FiCEP Finance 5 — Questions and Answers
Question 1: A client is enrolled in a High-Deductible Health Plan (HDHP). Which tax-advantaged account is specifically available to them for medical expenses?
- Flexible Spending Account (FSA)
- Health Savings Account (HSA) (Correct answer)
- Health Reimbursement Arrangement (HRA)
- Dependent Care FSA
Correct answer: Health Savings Account (HSA)
HSAs are exclusively available to individuals enrolled in qualifying HDHPs and offer triple tax advantages for medical expenses.
Question 2: Which credit scoring factor typically carries the greatest weight in a FICO score calculation?
- Length of credit history
- Credit mix
- Payment history (Correct answer)
- New credit inquiries
Correct answer: Payment history
Payment history accounts for approximately 35% of a FICO score, making it the single most influential factor.
Question 3: A client has $10,000 in credit card debt at 22% APR and $5,000 in a student loan at 5% APR. The avalanche method would prioritize repayment of which debt first?
- Student loan, because it has the smaller balance
- Credit card debt, because it has the higher interest rate (Correct answer)
- Student loan, because federal loans have tax-deductible interest
- Both equally, splitting extra payments between them
Correct answer: Credit card debt, because it has the higher interest rate
The avalanche method targets the highest-interest debt first to minimize total interest paid over time, regardless of balance size.
Question 4: In the context of retirement planning, what does the term 'sequence of returns risk' refer to?
- The risk that a retiree will outlive their assets due to poor investment returns early in retirement (Correct answer)
- The danger of investing retirement funds in the wrong sequence of asset classes
- The risk that Social Security payments will decrease over time
- The possibility that tax rates will change during retirement
Correct answer: The risk that a retiree will outlive their assets due to poor investment returns early in retirement
Sequence of returns risk is the danger that poor early-retirement investment returns, combined with withdrawals, can permanently deplete a portfolio even if long-term average returns are adequate.
Question 5: A client asks about the difference between a traditional IRA and a Roth IRA. Which statement correctly distinguishes them?
- Traditional IRA contributions may be tax-deductible now; Roth IRA qualified withdrawals are tax-free (Correct answer)
- Roth IRA contributions are tax-deductible; traditional IRA withdrawals are tax-free
- Both offer tax-deductible contributions and tax-free withdrawals
- Traditional IRAs have no contribution limits while Roth IRAs do
Correct answer: Traditional IRA contributions may be tax-deductible now; Roth IRA qualified withdrawals are tax-free
Traditional IRAs offer potential upfront tax deductions with taxable withdrawals, while Roth IRAs use after-tax contributions for tax-free qualified distributions.
Question 6: Which federal law requires lenders to disclose the Annual Percentage Rate (APR) and total finance charges to borrowers before credit is extended?
- Fair Credit Reporting Act (FCRA)
- Truth in Lending Act (TILA) (Correct answer)
- Equal Credit Opportunity Act (ECOA)
- Fair Debt Collection Practices Act (FDCPA)
Correct answer: Truth in Lending Act (TILA)
The Truth in Lending Act (TILA), implemented through Regulation Z, mandates standardized disclosure of credit costs including APR and finance charges.
Question 7: A client's net worth is calculated by subtracting their total liabilities from their total assets. If a client has $180,000 in assets and $95,000 in liabilities, what is their net worth?
- $85,000 (Correct answer)
- $95,000
- $180,000
- $275,000
Correct answer: $85,000
Net worth equals total assets minus total liabilities: $180,000 − $95,000 = $85,000.
FiCEP Finance 5
A client is enrolled in a High-Deductible Health Plan (HDHP).
Which tax-advantaged account is specifically available to them for medical expenses?