The CFP exam, formally known as the Certified Financial Planner Examination, is a challenging and comprehensive assessment for men and women looking to enter this exciting and rewarding field of money management. The test is developed by the Certified Financial Planner Board of Standards in consultation with an expert team of exam administrators.
The CFP exam is administered three times a year, typically on the third Friday and Saturday in March, July, and November. It is split over two days and completed within a total of 10 hours. Typically, there is a four-hour session on Friday afternoon, followed by two three-hour sessions on Saturday.
The exam is administered on paper and consists of two different types of multiple-choice questions. One outlines a brief scenario and then asks one to six factual questions. The second type of question on the CFP exam is posed as a more complex situation and is followed by ten to twenty questions. Most exams include three of these lengthier scenarios.
The subjects covered on the CFP exam include general principles of financial planning (11 percent of the exam); insurance planning and risk management (14 percent); employee benefits planning (8 percent); investment planning (19 percent); income tax planning (14 percent); retirement planning (19 percent); and estate planning (15 percent).
CFP exam scores are available approximately eight weeks after the day of the test. The score report includes an indication of whether the candidate has passed or failed; those who fail will receive a list of the areas in which they need to improve. Those who must retake the exam are required to take it again in its entirety.
1. A married couple would like to set up 529 Plan college education accounts for their two young grandchildren. For 2010, what is the maximum amount they could have contributed in total to both 529 plans without incurring gift tax?
2. Tom owns a small golf pro shop and has started a SEP IRA for himself and his employees. He wants to make minimal contributions into his employee’s SEP IRAs. If Tom uses the most restrictive requirements to determine eligible employees, which of the following employees may he consider ineligible for contributions?
a. Laura, age 21, who has worked for Tom for 3 years and received $10,000 in compensation
b. Mary, age 65, who has worked for Tom for 20 years and received $40,000 in compensation
c. Jack, age 22 who has worked for Tom for 5 years and received $660 in compensation
d. Eric, age 18, who has worked for Tom for 4 years and received $8,000 in compensation
3. If structured correctly, which type(s) of ownership(s) will avoid probate and allow assets to pass directly to a planned beneficiary at the death of the owner?
2. Individual bank account
4. Tenants in Common
5. Revocable Trust
a. 1 only
b. 1, 2 and 3 only
c. 3 and 4 only
d. 1, 3, 4 and 5 only
4. Becky is an investor with a margin account. Her brokerage firm requires 50% as the initial margin, and 40% as the maintenance margin. She purchases a stock on margin for $14,000. The stock’s value later drops to $10,000. What is Becky’s initial margin amount and maintenance margin amount, respectively?
a. $7,000 and $4,000
b. $14,000 and $4,000
c. $7,000 and $3,000
d. $7,000 and $10,000
5. Tina, age 35, is married. She is a homemaker and doesn’t work outside the home. Her husband, Tom, is a computer engineer who makes $100,000 annually. Their income tax filing status is Married Filing Jointly. Tina would like to know if she can contribute to her own Individual Retirement Account. Which of the following statements best describe Tina’s situation?
a. Tina can contribute to an IRA because her husband is a wage earner and they file their taxes jointly
b. Tina cannot contribute to an IRA because she does not have earned income
c. Tina cannot contribute to an IRA because of their high tax bracket
d. More information is needed to determine if she qualifies to contribute to an IRA
1. D: $260,000. The couple could have contributed a total of $260,000 in 2010 without incurring any gift tax. While the annual gift tax exclusion amount for 2010 was $13,000, 529 plans allow donors to contribute up to five years’ worth of contributions in one lump sum, allowing each grandparent to contribute $13,000 (annual contribution amount) x 5 years (lump sum provision) for a total of $65,000. Thus, $65,000 x 2 grandchildren = $130,000, the allowable contribution by each grandparent. Since both grandparents can make separate maximum contributions to each grandchild, the couple could have contributed $260,000 in total.
2. D: Eric, age 18, who has worked for Tom for 4 years and received $8,000 in compensation
Eric isn’t eligible for a SEP IRA contribution due to his age. In order for an employee to be eligible, he must be at least 21 years old, worked for the employer at least three of the past five years, and received at least $550 in compensation from the employer for the year. Laura, Mary, and Jack all fulfill these requirements. An employer can opt to use less restrictive requirements to determine eligibility.
3. D: 1, 3, 4 and 5 only. If set up correctly, Individual Retirement Accounts, JTWROS, Tenants in Common and Revocable Trusts can avoid probate and allow assets to be passed directly to beneficiaries. Individual bank accounts, as well as other assets titled individually, are usually included in the gross estate of the decedent and must go through the probate process. To avoid probate, individual bank and investment accounts can be held as TOD, or Transfer on Death accounts, which allow assets and securities to pass directly to beneficiaries at the owner’s death.
4. A: $7,000 and $4,000. To buy on margin, Becky must abide by the firm’s initial margin deposit. If it’s 50%, than the initial margin amount is $7,000, or 50% of $14,000. Becky is also required to meet the maintenance margin of 40%. If the stock drops to $10,000, she has $3,000 in equity ($10,000-$7,000 = $3,000). This will not meet the required maintenance amount of $4,000 (40% of $10,000) so Becky will have to deposit another $1,000 into the account to bring her equity up to the required minimum maintenance amount.
5. A: Tina can contribute to an IRA because her husband is a wage earner and they file their taxes jointly. Although Tina herself does not earn income, she can contribute to a Spousal IRA since Tom has earned income and their tax status is Married Filing Jointly. Should they choose to file Married Filing Separately, Tina would not be permitted to make a contribution to her IRA as she has no earned income for the year. In 2010, based on their income and age, Tina and Tom could each contribute $5,000 to their IRAs for the year.