15.3%; The employer and employee each pay 6.2% for old-age, survivors and disability insurance (OASDI) and 1.45% each for hospital insurance Social Security Wage Base - ANSWER $118,500 Covered employment - ANSWER Any position that participates in social security system Excluded - Railroad employees - Fed gov employees hired before 1984 Average SS benefit - ANSWER $1300 pm Max benefit - ANSWER $2639 pm Quarter of Coverage - ANSWER earned after $1260 of earnings in year - most you can earn in 1 year is 4 credits in year = $5040 in year need 40 quarters of credit Fully insured - ANSWER Eligible for all SS benefits - credits needed increase with age, up to max of 40 Currently insured - ANSWER have earned at least 6 credits during previous 13 quarters before death/disability - eligible for some survivor benefits Average indexed monthly earnings - ANSWER used to determine the amount of ss you will receive - TOP 35 years of earnings/420 (months in 35 years) =AIME ** if client doesn't have 35 years, any missed years will be factored as 0's Full Retirement Age (FRA) - ANSWER born 1960 or later: 67 born 1937 or earlier: 65 born : 66 Primary Insurance Amount (PIA) - ANSWER Benefit received at full retirement age - higher earners receive a smaller percentage of their AIME than low-wage earners-smaller "replacement rate" - Annual COLA based on CPI IRA statutory requirements - ANSWER - individual must have compensation (earned income) - must be established exclusively for an individual - must be established as a custodial account or a trust set up in the US - documents must be in writing - contributions must be made in cash - max contribution cannot exceed 100% of compensation or 5500 - contributions for given year must be made before April 15th tax deadline - cannot be invested in life insurance - RMDs must begin by april 1 in the year following turning 70.5 Penalty tax on excess contribution to IRA - ANSWER - 6% penalty tax unless excess contribution and its earnings are withdrawn by tax return filing due date Single taxpayer IRA phase out range; if the individual is an active participant in a company-maintained retirement plan - ANSWER $61,000-$71,000 Allowable IRA deduction limit equation - ANSWER IRA contribution limit x ((Upper Limit-AGI)/phaseout range) Joint tax filer ira phase out range; if both are active participants - ANSWER 98k-118k Joint tax filers IRA phase out range If one is an active participant and the other is not - ANSWER Active: 98k-118k Nonactive: 184k-194k What retirement plans must be considered when determining if a client has active participation status? 5 - ANSWER 1. Qualified pension, profit sharing, or stock bonus plan 2. qualified annuity plans under code Section 403b TSA 3. Simplified employee pension (SEP) 4. Simple IRA 5. Government plans (not including SS, railroad, or 457) What criteria are used to determine active participant status for DEFINED BENEFIT PLAN - ANSWER - An individual is an active participant if they are eligible under plan provisions, even if they elect not to participate, the employer failed to make mandatory contributions, and/or failed to perform the minimum service required What criteria are used to determine active participant status for PROFIT SHARING, 401K, OR STOCK BONUS PLAN - ANSWER - An individual is an active participant if the individuals account received an employer contribution, an employee contribution, and/or forfeiture allocation What criteria are used to determine active participant status for MONEY PURCHASE PLAN or TARGET PLAN - ANSWER - An individual is an active participant if the individuals account received a contribution or forfeiture allocation, regardless of whether the individual was employed at any time during the taxable year What income is not considered earned income - ANSWER - unemployment, passive income, deferred compensation, pension and annuity payments, SS, works comp, and cap gains What 3 investments are not permitted in IRA - ANSWER - Collectibles - Life Insurance - loans to disqualified persons (self or related party) What is the tax consequence of using any part of an IRA as security for a loan - ANSWER - loss of IRA status and taxation of entire account( plus the early withdrawal penalty, if applicable)