CFP Practice Exam #1 Flashcards
A married couple, both age 30, have a joint adjusted gross income (AGI) of $120,000. One has contributed $1,000 to a traditional IRA. What is the total amount that the couple can contribute to Roth IRAs this year?
A) $0
B) $5,000
C) $11,000
D) $12,000
C
$6,000 is the maximum amount per individual under the age of 50 that can be contributed to IRAs in any single year. $6,000*2=$12,000 - $1,000 already contributed = $11,000
Maria age 43, and Julie, age 35, have a combined annual income of $96,000. They are new parents to Samuel and plan to invest $2,000 per year for his college education. They both graduated from an expensive private college and would like Samuel to go there as well. They want to save in a way that maximized tax efficiency and Samuel’s chances of qualifying for financial aid. Which strategy would best meet their needs.
A) Invest in Samuel’s name use a UTMA Account
B) Invest in a Coverdell Education Savings Account for Samuel
C) Make Contributions to Maria’s Roth IRA
D) Make Contributions to Julio’s Roth IRA
C
At 61, Maria can withdraw any amount from her Roth IRA tax-free. A parent’s retirement plan is exempt from FAFSA, therefore Maria’s Roth IRA is the best answer.
A couple wants to save as much money as possible for the education of their two young children, particularly now while they have over 15 years for the assets to grow. The couple has just received an inheritance of $300,000 and wants to put all of it toward this purpose. Assuming their adjusted gross income (AGI) is $75,000, which of the following would best accomplish the couple’s goal.
A) Coverdell Education Savings Account
B) Section 529 Qualified Tuition Plan
C) Laddered Treasury Portfolio
D) UTMA Account
B
The section 529 qualified tuition plan will allow them to put $150,000 into an account for each child which will grow tax-free without gift tax implications as long as they choose five-year frontloading and file form 709.
When does CFP Board’s Code of Ethics and Standards of Conduct say that a CFP professional must act as a fiduciary?
A) When providing financial advice
B) When providing comprehensive financial planning
C) When providing tax advice
D) When providing investment advice
A
When providing any and all types of financial advice.
A client has a fully amortizing 15-year mortage of $50,000 at 7% interest. Which of the following is the approximate amount of interest the client will pay over the mortgage term, based on equal monthly payments over the term of the loan?
A) $30,895
B) $52,495
C) $62,395
D) $80,895
A
Steps:
-50,000 [PV]
7/12 [i]
1512=180 [n]
0 [FV]
[PMT]=449.41
449.41180=80,893.80-50,000=$30,894
A company provides a defined contribution retirement plan for its employees that allows each participant to exercise control over the investment options. The options range from conservative to speculative and satisfy the requirements of ERISA Sec 404(c). The company has provided educational information to the employees to help them make appropriate choices. Recently, many individual accounts have incurred losses due to speculative allocation of assets. Several plan participants want to hold the fiduciary responsible for the losses. Regarding the losses resulting from the selection of speculative investments, the fiduciary is responsible for
A) None of the losses
B) 50% of the losses incurred by participants over age 55
C) 100% of the losses and must allocate funds to cover
D) 100% of the losses and must pay 5% penalty on the losses
A
Since the company elected ERISA, provided educational information to participants, and provided a diversified pool of investments, this allows the employee to select their own investments and assume complete liability for any losses.
A married individual, age 52, is a participant in an employer-sponsored SIMPLE IRA plan to which he defers $6,000. The individual’s spouse, age 49, has earned income. The couple filed a joint income tax return for this year and reported a modified adjusted gross income of $210,000. The maximum combined ROTH IRA contribution the couple is able to make is
A) $0
B) $6,000
C) $12,000
D) $14,000
A
The phase-out range for ROTH eligibility is $198,000-208,000 for those filing married filing jointly, so neither spouse can contribute.
Glenn is a marketing executive for ABC Company. ABC provides a comprehensive benefits package that includes short-term disability coverage. ABC has purchased a group policy to fund this benefit, and neither Glenn nor any other ABC employees pay any part of the premiums for the policy. Which of the following statements describes the income tax consequences of this plan to ABC and Glenn?
A) ABC can deduct the premiums from its gross income and Glenn will be taxed on the benefits that he received under the policy.
Which of the following statements regarding the behavior of bonds is true?
A) Given two bonds of the same maturity time and yield to maturity, the bond with the lower coupon rate will have a higher duration and interest rate sensitivity.
B) Given two bonds of the same coupon rate, the bond with the lower duration will have a higher interest rate sensitivity.
C) The duration of a zero coupon bond is less than the time to maturity.
D) Reinvestment opportunities play no part in the determination of bond duration and bond price sensitivity.
A
Duration is a measure of the bond as it relates to interest rates. Lower coupon rates skew the cash flows toward the maturity date which increases the duration.
A client owns a condominium and has a standard HO-6 policy. A recent windstorm caused $2,000 of damage to the roof of the condominium. What amount might be recovered from the policy?
A) $0
B) $1,000
C) $1,600
D) $2,000
A
The damage to the roof of the condominium building will not be covered by an individual unit owner’s HO-6 policy. The master building policy purchased by the homeowner’s association covers all common elements of ownership.
Frank is self-employed and has decided to save for his retirement in 3 years. Frank has consistent Schedule C net income of $220,000 and he contributed $30,000 into a money purchase plan on the last day of each year. How much will his retirement account be worth at his retirement if he achieves 8% growth on his investments?
$97,392
A client who is an accredited investor is convinced that stock market prices will rise significantly over the next year. Which of the following investment strategies is the most appropriate for such an investor?
A) Sell an index call and buy an index put
B) Sell a money market fund and buy an index call
C) Sell an index call and sell and index put
D) Sell a money market fuck and buy an index put
B
An index call option would increase in value in a rising market.
A client who is a non-owner employee earning $50,000 has been told that her employer’s 401(k) has just become top-heavy. Which of the following statements accurately describes her situation?
A) The plan’s cliff vesting schedule may be increased from 3 to 5 years.
B) The pension benefit guaranty corporation can terminate the employer’s plan.
C) non-key participants must receive a minimum employer contribution of at least 3% of their compensation if key-employees participate.
D) the plan will be deemed disqualified according to ERISA regulations, and participants will need to roll over assets to a traditional IRA.
C
This is mandated by top-heavy rules
A retired client wants to invest the proceeds of a maturing certificate of deposit (CD) to generate current income. The client and spouse are satisfied that their heirs are sufficiently provided for without the funds in the CD. Which of the following would provide the highest after-tax income in conjunction with estate tax efficiency?
A) A single premium deferred annuity
B) A laddered portfolio of municipal bonds
C) An equity income mutual fund
D) A point and survivor immediate annuity
D
The joint and survivor immediate annuity provides an immediate income stream that will be tax-advantaged because a portion of each payment will be considered recovery of basis.
A married couple established a charitable remained unitrust with $100,000 of stock that has a cost basis of $10,000. Their adjusted gross income (AGI) this year is $100,000. What would be the maximum charitable income tax deduction available to the couple in the year the trust was established.
A) $10,000
B) $30,000
C) $60,000
D) $100,000
B
Charitable deduction of appreciate stock is limited to 30% of the taxpayers adjusted gross income. Therefore, the maximum is $30,000. $100,000 AGI * 30%)
