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Free CFP Practice Questions with Answers

The largest part of the CFP outline is Retirement Savings and Income Planning, at 18%. 25 CFP practice questions from 8 topics, each with the answer, why every choice is right or wrong, and the rule behind it. The free question bank has more than 650 questions.

Estate Planning

More Estate Planning questions

  1. Question 1, medium

    Ben leaves his entire estate outright to his wife, Carol, a U.S. citizen. Assuming Ben's estate qualifies for the unlimited marital deduction, what is the federal estate tax consequence at Ben's death?

    • A.Estate tax is eliminated on those assets, because the marital deduction forgives the tax instead of postponing it
    • B.Estate tax is reduced by 50% on the transferred assets, with the remaining half taxed at Ben's death at the applicable rates
    • C.Estate tax on the transferred assets is deferred until Carol's death (or a subsequent taxable transfer), not eliminated
    • D.Estate tax applies to the portion of the bequest above the annual gift tax exclusion amount, with the remainder passing free of tax
    Show answer and explanationHide answer

    Correct answer: C. Estate tax on the transferred assets is deferred until Carol's death (or a subsequent taxable transfer), not eliminated

    The unlimited marital deduction under IRC §2056 allows an unlimited amount of property to pass estate-tax-free to a U.S.-citizen surviving spouse. However, this is a deferral mechanism, not permanent forgiveness. The assets move into the surviving spouse's estate, where they will be taxed at her death unless sheltered by exclusion, further deduction, or charitable giving.

    • A. The marital deduction defers tax rather than forgiving it; the assets will generally be included in Carol's estate and be subject to tax at her death or a later taxable transfer.
    • B. There's no 50% reduction mechanism in the unlimited marital deduction; the full qualifying amount is deferred, not partially reduced.
    • C. Correct. The unlimited marital deduction defers estate tax on assets passing to a surviving U.S.-citizen spouse until the surviving spouse's death (or an earlier taxable transfer), rather than eliminating the tax altogether.
    • D. The marital deduction is unlimited for qualifying transfers to a U.S.-citizen spouse and is unrelated to the annual gift tax exclusion; its effect is deferral of tax on the whole amount.

  2. Question 2, hard

    A grandmother creates a trust for her grandchild that skips the grandchild's parent generation entirely. Assuming the transfer exceeds the grandmother's available GST exemption, what additional tax may apply, layered on top of any gift or estate tax otherwise due?

    • A.An additional income tax surcharge applied only to the trust's future distributions
    • B.Generation-Skipping Transfer (GST) tax, generally imposed at a flat rate equal to the top estate tax rate
    • C.A one-time luxury transfer tax under IRC §2704
    • D.No additional tax applies, since gift tax was already paid on the underlying transfer
    Show answer and explanationHide answer

    Correct answer: B. Generation-Skipping Transfer (GST) tax, generally imposed at a flat rate equal to the top estate tax rate

    Transfers that skip a generation (e.g., grandparent to grandchild, bypassing the parent) can trigger the Generation-Skipping Transfer tax in addition to any applicable gift or estate tax, once the donor's GST exemption is exhausted. GST tax is imposed at a flat rate equal to the top federal estate tax rate, making unplanned generation-skipping transfers potentially very costly.

    • A. There's no separate income tax surcharge for generation-skipping trusts; the additional layer of tax is the GST tax, a transfer tax, not an income tax mechanism.
    • B. Correct. Transfers to a generation more than one level below the transferor (skipping the parents' generation) that exceed the GST exemption are subject to GST tax, generally imposed at a flat rate equal to the top estate tax rate, on top of any gift or estate tax otherwise due.
    • C. IRC §2704 addresses valuation rules for family-controlled entities, not a "luxury transfer tax"; it has nothing to do with the generation-skipping scenario described.
    • D. Paying gift tax on the initial transfer does not exempt a transfer from GST tax; the GST tax is a separate, additional tax layered on top of gift or estate tax when a skip transfer exceeds the GST exemption.

  3. Question 3, hard

    A married couple wants to use gift-splitting to give $30,000 to their adult son this year, funded entirely from a brokerage account titled solely in the husband's name. Which statement about gift-splitting is correct?

    • A.Both spouses must consent to gift-splitting, and if elected, each spouse is treated as having made one-half of the gift, regardless of which spouse's separate property funded it
    • B.Gift-splitting is unavailable because the account is titled separately in the husband's name rather than jointly, and the wife has no ownership interest in the gifted property, even if both spouses consent
    • C.Gift-splitting applies automatically to gifts made by either spouse during the year, without any election or consent, and is reported on the husband's own return
    • D.Gift-splitting is limited to gifts made to charitable organizations, so a gift to an adult son cannot be treated as made half by each spouse under any election
    Show answer and explanationHide answer

    Correct answer: A. Both spouses must consent to gift-splitting, and if elected, each spouse is treated as having made one-half of the gift, regardless of which spouse's separate property funded it

    Gift-splitting under IRC §2513 allows married couples to treat a gift made by one spouse to a third party as if made one-half by each spouse. It requires both spouses to consent and does not require the gifted property to be jointly owned; it can be entirely separate property of one spouse.

    • A. Correct. Gift-splitting requires both spouses' consent (typically via a timely filed gift tax return), and once elected, each spouse is treated as making one-half of the gift, regardless of whose separate property actually funded it.
    • B. Gift-splitting is designed to let a couple treat a gift as made half by each spouse even when the asset is titled solely in one spouse's name; sole titling doesn't disqualify the election when both spouses consent.
    • C. Gift-splitting is not automatic; it requires an affirmative election with both spouses' consent, generally made on a filed gift tax return.
    • D. Gift-splitting applies to gifts to any qualifying recipient, including a child, and is not limited to charitable gifts.

  4. Question 4, easy

    A client's father died in 2025, leaving her a taxable brokerage account containing 500 shares of XYZ stock that he purchased in 1995 for $10 per share ($5,000 total). On his date of death, the shares were valued at $85 per share ($42,500 total). The client sells all 500 shares six months later for $90 per share ($45,000 total). What is her taxable gain and how is it characterized?

    • A.$2,500 short-term capital gain
    • B.$2,500 long-term capital gain
    • C.$40,000 long-term capital gain
    • D.$42,500 long-term capital gain
    Show answer and explanationHide answer

    Correct answer: B. $2,500 long-term capital gain

    Under IRC Section 1014, inherited property receives a basis step-up to fair market value as of the date of death ($85/share = $42,500 basis). Gain is measured against this stepped-up basis, so taxable gain is $45,000 proceeds minus $42,500 basis = $2,500. Separately, inherited property is automatically deemed to have been held long-term regardless of how long the beneficiary or decedent actually held it, so the $2,500 gain is long-term.

    • A. Wrong classification: inherited property is always treated as long-term, regardless of the beneficiary's actual holding period.
    • B. Correct. Stepped-up basis of $42,500 against $45,000 proceeds yields $2,500 gain, automatically long-term for inherited property.
    • C. Wrong basis: uses the decedent's original 1995 cost basis instead of the date-of-death stepped-up basis.
    • D. Wrong: treats the entire stepped-up value as if it were the taxable gain, rather than as the new basis used to compute gain on the later sale.

Financial Planning Process

More Financial Planning Process questions

  1. Question 5, easy

    Which of the following is the FIRST step in the CFP Board's seven-step financial planning process?

    • A.Identifying and selecting goals
    • B.Analyzing the client's current course of action
    • C.Developing the financial planning recommendation(s)
    • D.Understanding the client's personal and financial circumstances
    Show answer and explanationHide answer

    Correct answer: D. Understanding the client's personal and financial circumstances

    The seven-step process begins with understanding the client's personal and financial circumstances, which provides the factual foundation for every subsequent step, including goal identification, analysis, and recommendation development. The other listed steps occur later and depend on this initial understanding being established first.

    • A. Identifying and selecting goals is Step 2, which comes after understanding the client's circumstances.
    • B. Analyzing the client's current course of action follows the initial data-gathering step; it isn't the first step.
    • C. Developing recommendations happens later, after data gathering, goal-setting, and analysis.
    • D. Correct. Understanding the client's personal and financial circumstances is the first of the seven steps in the CFP Board's financial planning process.

  2. Question 6, hard

    A CFP professional refers a client to an estate planning attorney to draft a revocable trust as part of implementing the financial plan. Which statement best reflects the Standards of Conduct regarding this referral?

    • A.The CFP professional should prepare the trust document personally, because implementation of the plan's recommendations is the planner's own responsibility
    • B.Once the client is referred to the attorney, the CFP professional's responsibilities for that recommendation end and the attorney assumes them
    • C.The CFP professional should direct the attorney's drafting work, because the planner remains solely accountable for the legal documents produced
    • D.Implementation may involve the CFP professional and/or other professionals, with responsibilities that should be clearly agreed upon and appropriately documented
    Show answer and explanationHide answer

    Correct answer: D. Implementation may involve the CFP professional and/or other professionals, with responsibilities that should be clearly agreed upon and appropriately documented

    Step 6 (Implementation) explicitly contemplates that implementation may be shared with or delegated to other professionals such as attorneys, accountants, or insurance agents, provided the division of responsibilities is clearly established and documented. Referrals are not prohibited, but they also don't automatically eliminate the CFP professional's own ongoing duties under the engagement's agreed scope.

    • A. Wrong. Implementation may involve other professionals, and drafting a trust is legal work that belongs to a licensed attorney. A planner preparing the document could be engaging in unauthorized practice of law.
    • B. Wrong. A referral does not transfer or end the planner's responsibilities by default. What each party handles, including any monitoring role, depends on the agreed scope and should be clearly documented.
    • C. Wrong. The attorney is responsible for the legal work product within their own professional role. The planner does not direct it or become solely accountable for it. Responsibilities should be agreed upon and documented among the parties.
    • D. Correct. Implementation may be carried out by the CFP professional, other professionals, or both, with responsibilities clearly agreed upon and documented between the parties.

  3. Question 7, hard

    A client's child is 8 years old and will begin college in 10 years. The current annual cost of college is $30,000, and education costs are expected to inflate at 5% per year. What is the approximate future cost of just the first year of college, 10 years from now?

    • A.$39,800
    • B.$44,300
    • C.$48,900
    • D.$54,600
    Show answer and explanationHide answer

    Correct answer: C. $48,900

    Using the future value formula FV = PV × (1 + i)^n: FV = $30,000 × (1.05)^10 ≈ $30,000 × 1.6289 ≈ $48,867, which rounds to approximately $48,900.

    • A. This understates the result, consistent with using fewer years of 5% compounding than the actual 10-year horizon to college.
    • B. This is close to the figure you'd get compounding for only 8 years (the child's current age) rather than the correct 10-year horizon until college begins.
    • C. Correct. $30,000 x (1.05)^10 ≈ $48,900, reflecting 10 years of 5% education-cost inflation on the current annual cost.
    • D. This overstates the result, consistent with compounding for more than 10 years or assuming a higher inflation rate than 5%.

Investment Planning

More Investment Planning questions

  1. Question 8, hard

    Relative to traditional publicly traded securities, which characteristic most commonly applies to direct investments in digital assets such as certain cryptocurrencies?

    • A.They often receive the same custody and insurance protections as brokerage-held securities, though coverage may vary by platform
    • B.They often show lower historical price volatility than large-cap equities, though results may vary by token
    • C.They often lack the same level of regulatory oversight and may present unique custody and valuation risks
    • D.They are often classified as fixed-income holdings for asset allocation, though treatment may vary by investor
    Show answer and explanationHide answer

    Correct answer: C. They often lack the same level of regulatory oversight and may present unique custody and valuation risks

    Direct digital asset holdings generally fall outside traditional securities regulation and custody/insurance frameworks like SIPC, and they present distinctive risks around self-custody, exchange counterparty risk, and valuation. All points advisors must address when discussing suitability and disclosure.

    • A. Wrong. Direct crypto holdings generally are not covered by SIPC or similar insurance that protects brokerage-held securities, so custody failures or hacks can cause unrecoverable losses.
    • B. Wrong. Major cryptocurrencies have historically shown higher price volatility than large-cap equities, with frequent large drawdowns and sharp swings.
    • C. Correct. Direct digital asset investments commonly face less regulatory oversight than traditional securities and carry unique custody and valuation risks.
    • D. Wrong. Cryptocurrencies have no contractual coupon payments or maturity date, so they do not fit the fixed-income category and are usually treated as alternative or speculative assets.

  2. Question 9, easy

    An investor holds a well-diversified portfolio of 50 stocks spread across multiple industries. Which type of risk remains largely undiversified in this portfolio?

    • A.Market (systematic) risk
    • B.Business risk specific to individual companies
    • C.Credit risk of any single issuer
    • D.Unsystematic risk specific to any one company held
    Show answer and explanationHide answer

    Correct answer: A. Market (systematic) risk

    Diversification across companies and industries eliminates most unsystematic (company-specific) risk, including individual business and credit risk. Systematic (market) risk, however, affects essentially all securities and cannot be diversified away.

    • A. Correct. Systematic (market) risk affects all securities broadly and cannot be eliminated through diversification, so it remains largely undiversified even in a broad 50-stock portfolio.
    • B. Wrong. Business risk specific to individual companies is largely diversified away across 50 stocks in multiple industries.
    • C. Wrong. The credit risk of any single issuer is company-specific and is substantially reduced by spreading holdings across many issuers.
    • D. Wrong. Unsystematic risk tied to any one company is exactly the type of risk diversification across many holdings is designed to reduce.

  3. Question 10, medium

    Why do broad-market index ETFs typically distribute fewer capital gains to taxable shareholders than comparable index mutual funds?

    • A.ETFs are exempt from the rules that require regulated investment companies to distribute realized gains.
    • B.Gains inside an ETF are taxed at a lower statutory rate because the shares trade intraday on an exchange.
    • C.In-kind redemptions let the ETF hand low-basis shares to authorized participants without selling them in the market.
    • D.ETF managers defer taxation on realized gains by reinvesting them into additional shares of the fund automatically.
    Show answer and explanationHide answer

    Correct answer: C. In-kind redemptions let the ETF hand low-basis shares to authorized participants without selling them in the market.

    Most ETFs create and redeem shares in kind with authorized participants. This lets the fund purge low-basis securities without realizing gains, so fewer capital gains reach shareholders than in a mutual fund that sells holdings to meet redemptions.

    • A. ETFs are generally regulated investment companies subject to the same distribution rules.
    • B. Tax rates depend on holding period and income, not on how or when the fund shares trade.
    • C. Removing the lowest-basis lots through in-kind exchanges avoids realizing gains inside the fund.
    • D. Realized gains must still be distributed; reinvestment does not remove the tax liability.

Professional Conduct and Regulation

More Professional Conduct and Regulation questions

  1. Question 11, easy

    A client's brokerage firm, a SIPC member, fails and some customer securities are missing from the accounts. Separately, her portfolio fell 15% last year in a market decline. What does SIPC protection provide?

    • A.It works to return missing customer securities and cash up to statutory limits, but it does not cover market losses.
    • B.It reimburses the full 15% decline in value, up to the statutory limit, because the firm failed.
    • C.It covers losses from investment advice that later proved unsuitable, up to the statutory limit.
    • D.It guarantees a minimum rate of return on customer accounts held at member firms during a liquidation proceeding.
    Show answer and explanationHide answer

    Correct answer: A. It works to return missing customer securities and cash up to statutory limits, but it does not cover market losses.

    SIPC returns customers' missing securities and cash, within statutory limits, when a member broker-dealer fails. It is not insurance against investment performance or poor advice.

    • A. SIPC protects against custodial loss when a member firm fails, within statutory limits.
    • B. SIPC does not insure against declines in market value.
    • C. Unsuitable advice is handled through arbitration or litigation; SIPC does not pay such claims.
    • D. SIPC offers no return guarantee; it restores securities and cash held in customer accounts.

  2. Question 12, easy

    A certificant pleads no contest to a felony charge unrelated to his practice. Under CFP Board's procedural rules, within what period must he report the matter to CFP Board?

    • A.Within 10 business days of the plea.
    • B.Within 30 calendar days of the plea.
    • C.Within 90 calendar days of the plea.
    • D.At the next certification renewal, when the ethics declaration is completed.
    Show answer and explanationHide answer

    Correct answer: B. Within 30 calendar days of the plea.

    CFP Board's procedural rules require certificants to report certain events, such as a felony charge or plea, within 30 calendar days. The duty is independent of the periodic renewal declaration.

    • A. A 10-business-day deadline is not the CFP Board standard. The self-report is due within 30 calendar days of the event, so this period is too short and uses the wrong way of counting days.
    • B. CFP Board requires certificants to self-report specified events, including a felony plea, within 30 calendar days.
    • C. A 90-calendar-day window is too long. CFP Board's self-reporting clock is 30 calendar days from the plea, and waiting up to 90 days would put the certificant out of compliance.
    • D. Renewal disclosures supplement, but do not replace, the timely event-based report.

  3. Question 13, medium

    Regarding disclosure of compensation method, the CFP Board Standards of Conduct require that:

    • A.Only commission-based CFP professionals must disclose their compensation method
    • B.CFP professionals must describe their compensation method only after the client has engaged them and signed a written service agreement
    • C.All CFP professionals, regardless of compensation method, must accurately describe their compensation method to clients and prospective clients
    • D.CFP professionals must describe their compensation method only when a client or prospective client specifically asks how they are paid
    Show answer and explanationHide answer

    Correct answer: C. All CFP professionals, regardless of compensation method, must accurately describe their compensation method to clients and prospective clients

    The Standards of Conduct require every CFP professional. Fee-only, commission-based, or fee-and-commission. To accurately describe how they are compensated to clients and prospective clients. The duty is not limited to one compensation model, it is not delayed until after an engagement agreement is signed, and it does not wait for the client to ask. It is a national, CFP Board-imposed obligation.

    • A. Incorrect. The duty to describe compensation is not limited to commission-based professionals. Fee-only, fee-based, salaried and commission-based CFP professionals must all accurately describe how they are paid.
    • B. Incorrect. Prospective clients must receive an accurate description of the compensation method before they commit, so they can judge the cost and any conflicts of interest. Waiting until after engagement defeats the purpose of the disclosure.
    • C. Correct. The Standards of Conduct require every CFP professional, whatever the compensation method, to accurately describe it to clients and prospective clients. This supports informed client decisions and the duties of loyalty and care.
    • D. Incorrect. The CFP professional must provide the compensation description proactively. It does not depend on the client asking, so a professional cannot wait for a question before explaining how they are paid.

Psychology of Financial Planning

More Psychology of Financial Planning questions

  1. Question 14, medium

    A client acknowledges she should reduce discretionary spending to meet her retirement goal but keeps insisting 'now isn't the right time' at every meeting. Which counseling approach, drawn from motivational interviewing, is most appropriate for the planner to use?

    • A.Firmly telling the client she must cut spending immediately or she will not retire on time
    • B.Ignoring the resistance and proceeding with the original recommendation regardless of client input
    • C.Ending the engagement, since the client is not ready to take advice
    • D.Exploring the client's own ambivalence and eliciting her personal reasons for change, rather than arguing for the change
    Show answer and explanationHide answer

    Correct answer: D. Exploring the client's own ambivalence and eliciting her personal reasons for change, rather than arguing for the change

    Motivational interviewing is a client-centered counseling approach built around exploring a client's own ambivalence toward change, rather than the planner arguing or mandating action, since external pressure tends to increase resistance.

    • A. Wrong. Confrontational, directive statements tend to increase resistance ('the righting reflex') rather than resolve ambivalence, contrary to motivational interviewing principles.
    • B. Wrong. Ignoring the client's stated resistance and proceeding unilaterally undermines the collaborative, client-centered spirit of motivational interviewing.
    • C. Wrong. Ending the engagement abandons the client rather than working through normal, expected ambivalence about behavior change.
    • D. Correct. Motivational interviewing calls for exploring the client's own ambivalence and drawing out her personal motivations for change, rather than arguing the case for her.

  2. Question 15, hard

    A planner presents the same investment risk as either '90% chance of preserving principal' or '10% chance of losing principal.' A client reacts far more negatively to the second phrasing, even though the underlying probability is identical. This is best explained by which behavioral concept, and how does it differ from anchoring?

    • A.This is anchoring, because the client fixates on the 10% figure as a starting reference point and adjusts from it, so the reaction is a numeric estimation error rather than a wording effect
    • B.This is confirmation bias, because the client favors the phrasing that fits a prior belief about the investment's risk, whereas anchoring relies too heavily on an initial number
    • C.This is availability bias, because the vivid image of losing principal is easier to recall than preserving it, whereas anchoring relies too heavily on an initial number
    • D.This is the framing effect. The client's reaction is influenced by how equivalent information is presented, whereas anchoring involves over-relying on an initial reference point when estimating a value
    Show answer and explanationHide answer

    Correct answer: D. This is the framing effect. The client's reaction is influenced by how equivalent information is presented, whereas anchoring involves over-relying on an initial reference point when estimating a value

    The framing effect describes how identical information can produce different reactions depending solely on how it is presented. Anchoring involves over-relying on an initial reference point when making a subsequent estimate. Nothing is being estimated relative to a prior reference point here.

    • A. Anchoring requires the client to estimate a value by adjusting from an initial number. Here the client is not estimating anything. Both statements carry the same probability, and only the wording changes the reaction. That wording-driven shift is framing, not anchoring.
    • B. Confirmation bias means seeking or favoring information that supports an existing belief. The scenario describes no prior belief being confirmed, and the reaction changes only because the same fact is worded differently.
    • C. Availability bias means judging likelihood by how easily examples come to mind, usually because of recent or vivid events. The scenario involves no recalled events or memory effects. The client simply reacts differently to two equivalent statements of the same probability, which is the framing effect.
    • D. Correct. Different reactions to logically equivalent information based only on presentation (gain-framed vs. loss-framed) is the framing effect. Anchoring instead involves over-relying on an initial reference point or number when estimating a value.

  3. Question 16, easy

    After a market decline, a client demands liquidation despite previously confirming an appropriate long-term allocation. She frequently checks daily losses and describes even small losses as unbearable. Which response is most effective?

    • A.Tell the client the reaction is irrational and end the discussion until she is ready to follow the original investment plan again.
    • B.Explore the emotional reaction, revisit goals and capacity for loss, and use a disciplined decision framework while staying open to real changes.
    • C.Assure the client that markets will recover within 12 months so she can stay invested without reviewing her goals or risk capacity.
    • D.Increase equity risk in the portfolio to recoup the losses quickly, since a higher expected return shortens the time needed to recover.
    Show answer and explanationHide answer

    Correct answer: B. Explore the emotional reaction, revisit goals and capacity for loss, and use a disciplined decision framework while staying open to real changes.

    Loss aversion makes losses feel disproportionately painful. Empathetic discussion, education and an agreed decision process support better choices while remaining open to genuine changes in circumstances.

    • A. Labeling the client irrational and ending the discussion damages the relationship and does not address the behavior.
    • B. Correct: understand the emotion, revisit goals and risk capacity, and use a structured process.
    • C. A recovery promise is unsupported and skips the review of whether the plan still fits her capacity for loss.
    • D. Adding risk after a loss, for a client who cannot tolerate small losses, contradicts her capacity and tolerance.

Retirement Savings and Income Planning

More Retirement Savings and Income Planning questions

  1. Question 17, medium

    After one spouse dies, the surviving spouse qualifies for both an individual Social Security retirement benefit of $1,700 per month and a survivor benefit that would total $2,400 per month if claimed at the relevant full benefit age. Ignoring adjustments and timing choices, how do these benefits generally interact?

    • A.The survivor receives the combined $4,100 per month because both benefits are paid in full at the same time.
    • B.Benefits end when the wage earner dies, and the surviving spouse must reapply under new rules.
    • C.The survivor is limited to the lower $1,700 personal benefit once retirement benefits begin.
    • D.The survivor generally receives the higher total applicable benefit, not both amounts added together.
    Show answer and explanationHide answer

    Correct answer: D. The survivor generally receives the higher total applicable benefit, not both amounts added together.

    Social Security coordinates a person's own retirement benefit with the survivor benefit rather than stacking them. Under the stated timing the survivor's total would generally be $2,400 per month.

    • A. Fails: the two benefits are coordinated, not added, so the total is not $4,100.
    • B. Fails: the death of a wage earner creates survivor benefits rather than ending family benefits.
    • C. Fails: the survivor is not confined to the smaller personal amount; the higher total applies.
    • D. Correct: the survivor generally receives the larger applicable total, here $2,400, rather than the sum.

  2. Question 18, medium

    James turns 73 this year and must take his first RMD from his traditional IRA. His account balance on December 31 of the prior year was $486,000. Using a Uniform Lifetime Table factor of 26.5 for age 73, what is his required minimum distribution (rounded to the nearest dollar)?

    • A.$16,343
    • B.$20,250
    • C.$18,340
    • D.$24,300
    Show answer and explanationHide answer

    Correct answer: C. $18,340

    RMD = prior year-end balance ÷ the Uniform Lifetime Table divisor for the participant's age. $486,000 ÷ 26.5 = $18,339.62, which rounds to $18,340.

    • A. $16,343 doesn't match dividing the prior year-end balance by the applicable life expectancy factor.
    • B. $20,250 overstates the RMD and doesn't correspond to dividing $486,000 by the factor of 26.5.
    • C. Correct. RMD = prior year-end balance ÷ life expectancy factor = $486,000 ÷ 26.5 ≈ $18,340.
    • D. $24,300 is too high and doesn't match the correct division of the account balance by the age-73 Uniform Lifetime Table factor.

  3. Question 19, hard

    A single retiree has $40,000 in Social Security benefits and $30,000 of other taxable income (no tax-exempt interest) in 2026. How is the taxability of her Social Security benefits generally determined?

    • A.Up to 50% of benefits may be taxable once provisional income exceeds $25,000, and up to 85% may be taxable once provisional income exceeds $34,000 (single filer thresholds)
    • B.Up to 50% of benefits may be taxable once provisional income exceeds $32,000, and up to 85% may be taxable once provisional income exceeds $44,000 (joint filer thresholds)
    • C.Up to 50% of benefits may be taxable once provisional income exceeds $25,000, and up to 100% may be taxable once provisional income exceeds $34,000 (single filer thresholds)
    • D.Up to 50% of benefits may be taxable once wages exceed $25,000, and up to 85% may be taxable once wages exceed $34,000, with other income ignored (single filer thresholds)
    Show answer and explanationHide answer

    Correct answer: A. Up to 50% of benefits may be taxable once provisional income exceeds $25,000, and up to 85% may be taxable once provisional income exceeds $34,000 (single filer thresholds)

    Social Security benefit taxation depends on 'provisional income' (AGI excluding Social Security, plus tax-exempt interest, plus 50% of Social Security benefits). For a single filer, provisional income between $25,000 and $34,000 makes up to 50% of benefits potentially taxable; above $34,000, up to 85% may be taxable. Here, provisional income = $30,000 + (50% × $40,000) = $50,000, which exceeds $34,000, so up to 85% of benefits are potentially includible. With the exact taxable amount computed using the IRS worksheet, not simply 85% of all benefits paid.

    • A. Correct. The tiered thresholds ($25,000/$34,000 for single filers) determine the taxable percentage cap.
    • B. Incorrect: $32,000 and $44,000 are the thresholds for married couples filing jointly. A single filer uses the $25,000 and $34,000 thresholds, so these figures understate how much of her benefit is taxable.
    • C. Incorrect: the single-filer thresholds are right, but no more than 85% of Social Security benefits is ever taxable. Saying up to 100% can be taxed misstates the cap.
    • D. Incorrect: the thresholds are measured against provisional income, which is adjusted gross income plus tax-exempt interest plus half of the benefits. Wages are not the only measure, and her $30,000 of other taxable income counts even though it is not wages.

Risk Management and Insurance Planning

More Risk Management and Insurance Planning questions

  1. Question 20, medium

    A client holds a deferred nonqualified annuity with a large built-in gain. She wants to exchange it directly for a new cash-value life insurance policy. What is the tax treatment?

    • A.The exchange is tax-free under Section 1035 because both products are issued by insurance companies.
    • B.The gain is tax-free but the new policy's basis is reset to zero until the first loan is taken.
    • C.The gain is taxed as long-term capital gain because the annuity was held for more than one year.
    • D.The exchange is not covered by Section 1035, so the gain is taxable to the extent of the surrender.
    Show answer and explanationHide answer

    Correct answer: D. The exchange is not covered by Section 1035, so the gain is taxable to the extent of the surrender.

    Section 1035 permits tax-free exchanges of life insurance for life insurance or annuity, and of annuity for annuity. An annuity cannot be exchanged tax-free for a life policy, so the gain is recognized as ordinary income.

    • A. Section 1035 lists permitted exchange directions; annuity to life insurance is not among them.
    • B. No such nonrecognition-with-reset exists for this exchange.
    • C. Annuity gain is ordinary income when distributed, regardless of holding period.
    • D. Section 1035 allows annuity-to-annuity but not annuity-to-life-insurance exchanges tax-free.

  2. Question 21, medium

    A small business with two equal owners wants to ensure that if one owner dies, the surviving owner can buy the deceased owner's business interest from the estate at a previously agreed price. Which life-insurance-funded arrangement is designed for this purpose?

    • A.A cross-purchase buy-sell agreement, with each owner as owner and beneficiary of a policy on the life of the other owner
    • B.Key person life insurance payable to the business, to compensate the company for losing a co-owner's revenue-generating ability
    • C.Split-dollar life insurance, in which the business and an owner share the policy's premiums and death benefit
    • D.A Section 162 executive bonus plan, in which the business pays premiums on an owner's personal policy as compensation
    Show answer and explanationHide answer

    Correct answer: A. A cross-purchase buy-sell agreement, with each owner as owner and beneficiary of a policy on the life of the other owner

    A cross-purchase buy-sell agreement has each owner personally own and be the beneficiary of a life insurance policy on each other owner. On the first death, policy proceeds go directly to the surviving owner(s), who use them to buy the deceased owner's interest from the estate at the agreed price, providing liquidity and a smooth, pre-arranged ownership transition. Key person insurance instead protects the business against the financial loss of losing a key employee's talents or revenue-generating ability. It does not fund an ownership buyout of that person's interest. Split-dollar is a premium-sharing arrangement, and a Section 162 bonus plan is an executive compensation technique, neither of which is structured to fund a specific buy-sell obligation between owners.

    • A. Correct. In a cross-purchase buy-sell agreement, each owner personally owns and is beneficiary of a policy on the other owner's life, using the proceeds to buy the deceased owner's interest at the agreed price.
    • B. Wrong. Key person insurance protects the business against the financial loss of losing a key person; it isn't structured to fund a buyout of a deceased owner's interest by the surviving owner.
    • C. Wrong. Split-dollar is a method of sharing policy costs and benefits between two parties, not the buy-sell funding structure itself.
    • D. Wrong. A Section 162 bonus plan is an executive compensation technique using employer-paid premiums; it isn't designed to fund a business ownership transfer.

  3. Question 22, medium

    A long-term care insurance policy has a total lifetime benefit pool of $328,500 and pays a maximum daily benefit of $300. Assuming benefits are paid at the maximum daily amount every day, how many years of LTC benefits does the policy provide?

    • A.2 years
    • B.5 years
    • C.4 years
    • D.3 years
    Show answer and explanationHide answer

    Correct answer: D. 3 years

    Divide the total pool by the daily benefit to get total days: $328,500 ÷ $300 = 1,095 days. Dividing by 365 days/year gives exactly 3 years of coverage at maximum utilization.

    • A. Wrong. Understates the benefit period; $328,500 ÷ $300/day is far more than 2 years' worth of days.
    • B. Wrong. Overstates the benefit period; the math only supports 3 years, not 5.
    • C. Wrong. Overstates the benefit period based on the given pool and daily maximum.
    • D. Correct. $328,500 ÷ $300/day = 1,095 days, which equals exactly 3 years (365 x 3).

Tax Planning

More Tax Planning questions

  1. Question 23, hard

    A parent gifts stock to their adult child. The parent's adjusted basis in the stock is $50,000, and the fair market value on the date of the gift is $30,000. No gift tax was paid. The child later sells the stock for $35,000. What is the child's recognized gain or loss?

    • A.A $15,000 loss, using the parent's carryover basis of $50,000
    • B.A $5,000 gain, using the FMV-at-gift basis of $30,000
    • C.No gain or loss is recognized on the sale
    • D.A $20,000 loss, using the FMV-at-gift basis of $30,000
    Show answer and explanationHide answer

    Correct answer: C. No gain or loss is recognized on the sale

    When gifted property has declined in value (FMV at the gift date is less than the donor's basis), the dual basis rule applies: the donee uses the donor's carryover basis ($50,000) to measure gain, but uses the lower FMV at the gift date ($30,000) to measure loss. Since the $35,000 sale price falls between these two figures. Greater than $30,000 but less than $50,000. No gain or loss is recognized at all. Using $50,000 to compute a loss (A) or $30,000 to compute a gain (B) misapplies which basis governs which direction of the calculation, and D compounds that error.

    • A. A loss can only be calculated using the FMV-at-gift basis ($30,000) when there's a loss, and even then the sale price here ($35,000) is above that FMV, so no loss exists; using the $50,000 carryover basis for a loss is the wrong basis rule for this scenario.
    • B. The gain-basis (donor's carryover basis, $50,000) applies only when the sale price exceeds that carryover basis; since $35,000 is below $50,000, the gain basis doesn't apply, so this isn't a taxable gain scenario.
    • C. Correct. Under the dual-basis gift rule, when FMV at the date of gift is less than the donor's basis, the sale price ($35,000) falls between the loss basis (FMV, $30,000) and the gain basis (donor's basis, $50,000), so no gain or loss is recognized.
    • D. A loss is only recognized when the sale price is below the FMV-at-gift basis; here the sale price ($35,000) exceeds that $30,000 figure, so no loss exists under the dual-basis rule.

  2. Question 24, medium

    A 74-year-old IRA owner subject to Required Minimum Distributions wants to satisfy part of her RMD while minimizing taxable income. Which strategy accomplishes this most directly?

    • A.Withdraw the RMD, pay tax on it, then donate the after-tax proceeds to charity and claim an itemized deduction on that year's return, subject to AGI percentage limits
    • B.Direct the IRA custodian to transfer up to the annual Qualified Charitable Distribution limit directly to a qualified charity, which counts toward the RMD and is excluded from taxable income
    • C.Convert the entire IRA to a Roth IRA before taking the RMD for the year, so that the conversion itself satisfies the required distribution for that year
    • D.Take the RMD in-kind as shares of employer stock and elect net unrealized appreciation treatment, so only the original cost basis is taxed now and the rest is taxed later at capital gain rates
    Show answer and explanationHide answer

    Correct answer: B. Direct the IRA custodian to transfer up to the annual Qualified Charitable Distribution limit directly to a qualified charity, which counts toward the RMD and is excluded from taxable income

    A Qualified Charitable Distribution (QCD), transferred directly from the IRA custodian to a qualified charity, counts toward satisfying the RMD without being included in the account owner's taxable income. A more tax-efficient path than withdrawing, being taxed, and then deducting the after-tax donation as an itemized deduction.

    • A. Wrong. This path still includes the RMD in taxable income first, and the itemized deduction may not fully offset it (and gives no benefit if the taxpayer does not itemize), so it is less direct than a QCD.
    • B. Correct. A Qualified Charitable Distribution (QCD) sent directly from the IRA custodian to a qualified charity, up to the annual QCD limit, counts toward satisfying the RMD while being excluded entirely from taxable income.
    • C. Wrong. An amount converted to a Roth cannot satisfy the RMD; the RMD must be taken first, and the conversion would increase current taxable income.
    • D. Wrong. Net unrealized appreciation treatment is available only for lump-sum distributions of employer stock from a qualifying employer plan, not from an IRA. An in-kind IRA distribution is taxed at the full fair market value of the shares in the year received, so taxable income is not reduced.

  3. Question 25, easy

    An investor in a 35% marginal federal tax bracket compares a 4% federally tax-exempt municipal yield with a taxable bond of similar risk and maturity. Ignoring state tax and other complications, what is the municipal bond's taxable-equivalent yield?

    • A.2.60%
    • B.6.15%
    • C.5.40%
    • D.4.00%
    Show answer and explanationHide answer

    Correct answer: B. 6.15%

    Taxable-equivalent yield = 4% / (1 - 0.35) = 6.15%. Credit, call, liquidity and state-tax differences can still affect the choice.

    • A. This multiplies 4% by (1 - 0.35), which gives the after-tax yield of a taxable bond, not the equivalent yield.
    • B. Correct: 4% / 0.65 is about 6.15%.
    • C. This adds 35% of 4% to the yield instead of dividing by one minus the tax rate.
    • D. This equals the municipal yield and ignores the tax advantage.

Sources

Federal regulations

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