Mixed Deck — All AFC Topics Flashcards

What distinguishes financial counseling from financial coaching?

Answer: Counseling typically addresses crisis situations while coaching focuses on goal achievement and forward progress

Financial counseling traditionally addresses immediate problems and remedial needs, while coaching focuses on helping clients achieve goals from a stable baseline.

A client dies without a will. What legal process determines how their assets are distributed?

Answer: Probate court applies intestacy laws

When someone dies intestate, the probate court applies state intestacy laws dictating distribution based on a statutory hierarchy of heirs.

A client is self-employed and has no employer-sponsored health insurance. Which marketplace option allows them to deduct 100% of health insurance premiums from their taxable income?

Answer: Self-employed health insurance deduction

Self-employed individuals may deduct 100% of health insurance premiums for themselves and their family as an above-the-line deduction on their federal income tax return.

A client aged 55 wants to withdraw from their 401(k) due to a job loss. Which provision allows penalty-free withdrawals in this scenario?

Answer: Rule of 55

The Rule of 55 allows penalty-free 401(k) withdrawals if you separate from service in or after the year you turn 55.

A client is considering a 15-year mortgage versus a 30-year mortgage for the same loan amount at the same interest rate. Which statement is MOST accurate?

Answer: The 15-year loan has higher monthly payments but significantly less total interest paid

A 15-year mortgage has higher monthly payments but dramatically reduces total interest paid because the principal is repaid in half the time.

What is a target-date fund?

Answer: A fund that adjusts risk based on retirement date

A target-date fund is a professionally managed investment fund designed to simplify retirement planning. It automatically adjusts its asset allocation, becoming more conservative as the investor approaches their specified retirement 'target date.' This means it starts with a higher allocation to stocks and gradually shifts towards bonds as the target date nears.

A client converts $50,000 from a traditional IRA to a Roth IRA. Which of the following statements about this conversion is correct?

Answer: The converted amount is added to ordinary income in the year of conversion and taxed at the client's marginal rate

A Roth conversion is treated as a taxable distribution from the traditional IRA; the converted amount is included in the client's gross income for that year and taxed at ordinary income rates. There is no early withdrawal penalty on conversions, though the 10% penalty may apply to any amounts withheld for taxes unless replaced within 60 days.

What is predatory lending and what warning signs should a financial counselor help clients identify?

Answer: Lending practices that impose unfair, deceptive, or abusive terms on borrowers, including hidden fees, balloon payments, and loan flipping

Predatory lending involves unfair, deceptive, or abusive loan terms designed to benefit the lender at the borrower's expense.

What does the 'kiddie tax' rule primarily affect?

Answer: Unearned income of children under age 19 (or 24 if full-time students) taxed at parental rates

The kiddie tax taxes a child's unearned income (above a threshold) at the parent's marginal rate to prevent income-shifting strategies.

A client's auto insurance shows 100/300/100 liability coverage. What do these numbers represent?

Answer: $100,000 per person bodily injury, $300,000 per accident bodily injury, $100,000 property damage per accident

The split-limit format represents per-person bodily injury, per-accident bodily injury, and per-accident property damage liability limits.

A defined benefit pension plan provides monthly income based on years of service and final salary. What is the key risk this plan transfers to the employer?

Answer: Investment/longevity risk

In a defined benefit plan, the employer bears the investment and longevity risk, guaranteeing a specific monthly benefit regardless of investment performance or how long the retiree lives.

A 60-year-old is evaluating long-term care insurance. What factor most significantly impacts premium cost?

Answer: Age at time of purchase

Age at purchase is the most significant premium factor, with costs increasing substantially each year due to increased likelihood of needing care.

A financial counselor discovers that a client is making only minimum payments on a $10,000 credit card balance at 22% APR. What is the most important concept to explain to the client?

Answer: How compound interest dramatically increases total repayment cost

Understanding how compound interest works on revolving debt is crucial because minimum payments barely cover interest charges, resulting in decades of repayment and thousands in additional interest.

The Community Reinvestment Act (CRA) requires federally regulated banks to:

Answer: Meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods

The CRA was enacted to encourage banks to help meet the credit needs of all segments of their communities, particularly low- and moderate-income areas, combating redlining.

What is the annual gift tax exclusion for 2024 that allows individuals to give gifts without filing a gift tax return?

Answer: $18,000 per recipient

The annual gift tax exclusion for 2024 is $18,000 per recipient, indexed for inflation, allowing gifts up to this amount per person without using the lifetime exemption.

How can credit card debt be managed effectively?

Answer: By paying off the balance in full every month

Credit card debt can be managed most effectively by paying off the balance in full every month. This strategy prevents interest from accruing, saving a significant amount of money over time. If paying in full isn't possible, consistently paying more than the minimum and focusing on high-interest balances can help reduce debt faster and improve financial health.

In estate planning, what does the term 'per stirpes' mean in the context of beneficiary designations?

Answer: A deceased beneficiary's share passes to their descendants

Per stirpes means that if a beneficiary predeceases the account owner, that beneficiary's share passes to their descendants (children).

A client named their estate as beneficiary of their 401(k). Why is this problematic?

Answer: Assets passing through the estate are subject to probate, lose stretch distribution options, and are exposed to creditors

Naming the estate forces retirement assets through probate, eliminates stretch distribution options, and exposes assets to estate creditors.

A client purchased a home for $300,000 with 5% down. At what loan-to-value (LTV) ratio can they typically request cancellation of PMI under the Homeowners Protection Act?

Answer: 80% LTV (20% equity)

The Homeowners Protection Act requires lenders to cancel PMI when the loan balance reaches 80% LTV based on the original purchase price and payment schedule.

A client's debt-to-income ratio is 48%. According to standard financial counseling guidelines, this ratio indicates:

Answer: The client is over-indebted and needs immediate intervention

A debt-to-income ratio above 43% is generally considered over-indebted, requiring immediate attention and a structured repayment plan.