CFP Certified Financial Planner MCQ 4 — Questions and Answers
Question 1: Which college savings vehicle offers the greatest tax advantage and flexibility, including state income tax deductions in many states?
- Coverdell Education Savings Account (ESA)
- 529 College Savings Plan (Correct answer)
- UGMA/UTMA custodial account
- Series EE Savings Bonds
Correct answer: 529 College Savings Plan
529 plans offer tax-free growth and withdrawals for qualified education expenses, higher contribution limits than ESAs, and many states offer income tax deductions for contributions.
Question 2: A client in the 32% tax bracket converts $50,000 from a traditional IRA to a Roth IRA. What is the immediate tax cost of this conversion?
- $0; Roth conversions are not taxable
- $8,000 (16% effective rate on the conversion)
- $16,000 (32% of $50,000) (Correct answer)
- $10,000 (20% long-term capital gains rate)
Correct answer: $16,000 (32% of $50,000)
A Roth IRA conversion is treated as ordinary income; $50,000 converted at the 32% marginal rate results in $16,000 of additional federal income tax.
Question 3: What does the 'safe harbor' rule under Section 4% withdrawal rate assume about a retirement portfolio?
- The portfolio will be entirely in cash equivalents
- A portfolio of 50–75% stocks can sustain 4% annual withdrawals for 30 years (Correct answer)
- Withdrawals are only from bond interest, preserving principal
- Social Security will cover 4% of pre-retirement income
Correct answer: A portfolio of 50–75% stocks can sustain 4% annual withdrawals for 30 years
The 4% rule, based on the Trinity Study, suggests that a diversified portfolio of 50–75% equities can sustain inflation-adjusted annual withdrawals of 4% for a 30-year retirement period.
Question 4: Which disability income insurance provision ensures the policy cannot be cancelled and premiums cannot be raised as long as premiums are paid on time?
- Waiver of premium rider
- Non-cancelable and guaranteed renewable provision (Correct answer)
- Residual disability rider
- Cost-of-living adjustment (COLA) rider
Correct answer: Non-cancelable and guaranteed renewable provision
A non-cancelable and guaranteed renewable provision locks in both the insurer's obligation to continue coverage and the premium rate, providing maximum protection for the insured.
Question 5: A client has $500,000 in a taxable account with a $200,000 cost basis. If they donate the appreciated securities directly to a charity, what is the tax benefit?
- Deduction of $200,000 (cost basis only); capital gain still owed
- Deduction of $500,000 FMV with no capital gains tax due (Correct answer)
- Deduction of $300,000 (appreciation only); capital gain still owed
- No deduction; only cash donations are deductible
Correct answer: Deduction of $500,000 FMV with no capital gains tax due
Donating appreciated securities directly to a qualified charity allows a deduction of the full fair market value ($500,000) while avoiding capital gains tax on the $300,000 appreciation.
Question 6: Which document grants a designated individual legal authority to make financial decisions for a client if the client becomes incapacitated?
- Living will (advance directive)
- Revocable living trust
- Durable power of attorney for finances (Correct answer)
- Testamentary trust
Correct answer: Durable power of attorney for finances
A durable power of attorney for finances remains effective even if the principal becomes incapacitated, granting the agent authority to manage financial matters.
Question 7: An investor's portfolio earned 12% last year. The benchmark returned 10%, the risk-free rate was 3%, and the portfolio's beta is 1.2. What is the portfolio's Jensen's Alpha?
- 2.0%
- 0.6%
- −0.4% (Correct answer)
- 1.2%
Correct answer: −0.4%
Jensen's Alpha = Actual Return − [Rf + Beta × (Rm − Rf)] = 12% − [3% + 1.2 × (10% − 3%)] = 12% − 11.4% = −0.4%, indicating underperformance on a risk-adjusted basis.
CFP Certified Financial Planner MCQ 4
Which college savings vehicle offers the greatest tax advantage and flexibility, including state income tax deductions in many states?