Ultimate Certified Financial Planner Flashcards

Which investment risk measure captures the variability of returns below a target return threshold, making it particularly relevant for goals-based financial planning?

Answer: Semivariance (downside deviation)

Semivariance or downside deviation measures only the volatility of returns that fall below a target, making it more relevant than standard deviation for investors focused on avoiding shortfalls.

A client is 67 years old and still working. They are covered by their employer's group health plan. How does Medicare coordinate with their employer coverage?

Answer: Employer plan is primary; Medicare is secondary for employers with 20+ employees

For employers with 20 or more employees, the employer group health plan is the primary payer and Medicare acts as secondary coverage when an active employee is covered by both.

A client has $200,000 in a 529 plan for a child who receives a full athletic scholarship. Which option avoids the 10% penalty on earnings when withdrawing the funds?

Answer: Both B and C are penalty-free options

Withdrawals up to the scholarship amount are exempt from the 10% penalty (earnings are still taxable as income), and the account can also be transferred to a qualifying family member's 529 account penalty-free.

In a defined benefit pension plan, which party bears the investment risk?

Answer: The employer/plan sponsor

In a defined benefit plan, the employer bears the investment risk because they are obligated to pay the promised benefit regardless of investment performance.

A client exercises non-qualified stock options (NQSOs) when the fair market value is $50/share and the exercise price is $20/share. What is the tax treatment of the $30/share spread at exercise?

Answer: Ordinary income taxed in the year of exercise

The spread on NQSO exercise ($30/share) is treated as ordinary income and is subject to income tax and FICA withholding in the year of exercise.

A client is comparing a 15-year mortgage at 5.5% versus a 30-year mortgage at 6.0% for a $400,000 home. What is the most important planning consideration beyond the monthly payment difference?

Answer: The difference in monthly payments should be evaluated against the opportunity cost of investing the savings

The key planning consideration is whether investing the monthly payment difference from the 30-year mortgage could generate returns that exceed the interest cost, making the opportunity cost analysis critical.

Under ERISA, which of the following is a fiduciary responsibility of a 401(k) plan sponsor when selecting investment options?

Answer: Conducting a prudent process to evaluate and monitor plan investments

ERISA requires plan fiduciaries to follow a prudent process when selecting and monitoring investments, not to guarantee outcomes or adhere to any specific number of fund choices.