CFP Case Studies & Practical Application 2

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?

Accepted Answer

Run a Monte Carlo simulation using inflation-adjusted withdrawals

Answer

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?

Accepted Answer

The pro-rata rule will make most of the conversion taxable

Answer

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?

Accepted Answer

Establish an Irrevocable Life Insurance Trust (ILIT)

Answer

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?

Accepted Answer

Solo 401(k) with employee + employer contributions

Answer

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?

Accepted Answer

$90,000 long-term capital gain and $60,000 unrecaptured Section 1250 gain

Answer

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.

CFP - Certified Financial Planner Practice Test

CFP - Certified Financial Planner Practice Test

CFP Case Studies & Practical Application 2