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This document offers a valuable resource for students preparing for the cfp exam. it provides a series of questions and answers covering key topics in financial planning, including investment regulation, monetary and fiscal policy, college funding strategies, student loan management, and estate planning. The detailed explanations make it an excellent study tool.
Typology: Exams
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Who regulates mutual funds? Correct Answer: SEC (Securities and Exchange Commision) Who regulates securities brokers? Correct Answer: FINRA (Financial INdustry Regulatory Authority) Investment Advisers Act of 1940 Correct Answer: Legislation governing who must register with the SEC as an investment adviser. Defines "investment advice." Securities Act of 1933 and Securities Exchange Act of 1934 Correct Answer: 1933: Regulates IPOs 1934: Created SEC to enforce laws, regulates secondary market, defines stock "sales" Securities Investors Protection Act of 1970 Correct Answer: - Established the SIPC to protect investors for losses resulting from brokerage firm failures.
Federal Funds Correct Answer: Deposits that private banks hold on reserve at the Federal Reserve Bank. Pre-College Funding Years Strategies (4) Correct Answer: 1. UGMA/UTMA
higher the financial aid award from the college may be. 20% of child's assets and 5.64% of parents' assets (excluding primary residence or retirement savings). Coverdell Education Savings Account (ESA) Correct Answer: A savings account that allows you to make an annual non-deductible contribution of up to $2,000 per year/per person to a specially designated investment trust account. Earnings are tax free if used for qualified educational expenses: El-Hi, college, grad, room & board, transport, extended day programs, tutoring, any charges by the school. Use before age 30 or roll over to a family member. Subsidized Stafford Loan Correct Answer: Need-based; interest paid by govt. until student leaves school. Available aid calculated after EFC, Pell Grant, other aid. Unsubsidized Stafford Loan Correct Answer: Not need-based; govt. does not pay interest for you while in school; can be undergrad or grad, must fill out FAFSA. 529 Rules (5) Correct Answer: 1. Can change beneficiary to family of original beneficiary.
Complex Trust Correct Answer: A trust that accumulates income over time and is not required to make scheduled distributions to its beneficiaries. Section 303 Correct Answer: Used for estate liquidity. Allows a corporation to make a distribution of a portion of the stock of a decedent that will not be taxed as a dividend.
Basic parts of a Trust (4) Correct Answer: 1. Trust property - "principal" or "corpus"
Group Life Insurance Correct Answer: Provides lower rates for the employer or employee and includes all employees, including new employees, regardless of health or physical condition. Can you continue group life insurance after leaving an employer? Correct Answer: You can convert to individual life insurance when coverage stops. Must convert to permanent life insurance, not term. Taxation of Group Life Insurance Correct Answer: If total coverage exceeds $50k, the employee is taxed on the cost of coverage over $50k, minus what they pay in. If it's a discriminatory plan, there's no $50k exclusion for key employees. They must include the actual cost or table cost, whatever is greater. Dependent Life Insurance Correct Answer: - Not included in $50k exclusion for taxability
Property Loss Calculation when Underinsured Correct Answer: First, the required insurance = replacement cost x coinsurance percentage (80% for homes, sometimes 90% for commercial property) Then the amount paid out is the fraction of the loss that was insured minus the deductible. Amt paid = Loss x (Insurance carried/Insurance required) - Deductible Covered Perils: Broad (4) Correct Answer: Everything in basic plus RAFF:
Are loaner cars automatically insured? Correct Answer: Yes, but only for parts A,B,C. Who is covered by auto insurance? (3) Correct Answer: 1. Insured + spouse (living together)
Endorsement Method Correct Answer: Requires that the beneficiary change (from employer to another beneficiary) be typed or affixed directly to the policy - insured must make a written request and mail the request along with the policy to the insurance company. Homeowners Insurance Forms Correct Answer: HO-1: Basic coverage for all parts HO-2: Broad coverage for all parts HO-3: (Most common) Open coverage except C HO-4: Renters'. Covers C and D HO-5 or HO 3-15: Open coverage for all HO-6: Condo HO-7: Mobile home HO-8: Basic coverage for older homes Coverage for HO-6 Parts Correct Answer: A: Some coverage for installed carpet/cabinets, plus $5k loss assessment coverage (can buy more if needed) B: none C: Open D: Broad 50% of C Coverage for HO-4 Parts Correct Answer: A: none B: none C: Broad D: Broad 30% of C HO-3 Policy Outline Correct Answer: Declaration Page - name, address Section I: A-Dwelling, B-Other structures, C-Personal Property, D-Loss of Use Section II: E-Personal Liability, F-Medical Payments Coverage for HO-3 Part A (5) Correct Answer: Dwelling: open perils
What qualified plan distribution is exempt from the 10% early withdrawal penalty? Correct Answer: Distribution due to separation from service at age 55+ Is there a early withdrawal penalty or mandatory withholding for a QRDO distribution from a qualified plan? Correct Answer: No early withdrawal penalty, Yes mandatory 20% withholding. What is a money purchase plan? Correct Answer: It's like a profit sharing plan, but the contributions are a fixed mandatory contribution from the company, not variable. What is a cash balance plan? Pros/cons? Correct Answer: It's a defined-benefit pension plan with an option of taking a lifetime annuity OR a lump sum rollover distribution. Pros: For older business owners to turbocharge their pretax retirement savings. Cons: Company takes on investment risk (must increase funding if market dips), requires actuary certification each year. What is the contribution to a cash balance plan? Correct Answer: From the employer: A set percentage of compensation plus interest. Limits are based on age and can be over $200k If you're still working, would you ever HAVE to take a RMD from a 401k before retiring? Correct Answer: Yes, if you own >5% of the company (no skirting RMDs with a solo 401k) What is the maximum loan limit from a qualified plan? Correct Answer: The lesser of $50k or 50% of your account balance, but you can always take out at least $10k Pension Protection Act of 2006 (rule for nonspouse beneficiaries) Correct Answer: Federal law that imposes additional funding and disclosure requirements on employers who have employee pension plans. Nonspouse beneficiaries of 401k/403b/457 can transfer to an IRA and withdraw: