ChFC Retirement Planning Practice Questions

Correct answer: C. $32,000

Since she is age 50 or older, she may make the standard $24,000 elective deferral plus the $8,000 age-50 catch-up, for a total maximum deferral of $32,000 this year.

• AA. $24,000 is only the regular elective deferral limit; it ignores the $8,000 catch-up available to her because she is 50 or older.
• BB. $28,000 doesn't match either limit alone or the combined total. It understates the full deferral she's permitted.
• CC. As someone age 50+, she may defer the regular $24,000 limit plus the $8,000 catch-up contribution, totaling $32,000.
• DD. $40,000 overstates her elective deferral limit; it doesn't correspond to the stated deferral and catch-up figures.

• Source: IRS: Retirement topics - 401(k) and profit-sharing plan contribution limits, accessed October 2026

Correct answer: C. A cash balance defined benefit plan maintained alongside the existing 401(k)/profit-sharing plan

Cash balance plans are defined benefit plans that use actuarial funding to target a specific benefit, allowing substantially larger tax-deferred contributions than defined contribution limits alone. Particularly for older, highly compensated owners with a short remaining time horizon to retirement. When layered on top of an existing 401(k)/profit-sharing plan, a cash balance plan is a common strategy for owner-dominated professional practices seeking maximum tax-deferred savings.

• AA. A SIMPLE IRA has a much lower contribution ceiling than a 401(k) and would not add capacity beyond what she already has.
• BB. A SEP IRA is a defined contribution plan subject to the same overall annual-additions limit as the 401(k)/profit-sharing plan, so it does not add incremental capacity and would require terminating the existing plan.
• CC. Correct. A cash balance plan's actuarial funding can substantially exceed DC limits for an older, high-income owner.
• DD. 457(b) plans are available only to governmental and certain tax-exempt employers, not a private medical practice, so this is not an option for her.

• Source: IRC section 415 (limits on benefits and contributions), accessed October 2026
• Source: IRS: Retirement topics - Defined benefit plan benefit limits, accessed October 2026

Correct answer: C. She may still make the contribution, but it is nondeductible; her basis is tracked on Form 8606.

Being an active participant in an employer plan only affects the deductibility of a traditional IRA contribution above certain income thresholds. It does not bar the contribution itself (subject to earned income and contribution limits). Above the phase-out range, the contribution becomes nondeductible, and the client's basis is tracked via Form 8606 so it isn't taxed again at distribution.

• AA. A partial deduction is available only while modified AGI falls inside the phase-out range. Her income is well above the range, so the deduction is fully eliminated, not reduced.
• BB. Active participation in an employer plan does not bar a traditional IRA contribution, so there is no excess contribution and no 6% excise tax. It only limits or eliminates the deduction.
• CC. Correct. She may still contribute, but because her income is above the phase-out range as an active participant, the contribution is nondeductible; nondeductible basis is tracked on Form 8606 to avoid double taxation later.
• DD. Phase-out ranges apply to single filers who are active participants as well as to joint filers. Single filers have their own, lower range, and her income is above it, so no deduction is allowed.

• Source: 26 U.S.C. § 219, accessed October 2026

Correct answer: C. The employee may make catch-up contributions to both the 401(k) and the IRA, since both catch-up provisions begin at age 50

Both 401(k) plans and traditional/Roth IRAs permit catch-up contributions beginning in the year a participant turns 50. A 55-year-old is eligible for catch-up contributions to both account types simultaneously (subject to each plan's own base and catch-up limits).

• AA. Incorrect. IRA catch-ups also begin at age 50, not 59½.
• BB. Incorrect. There is no service-length requirement, with the same employer or otherwise, for 401(k) catch-up eligibility; it is purely age-based (50+).
• CC. Correct. Age 50 is the uniform catch-up eligibility threshold across both plan types.
• DD. Incorrect. The 401(k) catch-up and the IRA catch-up are separate allowances with separate limits. An eligible employee age 50 or older can use both in the same year, and there is no combined cap that forces a choice between them.

• Source: Exam outline: The American College ChFC designation (courses), accessed October 2026

Correct answer: C. Defined benefit plan

In a defined benefit plan, the employer promises a specific retirement benefit and bears the investment risk of funding it. Defined contribution plans (including profit-sharing plans, 401(k)s and money purchase pension plans) instead shift investment risk to the participant, whose eventual benefit depends on account performance.

• AA. A profit-sharing plan is a qualified defined contribution plan. The employer contributes a discretionary amount to individual accounts, and the employee bears the investment risk because the eventual benefit depends on account performance.
• BB. A 401(k) is a type of defined contribution plan, where investment risk falls on the employee's account, not the employer.
• CC. A defined benefit plan obligates the employer to fund a promised benefit, placing the investment risk primarily on the employer.
• DD. A money purchase pension plan is a qualified plan with a fixed, required employer contribution rate. The employer's obligation ends once it makes that contribution, and the employee bears the investment risk. It does not promise a set retirement benefit.

• Source: Exam outline: The American College ChFC designation (courses), accessed October 2026

Correct answer: C. $8,000

The pro-rata rule requires all traditional IRAs to be aggregated to determine the nontaxable percentage: $20,000 basis / $100,000 total value = 20% nontaxable. Applying that ratio to the $10,000 conversion, 20% ($2,000) is a nontaxable return of basis and 80% ($8,000) is taxable income, regardless of which specific IRA or dollars are nominally converted.

• AA. Incorrect. Taxpayers cannot cherry-pick after-tax dollars for conversion; all traditional IRAs are aggregated and pro-rated.
• BB. This is the nontaxable (basis) portion of the conversion, not the taxable portion the question asks for.
• CC. Correct. 80% of the $10,000 conversion ($8,000) is taxable under the pro-rata rule.
• DD. Ignores the individual's after-tax basis entirely; not all conversion dollars are taxable when nondeductible contributions exist.

• Source: IRC section 408 (IRAs; SEP; SIMPLE IRA; IRA rollovers), accessed October 2026

Correct answer: A. The plan must provide a minimum benefit or contribution to non-key employees and may require accelerated vesting

Top-heavy rules exist to protect rank-and-file (non-key) employees when a plan's benefits are concentrated among key employees. They require minimum benefits/contributions for non-key employees and can accelerate vesting schedules. They apply to both defined benefit and defined contribution plans, and don't disqualify the plan outright.

• AA. A top-heavy plan must provide a minimum benefit or contribution to non-key employees and may be required to use an accelerated vesting schedule.
• BB. Top-heavy rules are specifically designed to protect non-key employees, not just highly compensated employees.
• CC. Top-heavy rules apply to both defined contribution and defined benefit qualified plans, each with its own minimum benefit/contribution requirement.
• DD. Top-heavy status doesn't disqualify a plan; it triggers corrective minimum contribution/benefit and vesting requirements, not loss of qualification.

• Source: IRC section 416 (top-heavy plan rules), accessed October 2026