Investment Advisor Retirement Planning and Tax Strategies 2 — Questions and Answers
Question 1: Tax-loss harvesting involves:
- Selling losing investments to realize losses that can offset capital gains (Correct answer)
- Buying more of a losing investment to reduce average cost
- Deferring all capital gains to future years
- Converting taxable accounts to Roth accounts
Correct answer: Selling losing investments to realize losses that can offset capital gains
Tax-loss harvesting is the strategy of selling investments at a loss to generate capital losses that can offset capital gains and reduce tax liability.
Question 2: The 'wash sale rule' prevents an investor from claiming a tax loss if they purchase a substantially identical security within how many days before or after the sale?
- 15 days
- 30 days (Correct answer)
- 60 days
- 90 days
Correct answer: 30 days
The IRS wash sale rule disallows a tax loss if the investor buys the same or substantially identical security within 30 days before or after the loss sale.
Question 3: Which type of capital gain is taxed at preferential long-term rates in the US?
- Gains on assets held less than 6 months
- Gains on assets held more than one year (Correct answer)
- Gains on assets held exactly one year
- All capital gains regardless of holding period
Correct answer: Gains on assets held more than one year
Assets held for more than one year qualify for long-term capital gains tax rates, which are generally 0%, 15%, or 20% — lower than ordinary income rates.
Question 4: A Roth IRA conversion involves moving assets from a Traditional IRA to a Roth IRA. The converted amount is:
- Tax-free because it is a transfer between IRAs
- Subject to ordinary income tax in the year of conversion (Correct answer)
- Subject to capital gains tax
- Subject to the 10% early withdrawal penalty
Correct answer: Subject to ordinary income tax in the year of conversion
A Roth conversion is taxable — the pre-tax Traditional IRA funds converted are included in ordinary income in the conversion year.
Question 5: Which account type is most appropriate for assets with high expected growth to maximize long-term after-tax wealth?
- Traditional brokerage account
- Traditional IRA or 401(k)
- Roth IRA or Roth 401(k) (Correct answer)
- Money market account
Correct answer: Roth IRA or Roth 401(k)
Roth accounts are ideal for high-growth assets because all gains grow and are withdrawn tax-free, maximizing after-tax wealth on appreciated investments.
Question 6: The Social Security full retirement age (FRA) for individuals born in 1960 or later is:
- 62 years old
- 65 years old
- 66 years old
- 67 years old (Correct answer)
Correct answer: 67 years old
For individuals born in 1960 or later, the Social Security full retirement age is 67, though benefits can be claimed as early as 62 at a reduced amount.
Investment Advisor Retirement Planning and Tax Strategies 2
Tax-loss harvesting involves: