Regarding 401(k) plans, which TWO of the following are TRUE?They are defined contribution plans.They are defined benefit plans.The amount withdrawn at retirement is partially taxable.The amount withdrawn at retirement is fully taxable.

The Series 7 exam tests knowledge of tax implications for investments and various retirement plans (IRAs, Keoghs, 401(k)s, 529s), focusing on contribution limits, withdrawal rules, and tax treatment (pre-tax vs. Roth). Key topics include 10% penalties for early withdrawals ( 1 year), while short-term gains are taxed as ordinary income. Dividends: Generally taxed at qualified dividend rates; however, REIT dividends are taxed as ordinary income. Municipal Bonds: Interest is exempt from federal taxes, and sometimes state taxes if the holder is a resident of the issuing state. Tax-Deferred vs.... Show more

The Series 7 exam tests knowledge of tax implications for investments and various retirement plans (IRAs, Keoghs, 401(k)s, 529s), focusing on contribution limits, withdrawal rules, and tax treatment (pre-tax vs. Roth). Key topics include 10% penalties for early withdrawals (<59 1/2), 6% penalties for excess contributions, and suitability. 

Key Tax Concepts for Series 7
Capital Gains & Losses: Taxed at favorable rates if held long-term (> 1 year), while short-term gains are taxed as ordinary income.
Dividends: Generally taxed at qualified dividend rates; however, REIT dividends are taxed as ordinary income.
Municipal Bonds: Interest is exempt from federal taxes, and sometimes state taxes if the holder is a resident of the issuing state.

Tax-Deferred vs. Tax-Free:
Pre-tax (Traditional IRAs/401(k)s): Contributions reduce taxable income, but withdrawals are taxed as ordinary income.
Roth IRAs/401(k)s: Contributions are made after-tax, but qualified withdrawals are tax-free.
Cost Basis: Important for calculating gains on inherited securities (stepped-up basis) or gifts (donor's basis). 

Retirement Plans Covered
Individual Retirement Accounts (IRAs): Traditional (pre-tax) vs. Roth (after-tax).
Contribution Limits (2026): Generally $7,500 (with catch-up for 50+).
Qualified Corporate Plans (ERISA): 401(k), Profit-Sharing, Pension Plans. These are generally tax-deferred.
Self-Employed Plans: Keogh (HR-10) plans and SEP-IRAs, which have higher contribution limits than IRAs.
529 College Savings Plans: After-tax contributions, tax-deferred growth, tax-free withdrawals for qualified education expenses. 

Retirement Plan Rules & Penalties
Early Withdrawal Penalty: 10% penalty for withdrawals before age 59 1/2, plus ordinary income tax.
Exceptions to 10% Penalty: Death, disability, first-time home purchase, or qualified education expenses.
Required Minimum Distributions (RMDs): Must start at a specific age (currently 73 or 75, depending on birth year) for traditional IRAs and 401(k)s, or a 50% penalty applies to the shortfall.
Excess Contribution Penalty: 6% penalty on contributions exceeding IRS limits. 

Study Tips
Focus on suitability: Know which plan fits a client based on income, age, and goals.
Understand the difference between qualified (employer-sponsored) and non-qualified plans.
Do not confuse tax-deferred with tax-free. 

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