CFP Case Studies & Practical Application 2 — Questions and Answers
Question 1: A 58-year-old client wants to retire at 62 with $1.2M saved. She expects to live to 90 and needs $60,000/year (today's dollars). Inflation is 3%, portfolio return is 6%. Which analysis best determines if she can retire as planned?
- Calculate simple interest on $1.2M at 6%
- Run a Monte Carlo simulation using inflation-adjusted withdrawals (Correct answer)
- Divide $1.2M by $60,000 to get a 20-year runway
- Assume Social Security will cover any shortfall
Correct answer: Run a Monte Carlo simulation using inflation-adjusted withdrawals
Monte Carlo simulation accounts for sequence-of-returns risk and inflation variability over a 28-year horizon, providing probability-based retirement sustainability.
Question 2: David, age 45, earns $180,000 and has maxed his 401(k). His marginal tax rate is 32%. He asks about a Backdoor Roth IRA. He has a $40,000 traditional IRA from a prior rollover. What issue arises?
- He is too young for Roth conversions
- The pro-rata rule will make most of the conversion taxable (Correct answer)
- Backdoor Roth is only available for income under $100,000
- He must first convert his 401(k) to a Roth 401(k)
Correct answer: The pro-rata rule will make most of the conversion taxable
The pro-rata rule aggregates all traditional IRA balances, making the non-deductible contribution proportionally taxable upon conversion.
Question 3: A couple has $800,000 in assets and $2M in life insurance. They have three minor children and want to avoid probate on the insurance proceeds. Which planning tool is most appropriate?
- Name the estate as beneficiary
- Establish an Irrevocable Life Insurance Trust (ILIT) (Correct answer)
- Use a revocable living trust as beneficiary
- Purchase a variable annuity with the proceeds
Correct answer: Establish an Irrevocable Life Insurance Trust (ILIT)
An ILIT keeps life insurance proceeds out of the taxable estate and out of probate while allowing trustee-managed distribution to minor children.
Question 4: Maria, a self-employed consultant earning $120,000 net, wants to maximize retirement savings. She has no employees. Which plan allows the highest contribution?
- SIMPLE IRA ($16,000 limit)
- SEP-IRA (up to 25% of net earnings)
- Solo 401(k) with employee + employer contributions (Correct answer)
- Traditional IRA ($7,000 limit)
Correct answer: Solo 401(k) with employee + employer contributions
A Solo 401(k) allows both employee deferrals ($23,000 in 2024) plus employer profit-sharing (25% of compensation), enabling higher total contributions than a SEP-IRA.
Question 5: A client sold rental property for $400,000 that he purchased for $250,000 fifteen years ago. He claimed $60,000 in depreciation. What is his total taxable gain and how is it characterized?
- $150,000 long-term capital gain only
- $90,000 long-term capital gain and $60,000 unrecaptured Section 1250 gain (Correct answer)
- $210,000 ordinary income
- $150,000 ordinary income and $60,000 long-term capital gain
Correct answer: $90,000 long-term capital gain and $60,000 unrecaptured Section 1250 gain
The $60,000 of prior depreciation is recaptured as unrecaptured Section 1250 gain taxed at up to 25%, while the remaining $90,000 qualifies as long-term capital gain.
Question 6: A 70-year-old widower has $500,000 in a traditional IRA and no other income. His RMD is $18,248. He is charitably inclined. Which strategy eliminates federal income tax on the distribution?
- Donate the after-tax proceeds to charity and take an itemized deduction
- Qualify the RMD as a Qualified Charitable Distribution (QCD) (Correct answer)
- Roll the RMD into a Roth IRA
- Defer the RMD using a 60-day rollover
Correct answer: Qualify the RMD as a Qualified Charitable Distribution (QCD)
A QCD allows taxpayers age 70½+ to direct up to $105,000 of IRA distributions directly to qualified charities, satisfying the RMD while excluding it from gross income.
Question 7: A 35-year-old client is reviewing her disability insurance policy. Her benefit is $5,000/month and her own-occupation definition ends at age 60, then switches to any-occupation. She earns $120,000. What gap should her CFP address?
- The policy is fully adequate and no gap exists
- The any-occupation definition after 60 could deny benefits if she can work in any job (Correct answer)
- She should cancel disability insurance and self-insure
- She needs long-term care insurance instead
Correct answer: The any-occupation definition after 60 could deny benefits if she can work in any job
The shift to any-occupation at age 60 means she could be denied benefits if she is capable of performing any job, not just her own occupation, leaving significant income exposure.
CFP Case Studies & Practical Application 2
A 58-year-old client wants to retire at 62 with $1.2M saved.
She expects to live to 90 and needs $60,000/year (today's dollars).
Inflation is 3%, portfolio return is 6%.
Which analysis best determines if she can retire as planned?