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CFP Retirement Savings and Income Planning Practice Questions

Official outline
CFP Board Principal Knowledge Topics (2021 practice analysis)
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7
Updated
Nov 3, 2026
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18%

  1. Question 1, hard

    Under SECURE 2.0, once the applicable effective date arrives, employees age 50+ whose prior-year FICA wages from their employer exceeded the indexed threshold must make their 401(k) catch-up contributions in which form?

    • A.Pre-tax only
    • B.Roth (after-tax) contributions
    • C.Either pre-tax or Roth, at the employee's election
    • D.Pre-tax, but capped at a reduced catch-up limit
    Show answer and explanationHide answer

    Correct answer: B. Roth (after-tax) contributions

    SECURE 2.0 requires that catch-up contributions from higher-income employees (those with prior-year wages from that employer above the indexed threshold) be made on a Roth (after-tax) basis, provided the plan offers a Roth option; if the plan has no Roth feature, those employees cannot make catch-up contributions at all under the rule.

    • A. Wrong. This is the opposite of the SECURE 2.0 requirement; affected high earners lose the pre-tax catch-up option.
    • B. Correct. SECURE 2.0 requires catch-up contributions from age-50+ employees whose prior-year wages from that employer exceeded the indexed threshold to be made as Roth (after-tax) contributions.
    • C. Wrong. Employee choice between pre-tax and Roth is the general rule for catch-ups. For employees above the prior-year FICA wage threshold, the statute removes that choice and requires Roth treatment.
    • D. Wrong. SECURE 2.0 does not reduce the catch-up limit for high earners. It changes the tax treatment, so the catch-up must be Roth, and the pre-tax option is not available at any amount.

  2. Question 2, medium

    A high-income taxpayer's modified AGI exceeds the Roth IRA contribution phase-out range, making a direct Roth contribution unavailable. Which strategy allows the taxpayer to still fund a Roth-type account, subject to tax on any pre-tax amounts converted?

    • A.Contribute to a deductible Traditional IRA, which converts to Roth status automatically after a five-year holding period
    • B.Make the direct Roth IRA contribution and then recharacterize it as a Traditional IRA contribution to avoid the income limit
    • C.Make the Roth contribution through a spousal IRA, which has a higher income phase-out range than the taxpayer's own
    • D.A 'backdoor Roth'. Contributing to a nondeductible Traditional IRA and then converting it to a Roth IRA
    Show answer and explanationHide answer

    Correct answer: D. A 'backdoor Roth'. Contributing to a nondeductible Traditional IRA and then converting it to a Roth IRA

    Since there is no income limit on nondeductible Traditional IRA contributions or Roth conversions, a high-income taxpayer can make a nondeductible Traditional IRA contribution and convert it to a Roth IRA. The 'backdoor Roth.' Pre-tax amounts (earnings, or basis from other pre-tax IRA funds under the pro-rata rule) are taxed on conversion, but this provides Roth-type access despite exceeding the direct contribution phase-out. The alternatives fail: a deductible Traditional IRA does not convert to Roth status automatically after any holding period, a conversion must be elected rather than happening on its own; recharacterizing a Roth contribution as Traditional does not create a Roth account, and the contribution would no longer be in the Roth IRA; and a spousal IRA is subject to the same Roth income limits based on the couple's modified AGI, not a higher range of its own.

    • A. Wrong: no rule converts a Traditional IRA to Roth status after a holding period. Roth status requires an actual conversion, which is taxable on pre-tax amounts. The five-year rule only affects whether Roth distributions are qualified.
    • B. Wrong: recharacterization moves a contribution out of a Roth IRA and into a Traditional IRA, so the money ends up in a Traditional account and not a Roth. It corrects a contribution, and it does not fund a Roth above the income limit.
    • C. Wrong: a spousal IRA only lets a nonworking spouse use the working spouse's income. Roth eligibility is still based on joint modified AGI against the same phase-out ranges, so it gives no higher limit.
    • D. Correct. The backdoor Roth (nondeductible traditional IRA contribution followed by a Roth conversion) has no income limit, letting high earners fund a Roth-type account, with tax owed only on any pre-tax amounts converted.

  3. Question 3, medium

    An employee retiring from a company with highly appreciated employer stock inside her 401(k) is evaluating a Net Unrealized Appreciation (NUA) strategy as part of a lump-sum distribution. Which statement about NUA is correct?

    • A.At distribution, the employee pays ordinary income tax only on the stock's original cost basis; the appreciation (NUA) is taxed later at long-term capital gains rates when the stock is sold, regardless of holding period after distribution
    • B.At distribution, the employee pays ordinary income tax on the stock's cost basis, and the appreciation (NUA) is permanently excluded from income tax as long as the shares are held at least one year after distribution, and the 10% penalty is waived on the cost basis at any age
    • C.NUA treatment applies when the employee rolls the employer stock into a rollover IRA within 60 days, after which the appreciation is taxed at long-term capital gains rates on later sales of the shares from the IRA
    • D.NUA treatment is available to an employee who has reached age 65 at the time of the lump-sum distribution, provided the employer stock has been held inside the plan for at least ten years before distribution
    Show answer and explanationHide answer

    Correct answer: A. At distribution, the employee pays ordinary income tax only on the stock's original cost basis; the appreciation (NUA) is taxed later at long-term capital gains rates when the stock is sold, regardless of holding period after distribution

    With an NUA strategy, employer securities are distributed in-kind (not rolled to an IRA) as part of a qualifying lump-sum distribution. At distribution, ordinary income tax applies only to the stock's cost basis; the net unrealized appreciation is taxed at long-term capital gains rates upon a later sale, and the usual holding-period requirement for long-term treatment is waived for the NUA portion.

    • A. Correct. This is the core NUA mechanism.
    • B. Incorrect. The appreciation is still taxed, just at capital gains rates upon sale rather than ordinary rates at distribution; it's not tax-free, and the early-distribution penalty is not waived on the cost basis portion at any age.
    • C. Incorrect. NUA requires an in-kind distribution of the stock outside the IRA wrapper; rolling the shares into an IRA forfeits NUA treatment and later IRA withdrawals are taxed as ordinary income.
    • D. Incorrect. There is no age-65 or ten-year plan-holding requirement; eligibility turns on a qualifying lump-sum distribution of the plan balance following a triggering event.

  4. Question 4, medium

    A retiree has taxable, pretax and Roth assets, with taxable income varying across years. What is a prudent approach to withdrawal sequencing?

    • A.Exhaust Roth assets first because distributions are tax free and the remaining pretax balance can then continue to grow deferred.
    • B.Coordinate withdrawals and possible conversions with multi-year marginal tax brackets, RMDs, and estate goals.
    • C.Exhaust taxable assets first as a fixed rule, deferring pretax and Roth withdrawals for as many years as possible whatever the bracket outcome.
    • D.Select account withdrawals in proportion to current balances, treating pretax, Roth and taxable dollars as equivalent in after-tax value.
    Show answer and explanationHide answer

    Correct answer: B. Coordinate withdrawals and possible conversions with multi-year marginal tax brackets, RMDs, and estate goals.

    Rigid ordering rules miss chances to smooth marginal rates and preserve flexible balances. An integrated policy weighs gain realization, Medicare effects, RMD timing and beneficiaries.

    • A. Spending the most tax-advantaged Roth dollars first forgoes tax-free growth and flexibility, and is not a prudent default.
    • B. Correct: withdrawals should be coordinated across brackets, RMDs and legacy goals.
    • C. A fixed taxable-first rule can push later pretax withdrawals and RMDs into higher brackets.
    • D. Pretax, Roth and taxable dollars carry different tax character, so balance-proportional withdrawals ignore real tax differences.

  5. Question 5, easy

    Which of the following is a key difference between a Roth 401(k) and a Roth IRA?

    • A.Roth 401(k) contributions are subject to the same income limits as Roth IRA contributions
    • B.Roth 401(k)s have no income limit on participant eligibility to contribute, unlike Roth IRAs which phase out at higher income levels
    • C.Roth 401(k) earnings are always taxable upon qualified withdrawal, unlike Roth IRA earnings
    • D.Roth 401(k)s do not allow employer matching contributions
    Show answer and explanationHide answer

    Correct answer: B. Roth 401(k)s have no income limit on participant eligibility to contribute, unlike Roth IRAs which phase out at higher income levels

    Unlike Roth IRAs, which restrict or eliminate contribution eligibility above certain modified AGI thresholds, Roth 401(k)s have no income limit on employee eligibility to make Roth contributions. Qualified withdrawals from both Roth 401(k)s and Roth IRAs are tax-free when requirements are met, so C is incorrect. Employer contributions can still be made alongside a Roth 401(k) arrangement, so D is also incorrect.

    • A. This reverses the actual distinction. Roth IRAs have income phase-out limits on contribution eligibility, while Roth 401(k)s do not.
    • B. Correct. Unlike Roth IRAs, which phase out contribution eligibility at higher income levels, Roth 401(k)s have no income limit restricting who can contribute.
    • C. Qualified Roth 401(k) withdrawals are tax-free just like qualified Roth IRA withdrawals, provided the age and holding period requirements are met; this answer incorrectly claims they're always taxable.
    • D. Roth 401(k)s can absolutely receive employer matching contributions (though the match itself is typically credited to a pre-tax/traditional sub-account); this restriction doesn't exist.

  6. Question 6, medium

    A 55-year-old non-spouse individual inherits a traditional IRA in 2026 from a friend who died at age 70, after reaching their required beginning date. The individual is not an eligible designated beneficiary. Under current SECURE Act rules, what distribution requirement generally applies?

    • A.The beneficiary must withdraw the entire account within 10 years of the owner's death, and because the owner died after their required beginning date, must also generally take annual RMDs during years 1. 9 of that period
    • B.The beneficiary may stretch distributions over their own single life expectancy starting the year after death, because a non-spouse who inherits after the owner's required beginning date keeps the lifetime payout option
    • C.The beneficiary must withdraw the entire account by the end of the fifth year after the owner's death, generally with no annual distributions needed before then, because the owner had already passed their required beginning date
    • D.The beneficiary can elect to treat the inherited IRA as their own and delay distributions until their own required beginning date, because the owner had already reached their required beginning date at death
    Show answer and explanationHide answer

    Correct answer: A. The beneficiary must withdraw the entire account within 10 years of the owner's death, and because the owner died after their required beginning date, must also generally take annual RMDs during years 1. 9 of that period

    Under the SECURE Act, most non-spouse designated beneficiaries who are not 'eligible designated beneficiaries' (such as minor children of the owner, disabled or chronically ill individuals, or beneficiaries not more than 10 years younger than the decedent) must fully distribute an inherited IRA within 10 years of the owner's death. IRS guidance clarified that when the original owner died on or after their required beginning date, the beneficiary must also take annual RMDs in years 1 through 9 of that period, in addition to fully depleting the account by the end of year 10.

    • A. Correct. The 10-year rule applies along with required annual RMDs in years 1. 9.
    • B. Incorrect: the SECURE Act removed the lifetime stretch for designated beneficiaries who are not eligible designated beneficiaries, for deaths after 2019. The owner dying after the required beginning date does not restore it. Life-expectancy payouts are limited to spouses, minor children of the owner, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the owner.
    • C. Incorrect: the 5-year rule generally applies only when the owner died before the required beginning date and there is no designated beneficiary, such as an estate. A named individual is a designated beneficiary and falls under the 10-year rule. Because this owner died after the required beginning date, annual RMDs also generally apply in years 1-9, so the account cannot simply sit untouched until the end of the period.
    • D. Incorrect. Only a surviving spouse may treat an inherited IRA as their own; a non-spouse beneficiary cannot, whatever the owner's age at death.

  7. Question 7, medium

    A client currently earns $120,000 per year in gross income. Their financial planner estimates the client will need approximately 80% of pre-retirement gross income to maintain their standard of living in retirement, factoring in reduced savings needs, payroll tax elimination, and modestly lower expenses. Approximately how much annual retirement income should this client target using the income replacement ratio approach?

    • A.$80,000
    • B.$96,000
    • C.$100,000
    • D.$24,000
    Show answer and explanationHide answer

    Correct answer: B. $96,000

    The income replacement ratio approach targets a percentage of pre-retirement gross income. Commonly in the 70-85% range depending on the client's specific circumstances. As the retirement income goal. Applying an 80% replacement ratio to $120,000 yields a target of $96,000 ($120,000 × 0.80). Answer A misreads the percentage as a flat dollar amount, C rounds imprecisely without doing the multiplication, and D reflects only the 20% reduction rather than the 80% target itself.

    • A. This treats the 80% replacement figure as if it were the dollar target itself, rather than applying it to the client's $120,000 income.
    • B. Correct. Target retirement income = 80% x $120,000 = $96,000 under the income replacement ratio approach.
    • C. This assumes a higher replacement ratio than the 80% given in the scenario.
    • D. This is the 20% reduction amount (the gap not replaced), not the target retirement income itself.

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