What Is the CFP® Certified Financial Planner Exam?
The Certified Financial Planner (CFP®) Exam is a rigorous, nationally recognized certification exam administered by the CFP Board. It evaluates a candidate’s ability to apply financial planning knowledge to real-life situations, testing their skills in areas such as retirement planning, tax strategies, investment management, estate planning, insurance, and financial ethics. Passing the CFP® Exam is a critical step for professionals who want to earn the prestigious CFP® certification and establish themselves as trusted experts in the financial planning industry.
Who Can Take This Practice Exam?
This free CFP® Practice Exam is perfect for:
Candidates actively preparing for the CFP® certification exam
Finance students looking to understand the CFP® exam format and content
Working professionals in financial services seeking to assess their readiness
Career switchers exploring a future in financial planning
Instructors and tutors seeking reliable practice material for students
What You’ll Learn from This Practice Exam
By taking this CFP® practice test, you’ll sharpen your problem-solving skills, reinforce complex financial concepts, and build the confidence needed to succeed on exam day. This exam helps you assess your strengths and identify areas where further review is needed.
Key Topics Covered:
✅ Retirement savings and income planning
✅ Investment analysis and portfolio management
✅ Tax planning and optimization strategies
✅ Estate planning fundamentals
✅ Insurance and risk management principles
✅ Professional conduct, fiduciary duty, and ethics
✅ Financial plan development and analysis
Each question is designed to simulate the actual exam’s difficulty and format, offering detailed explanations that reinforce learning and provide context for each correct answer.
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Take the first step toward becoming a Certified Financial Planner with confidence. This free practice exam from Exam Sage offers a professional-grade preview of the real exam experience, helping you study smarter and pass faster.
1. Which of the following is a duty under the CFP Board’s Code of Ethics and Standards of Conduct?
A. Always act in the firm’s best interest
B. Maintain independence at all times
C. Disclose material conflicts of interest
D. Guarantee investment returns
Answer: C. Disclose material conflicts of interest
Explanation: CFP professionals must disclose material conflicts of interest to clients to maintain transparency and uphold their fiduciary duty.
2. Which tax form is used to report capital gains from the sale of investment property?
A. Form 1040 Schedule A
B. Form 8889
C. Form 8949
D. Form W-4
Answer: C. Form 8949
Explanation: Form 8949 is used to report sales and exchanges of capital assets, including stocks and real estate.
3. What is the 2025 annual gift tax exclusion per recipient?
A. $15,000
B. $17,000
C. $18,000
D. $20,000
Answer: C. $18,000
Explanation: For 2025, the annual gift tax exclusion is $18,000 per donee, allowing individuals to gift up to that amount without incurring gift tax.
4. A client has a marginal tax rate of 35%. What is the after-tax return on a bond yielding 6%?
A. 3.90%
B. 4.50%
C. 4.20%
D. 5.10%
Answer: A. 3.90%
Explanation: After-tax return = 6% × (1 – 0.35) = 3.90%.
5. What type of trust becomes irrevocable upon the grantor’s death?
A. Testamentary Trust
B. Grantor Trust
C. Revocable Living Trust
D. Charitable Remainder Trust
Answer: A. Testamentary Trust
Explanation: A testamentary trust is created by a will and becomes irrevocable upon the grantor’s death.
6. Which of the following is true about Roth IRA contributions in 2025?
A. Contributions are tax-deductible
B. There is no income limit for eligibility
C. Withdrawals are tax-free after age 59½ and 5 years
D. Required minimum distributions start at 70½
Answer: C. Withdrawals are tax-free after age 59½ and 5 years
Explanation: Roth IRA contributions are made with after-tax dollars, and qualified withdrawals are tax-free if age and time requirements are met.
7. What is the maximum 401(k) employee deferral limit for individuals under age 50 in 2025?
A. $19,500
B. $20,500
C. $23,000
D. $22,500
Answer: C. $23,000
Explanation: For 2025, the employee elective deferral limit to a 401(k) plan is $23,000.
8. What is beta in investment analysis?
A. The average annual return
B. A measure of credit risk
C. A measure of a stock’s volatility relative to the market
D. The intrinsic value of a security
Answer: C. A measure of a stock’s volatility relative to the market
Explanation: Beta quantifies the sensitivity of a security’s returns to movements in the market.
9. Which of the following statements about life insurance is true?
A. Whole life has no cash value
B. Term life is permanent insurance
C. Universal life offers flexible premiums and death benefits
D. Variable life guarantees investment returns
Answer: C. Universal life offers flexible premiums and death benefits
Explanation: Universal life insurance is flexible, allowing policyholders to adjust premiums and death benefits.
10. What is the primary purpose of a buy-sell agreement in business succession planning?
A. To avoid double taxation
B. To restrict employee stock ownership
C. To ensure a smooth ownership transition upon death or retirement
D. To increase shareholder dividends
Answer: C. To ensure a smooth ownership transition upon death or retirement
Explanation: Buy-sell agreements protect businesses by outlining ownership transition procedures.
11. What is the main advantage of a Health Savings Account (HSA)?
A. Tax-free withdrawals for all expenses
B. Use-it-or-lose-it rules
C. Triple tax benefit: pre-tax contributions, tax-deferred growth, tax-free withdrawals for medical expenses
D. Must be used by year-end
Answer: C. Triple tax benefit
Explanation: HSAs provide tax-deductible contributions, tax-deferred growth, and tax-free qualified withdrawals.
12. Which of the following is not a qualified education expense for a 529 plan?
A. Tuition
B. Room and board
C. Student loan payments
D. Travel expenses
Answer: D. Travel expenses
Explanation: Travel costs are not considered qualified education expenses under 529 rules.
13. The efficient frontier in portfolio theory represents:
A. All possible portfolios regardless of risk
B. Portfolios with the highest return for a given level of risk
C. Portfolios with equal risk and return
D. The riskiest portfolios in the market
Answer: B. Portfolios with the highest return for a given level of risk
Explanation: The efficient frontier includes optimal portfolios that offer the best risk-return trade-offs.
14. What is the primary concern with a concentrated stock position in a client’s portfolio?
A. Increased dividend income
B. Liquidity surplus
C. Undiversified risk
D. Low cost basis
Answer: C. Undiversified risk
Explanation: Holding a large portion of one stock increases risk due to lack of diversification.
15. What type of annuity allows the owner to invest in sub-accounts similar to mutual funds?
A. Fixed annuity
B. Indexed annuity
C. Variable annuity
D. Immediate annuity
Answer: C. Variable annuity
Explanation: Variable annuities allow investment in various sub-accounts tied to market performance.
16. What is the purpose of Monte Carlo simulations in financial planning?
A. Predict tax liabilities
B. Project stock prices
C. Model potential outcomes using random variables
D. Calculate break-even analysis
Answer: C. Model potential outcomes using random variables
Explanation: Monte Carlo simulations test financial strategies against a range of uncertain scenarios.
17. What is the major advantage of a revocable living trust?
A. Avoids probate
B. Reduces income tax
C. Guarantees returns
D. Protects from Medicaid spend-down
Answer: A. Avoids probate
Explanation: Revocable trusts allow assets to pass outside probate, facilitating faster estate settlement.
18. What is the holding period for long-term capital gains treatment?
A. 3 months
B. 6 months
C. 12 months
D. 24 months
Answer: C. 12 months
Explanation: Assets held for more than one year qualify for long-term capital gains tax rates.
19. The Prudent Investor Rule requires fiduciaries to:
A. Only invest in government bonds
B. Avoid all risk
C. Diversify investments based on modern portfolio theory
D. Guarantee principal
Answer: C. Diversify investments based on modern portfolio theory
Explanation: The Prudent Investor Rule emphasizes risk management and diversification.
20. What is the penalty for early withdrawal from a traditional IRA before age 59½ (absent exceptions)?
A. 5%
B. 10%
C. 20%
D. No penalty
Answer: B. 10%
Explanation: A 10% penalty applies to early IRA withdrawals, plus ordinary income tax.
21. A client has a moderate risk tolerance. Which asset allocation is most suitable?
A. 80% stocks, 20% bonds
B. 20% stocks, 80% bonds
C. 60% stocks, 40% bonds
D. 100% stocks
Answer: C. 60% stocks, 40% bonds
Explanation: A 60/40 portfolio balances growth and risk for moderate investors.
22. Which of the following would not increase a client’s net worth?
A. Paying off credit card debt
B. Increasing savings
C. Investing in a rental property
D. Buying a luxury car on credit
Answer: D. Buying a luxury car on credit
Explanation: This increases liabilities and depreciating assets, reducing net worth.
23. What is the key benefit of dollar-cost averaging?
A. Eliminates investment losses
B. Maximizes returns
C. Reduces timing risk
D. Provides tax advantages
Answer: C. Reduces timing risk
Explanation: Dollar-cost averaging helps smooth entry into volatile markets by investing consistently.
24. What does CFP Board require for the Financial Planning Process Step 1?
A. Monitor the plan
B. Develop financial goals
C. Understand the client’s personal and financial circumstances
D. Present recommendations
Answer: C. Understand the client’s personal and financial circumstances
Explanation: Step 1 involves gathering and analyzing personal and financial data.
25. Which retirement plan is ideal for a self-employed person with no employees?
A. SIMPLE IRA
B. Traditional IRA
C. Solo 401(k)
D. 403(b)
Answer: C. Solo 401(k)
Explanation: A Solo 401(k) allows high contributions and is tailored for sole proprietors.
26. What is correlation in investment terms?
A. Total investment return
B. The risk of an asset
C. The relationship between two securities’ price movements
D. A measure of inflation
Answer: C. The relationship between two securities’ price movements
Explanation: Correlation measures how asset prices move in relation to each other.
27. What does a credit score primarily assess?
A. Wealth level
B. Income potential
C. Risk of default
D. Education background
Answer: C. Risk of default
Explanation: Credit scores evaluate an individual’s likelihood of repaying debt.
28. Which of the following is true of the fiduciary standard?
A. It requires suitability
B. It allows commissions only
C. It demands acting in the client’s best interest
D. It is optional for CFP professionals
Answer: C. It demands acting in the client’s best interest
Explanation: The fiduciary standard requires loyalty and care for the client above all else.
29. Which insurance policy typically has the lowest initial premium?
A. Whole life
B. Universal life
C. Term life
D. Variable life
Answer: C. Term life
Explanation: Term life insurance provides temporary coverage at the lowest cost.
30. When is a financial planner required to provide a written engagement agreement?
A. Only when investment products are sold
B. If required by law
C. Always, when providing financial planning services
D. Never
Answer: C. Always, when providing financial planning services
Explanation: The CFP Board mandates written agreements when delivering financial planning to ensure clear scope and understanding.
31. Which of the following best describes the time value of money?
A. Money today is worth the same as money tomorrow
B. Inflation has no impact on future value
C. Money now is worth more due to its earning potential
D. Interest rates do not affect present value
Answer: C. Money now is worth more due to its earning potential
Explanation: The time value of money principle holds that a dollar received today can be invested to earn more than a dollar received in the future.
32. In estate planning, which of the following assets typically avoids probate?
A. Sole ownership property
B. Assets in a revocable living trust
C. Assets governed by a will
D. Property in a testamentary trust
Answer: B. Assets in a revocable living trust
Explanation: Assets placed in a revocable trust are not subject to probate, which simplifies and speeds up estate distribution.
33. A 62-year-old client begins taking Social Security early. What is the consequence?
A. Full benefits and a bonus
B. Delayed retirement credits
C. Reduced monthly benefits for life
D. Benefits will increase at age 70
Answer: C. Reduced monthly benefits for life
Explanation: Taking Social Security early (before full retirement age) permanently reduces the monthly benefit amount.
34. Which of the following describes a progressive tax system?
A. Flat tax rate across all incomes
B. Decreasing tax rate as income rises
C. Higher tax rates for higher income brackets
D. Equal taxes for all income levels
Answer: C. Higher tax rates for higher income brackets
Explanation: A progressive tax imposes higher rates on higher income, such as the U.S. federal income tax system.
35. What is the primary goal of asset allocation in portfolio management?
A. Maximize dividends
B. Eliminate all risk
C. Balance risk and return
D. Increase tax liabilities
Answer: C. Balance risk and return
Explanation: Asset allocation spreads investments across different asset classes to manage risk and optimize returns.
36. What is the IRS penalty for excess contributions to a traditional IRA?
A. 5%
B. 6%
C. 10%
D. 15%
Answer: B. 6%
Explanation: A 6% penalty is applied each year on excess contributions not withdrawn by the due date.
37. Which insurance principle states that only losses, not profits, can be recovered?
A. Indemnity
B. Subrogation
C. Adhesion
D. Insurable interest
Answer: A. Indemnity
Explanation: The principle of indemnity ensures that insurance compensates only for actual losses, not gains.
38. A bond has a duration of 5 years. What does this indicate?
A. Its maturity is in 5 years
B. Its interest is paid every 5 years
C. It will be called in 5 years
D. It is highly sensitive to interest rate changes
Answer: D. It is highly sensitive to interest rate changes
Explanation: Duration measures a bond’s sensitivity to interest rate changes. Higher duration means greater sensitivity.
39. What type of income is subject to both income and self-employment taxes?
A. Interest income
B. Wages from an S-Corp
C. Sole proprietor profits
D. Qualified dividends
Answer: C. Sole proprietor profits
Explanation: Profits from sole proprietorships are subject to both income tax and self-employment tax.
40. Which planning technique is often used to protect assets from long-term care costs?
A. Umbrella insurance
B. Irrevocable Medicaid trust
C. Credit shelter trust
D. Buy-sell agreement
Answer: B. Irrevocable Medicaid trust
Explanation: These trusts are used to shelter assets from Medicaid eligibility calculations, often with a 5-year look-back.
41. What does a high P/E (price-to-earnings) ratio typically indicate?
A. Undervalued stock
B. Low growth expectations
C. High investor expectations for future growth
D. Immediate liquidation value
Answer: C. High investor expectations for future growth
Explanation: A high P/E suggests that investors expect strong future earnings, though it can also indicate overvaluation.
42. A client earns $150,000 and is covered by a workplace retirement plan. Can they deduct a traditional IRA contribution in 2025 (single filer)?
A. Yes, fully deductible
B. No, above the income limit
C. Only partially deductible
D. Depends on investment income
Answer: B. No, above the income limit
Explanation: For 2025, single filers with income above $83,000 (approx.) and covered by a plan are not eligible for a deduction.
43. Which of the following most accurately describes a mutual fund?
A. A guaranteed return product
B. A pooled investment managed by professionals
C. An individual stock
D. An annuity sold by banks
Answer: B. A pooled investment managed by professionals
Explanation: Mutual funds pool investors’ money into diversified portfolios managed by professionals.
44. What is the standard deduction for a married couple filing jointly in 2025?
A. $25,100
B. $27,700
C. $29,200
D. $30,800
Answer: D. $30,800
Explanation: The standard deduction is indexed annually for inflation and is $30,800 for MFJ in 2025.
45. Which ratio best indicates a household’s short-term financial health?
A. Debt-to-equity ratio
B. Emergency fund ratio
C. Net worth ratio
D. Investment return ratio
Answer: B. Emergency fund ratio
Explanation: This ratio shows how many months of living expenses are covered by liquid assets.
46. In risk management, what does risk transfer typically involve?
A. Increasing emergency funds
B. Avoiding hazardous activities
C. Buying insurance
D. Saving more for retirement
Answer: C. Buying insurance
Explanation: Risk transfer means shifting financial risk to a third party, usually through insurance.
47. What is the primary use of an irrevocable life insurance trust (ILIT)?
A. Provide liquidity for the insured
B. Avoid probate
C. Remove life insurance from the taxable estate
D. Invest in annuities
Answer: C. Remove life insurance from the taxable estate
Explanation: An ILIT ensures that life insurance proceeds are not included in the decedent’s estate.
48. A client’s employer offers a nonqualified deferred compensation plan. What is a key risk?
A. Penalty-free access
B. Early withdrawal
C. Employer insolvency
D. No income tax
Answer: C. Employer insolvency
Explanation: These plans are not protected from employer bankruptcy, making them riskier than qualified plans.
49. What is the main purpose of a needs-based financial aid system like FAFSA?
A. Offer loans to all students
B. Allocate federal grants based on merit
C. Determine aid based on income and assets
D. Promote student debt
Answer: C. Determine aid based on income and assets
Explanation: FAFSA evaluates financial need based on family income and assets to award need-based aid.
50. Which of the following is true about a Coverdell Education Savings Account?
A. Contribution limit is $18,000
B. Contributions are deductible
C. Qualified withdrawals are tax-free
D. It can only be used for college expenses
Answer: C. Qualified withdrawals are tax-free
Explanation: While contributions are not deductible, qualified distributions for education are tax-free.
51. What type of life insurance offers both investment options and lifelong coverage?
A. Term life
B. Universal life
C. Variable life
D. Whole life
Answer: C. Variable life
Explanation: Variable life includes investment sub-accounts and permanent coverage but involves market risk.
52. What is a key benefit of laddering bonds in a fixed income portfolio?
A. Tax deferral
B. Market timing
C. Interest rate risk mitigation
D. Maximized coupon rate
Answer: C. Interest rate risk mitigation
Explanation: Laddering spreads maturity dates, reducing reinvestment and interest rate risks.
53. A client wants to transfer wealth to grandchildren without generation-skipping tax. What tool can help?
A. QTIP trust
B. UGMA account
C. GST-exempt trust
D. Charitable lead trust
Answer: C. GST-exempt trust
Explanation: A GST-exempt trust helps avoid the Generation-Skipping Transfer tax when assets skip a generation.
54. When should a financial plan typically be reviewed?
A. Every five years
B. Only at retirement
C. When goals or circumstances change
D. At tax season only
Answer: C. When goals or circumstances change
Explanation: Financial plans should be updated whenever life events or financial goals shift significantly.
55. What does the capital asset pricing model (CAPM) determine?
A. Future economic growth
B. Appropriate discount rate for an investment
C. Value of a bond
D. Net present value of a project
Answer: B. Appropriate discount rate for an investment
Explanation: CAPM estimates expected return based on risk-free rate, beta, and market return.
56. What is the typical tax treatment of dividends from U.S. stocks held over 60 days?
A. Ordinary income
B. Long-term capital gains
C. Qualified dividends taxed at favorable rates
D. Tax-free
Answer: C. Qualified dividends taxed at favorable rates
Explanation: Qualified dividends meet holding requirements and are taxed at 0%, 15%, or 20% rates.
57. Which of the following best helps reduce estate taxes?
A. Deferred compensation plan
B. Revocable trust
C. Charitable remainder trust
D. Term life insurance
Answer: C. Charitable remainder trust
Explanation: These trusts provide income to the donor and leave the remainder to charity, reducing estate value.
58. A CFP professional must act in the client’s best interest when providing:
A. Only investment advice
B. Any financial advice
C. Only insurance recommendations
D. None of the above
Answer: B. Any financial advice
Explanation: CFP professionals are bound by a fiduciary duty whenever they provide financial advice.
59. Which of the following is NOT part of the CFP Board’s Practice Standards?
A. Developing financial recommendations
B. Selling financial products
C. Monitoring progress
D. Gathering client information
Answer: B. Selling financial products
Explanation: While product implementation may follow planning, it is not a core component of the practice standards.
60. Which estate planning document appoints someone to make medical decisions if the client becomes incapacitated?
A. Will
B. Power of attorney
C. Living will
D. Healthcare proxy
Answer: D. Healthcare proxy
Explanation: A healthcare proxy authorizes someone to make medical decisions when the individual cannot.
61. Which estate planning document appoints someone to make medical decisions if the client becomes incapacitated?
A. Living will
B. Durable power of attorney
C. Health care proxy
D. Revocable trust
Answer: C. Health care proxy
Explanation: A health care proxy authorizes someone to make medical decisions if the individual is unable to do so.
62. What is the main goal of a Roth IRA conversion?
A. Delay required minimum distributions
B. Avoid all income taxes
C. Pay taxes now for tax-free growth later
D. Increase Social Security benefits
Answer: C. Pay taxes now for tax-free growth later
Explanation: Converting to a Roth IRA involves paying taxes on the amount converted now, allowing for tax-free growth going forward.
63. Which of the following is most likely to help reduce sequence of returns risk in retirement?
A. Investing in high-growth stocks only
B. Purchasing immediate annuities
C. Taking large early withdrawals
D. Timing the market
Answer: B. Purchasing immediate annuities
Explanation: Immediate annuities provide a stable income stream, mitigating sequence risk.
64. Which type of trust allows the grantor to retain income but eventually gives assets to a charity?
A. Charitable lead trust
B. Charitable remainder trust
C. Credit shelter trust
D. Grantor retained annuity trust
Answer: B. Charitable remainder trust
Explanation: The grantor receives income from the trust during life, and the remaining assets go to charity.
65. What does beta measure in portfolio management?
A. Credit risk
B. Systematic risk relative to the market
C. Interest rate sensitivity
D. Volatility of bonds
Answer: B. Systematic risk relative to the market
Explanation: Beta quantifies an investment’s sensitivity to market movements. A beta of 1 means the asset moves in line with the market.
66. What is the maximum annual contribution to a 529 plan per beneficiary in 2025 without gift tax implications (using the 5-year election)?
A. $17,000
B. $34,000
C. $85,000
D. $170,000
Answer: C. $85,000
Explanation: Using the 5-year election, a contributor can give up to 5 × $17,000 (the annual exclusion) = $85,000 without incurring gift tax.
67. Which of the following investments is most exposed to inflation risk?
A. Common stock
B. TIPS
C. Long-term government bonds
D. Real estate investment trusts
Answer: C. Long-term government bonds
Explanation: These fixed-income instruments can lose purchasing power during inflationary periods.
68. What is the main benefit of dollar-cost averaging?
A. Maximizes returns
B. Minimizes all risk
C. Reduces the impact of market volatility over time
D. Guarantees profits
Answer: C. Reduces the impact of market volatility over time
Explanation: Dollar-cost averaging involves investing a fixed amount at regular intervals, smoothing out purchase prices over time.
69. What is the earliest age someone can take Social Security retirement benefits?
A. 59½
B. 60
C. 62
D. 65
Answer: C. 62
Explanation: Benefits can begin at age 62, but at a reduced rate compared to full retirement age.
70. What does a high current ratio indicate for a household’s finances?
A. Poor investment strategy
B. Strong liquidity position
C. High leverage
D. Low savings rate
Answer: B. Strong liquidity position
Explanation: The current ratio compares current assets to current liabilities. A higher ratio indicates better short-term financial health.
71. What investment strategy involves shifting allocations in response to market conditions?
A. Strategic asset allocation
B. Buy and hold
C. Tactical asset allocation
D. Dollar-cost averaging
Answer: C. Tactical asset allocation
Explanation: Tactical allocation allows for short-term adjustments based on market trends.
72. What is the main tax advantage of municipal bonds?
A. Tax-free at federal and state levels
B. Tax-deferred income
C. Federal tax-exempt interest
D. Eligible for foreign tax credit
Answer: C. Federal tax-exempt interest
Explanation: Municipal bond interest is generally exempt from federal income tax, and possibly state taxes too if issued in your state.
73. What type of insurance policy builds cash value and offers flexible premiums?
A. Term life
B. Whole life
C. Universal life
D. Variable annuity
Answer: C. Universal life
Explanation: Universal life offers permanent coverage with adjustable premiums and death benefits, along with a cash value component.
74. What is the penalty for failing to take required minimum distributions (RMDs)?
A. 6%
B. 10%
C. 25%
D. 50%
Answer: C. 25%
Explanation: As of 2023 SECURE 2.0 Act updates, the penalty for missed RMDs is 25%, reduced from 50%.
75. Which of the following is not considered a capital asset?
A. Primary residence
B. Stocks held for investment
C. Inventory in a business
D. Collectible artwork
Answer: C. Inventory in a business
Explanation: Inventory is treated as ordinary income property, not a capital asset.
76. What is the major difference between a traditional IRA and a Roth IRA?
A. Roth has higher contribution limits
B. Traditional grows tax-free
C. Roth allows tax-free qualified withdrawals
D. Traditional is not subject to income limits
Answer: C. Roth allows tax-free qualified withdrawals
Explanation: Roth IRAs are funded with after-tax dollars and offer tax-free withdrawals in retirement.
77. Which of the following is a characteristic of a revocable living trust?
A. Irrevocable and avoids probate
B. Cannot be amended
C. Avoids probate and can be changed during life
D. Subject to gift tax immediately
Answer: C. Avoids probate and can be changed during life
Explanation: Revocable trusts can be amended or revoked during the grantor’s life and help bypass probate.
78. What type of insurance protects a business from the loss of a key employee?
A. Disability insurance
B. Buy-sell agreement
C. Key person insurance
D. Business liability insurance
Answer: C. Key person insurance
Explanation: This coverage helps offset the loss of critical employees by providing a financial cushion to the business.
79. In portfolio theory, what is diversification intended to reduce?
A. Systematic risk
B. All market losses
C. Unsystematic risk
D. Market volatility
Answer: C. Unsystematic risk
Explanation: Diversification spreads investments to reduce company-specific or industry-specific risk.
80. What is the main goal of a credit shelter trust?
A. Shelter assets from Medicaid
B. Preserve the estate tax exemption
C. Avoid capital gains tax
D. Fund higher education
Answer: B. Preserve the estate tax exemption
Explanation: Credit shelter trusts use the deceased spouse’s estate tax exemption while passing future appreciation to heirs.
81. What is the most appropriate ratio to assess debt management in financial planning?
A. Net worth ratio
B. Debt-to-income ratio
C. Price-to-earnings ratio
D. Capital gains ratio
Answer: B. Debt-to-income ratio
Explanation: This ratio evaluates whether a client is managing debt levels in relation to income.
82. What financial planning document outlines a CFP professional’s compensation and conflicts of interest?
A. Financial plan
B. Form 1040
C. Form ADV Part 2
D. Engagement letter
Answer: D. Engagement letter
Explanation: The engagement letter spells out compensation, scope, responsibilities, and potential conflicts.
83. What is a major benefit of Health Savings Accounts (HSAs)?
A. Employer match
B. Triple tax advantage
C. Unlimited contributions
D. Immediate reimbursement required
Answer: B. Triple tax advantage
Explanation: Contributions are pre-tax, grow tax-free, and withdrawals are tax-free for qualified medical expenses.
84. Which type of annuity guarantees income for life but has no market participation?
A. Variable annuity
B. Fixed indexed annuity
C. Deferred income annuity
D. Immediate fixed annuity
Answer: D. Immediate fixed annuity
Explanation: This provides guaranteed income without exposure to market fluctuations.
85. When should a CFP professional report another professional’s misconduct?
A. Only if a client complains
B. Only if it affects their own practice
C. When required under the Code of Ethics
D. Reporting is always optional
Answer: C. When required under the Code of Ethics
Explanation: CFP® professionals have an ethical obligation to report serious misconduct per the CFP Board standards.
86. What is the fiduciary duty of loyalty?
A. Acting in the client’s best interest
B. Prioritizing firm profits
C. Disclosing marketing fees
D. Only working with wealthy clients
Answer: A. Acting in the client’s best interest
Explanation: Fiduciary duty of loyalty means placing the client’s interests above all others, including the planner’s.
87. What is a Monte Carlo simulation used for in retirement planning?
A. Tax projections
B. Market timing
C. Predicting inflation
D. Analyzing success probabilities in various market scenarios
Answer: D. Analyzing success probabilities in various market scenarios
Explanation: Monte Carlo simulations model thousands of scenarios to assess the likelihood a plan will succeed under uncertainty.
88. What type of risk cannot be eliminated through diversification?
A. Business risk
B. Regulatory risk
C. Systematic risk
D. Credit risk
Answer: C. Systematic risk
Explanation: Systematic (market) risk affects all investments and cannot be diversified away.
89. What is the primary benefit of using a Roth 401(k) over a traditional 401(k)?
A. Higher employer match
B. Tax-free distributions
C. Immediate tax deduction
D. No required minimum distributions
Answer: B. Tax-free distributions
Explanation: Roth 401(k)s are funded with after-tax dollars, and qualified withdrawals are tax-free.
90. What’s the most suitable recommendation for a 30-year-old saving for retirement in 35 years?
A. Short-term CDs
B. Conservative bond portfolio
C. Growth-oriented diversified equities
D. Immediate annuity
Answer: C. Growth-oriented diversified equities
Explanation: With a long time horizon, equities offer the best potential for growth and long-term compounding.
91. Which of the following accounts is best suited for saving for a child’s education with tax advantages?
A. Custodial account
B. 401(k)
C. 529 plan
D. Traditional IRA
Answer: C. 529 plan
Explanation: 529 plans offer tax-free growth and tax-free withdrawals when used for qualified education expenses.
92. What is the standard deduction for a married couple filing jointly in 2025 (estimated based on inflation adjustments)?
A. $24,800
B. $25,900
C. $27,700
D. $29,200
Answer: D. $29,200
Explanation: The IRS adjusts the standard deduction annually for inflation; $29,200 is the estimated 2025 amount for joint filers.
93. Which retirement plan allows for catch-up contributions for participants age 50 or older?
A. SIMPLE IRA
B. 457(b) plan
C. 403(b) plan
D. All of the above
Answer: D. All of the above
Explanation: SIMPLE IRAs, 457(b), and 403(b) plans allow additional catch-up contributions for individuals age 50+.
94. Which of the following is the most tax-efficient asset to donate to charity?
A. Cash
B. Stocks with capital loss
C. Appreciated securities held over one year
D. Traditional IRA distributions
Answer: C. Appreciated securities held over one year
Explanation: Donating long-term appreciated securities allows avoidance of capital gains tax and provides a full deduction.
95. What type of insurance is most appropriate for protecting against the financial risk of outliving one’s assets?
A. Long-term care insurance
B. Disability insurance
C. Life insurance
D. Annuities
Answer: D. Annuities
Explanation: Lifetime annuities can provide guaranteed income for life, helping protect against longevity risk.
96. What is the key characteristic of a zero-coupon bond?
A. Pays interest semi-annually
B. Trades above par value
C. Sold at a discount and pays no interest
D. Fully tax-free income
Answer: C. Sold at a discount and pays no interest
Explanation: Zero-coupon bonds are sold below face value and mature at par, with no periodic interest payments.
97. What planning strategy can help reduce estate taxes by transferring future asset growth outside the estate?
A. Revocable living trust
B. Irrevocable life insurance trust (ILIT)
C. Probate avoidance
D. Medicaid spend-down
Answer: B. Irrevocable life insurance trust (ILIT)
Explanation: ILITs can remove life insurance proceeds from the estate and transfer value to heirs estate-tax free.
98. What’s the primary advantage of a Roth IRA for young investors?
A. Tax deduction now
B. Tax-free withdrawals in retirement
C. Required minimum distributions at age 73
D. No income limits to contribute
Answer: B. Tax-free withdrawals in retirement
Explanation: Young investors benefit from years of tax-free growth and tax-free withdrawals later in life.
99. Which investment is most exposed to interest rate risk?
A. Common stock
B. Short-term T-bills
C. Long-term bonds
D. Real estate
Answer: C. Long-term bonds
Explanation: Long-term bonds are more sensitive to interest rate changes, causing price volatility.
100. A CFP® professional must act in the client’s best interest at all times under which standard?
A. Suitability standard
B. Regulation D
C. Fiduciary standard
D. FINRA rule 2111
Answer: C. Fiduciary standard
Explanation: The CFP® Board enforces a fiduciary duty, requiring planners to act in the client’s best interest at all times.
101. What is the main difference between Medicare Part A and Part B?
A. Part A is optional; Part B is mandatory
B. Part A covers hospital; Part B covers outpatient care
C. Part A is free for all; Part B is not available to retirees
D. Part A covers prescriptions; Part B covers dental
Answer: B. Part A covers hospital; Part B covers outpatient care
Explanation: Medicare Part A includes hospital services, while Part B covers doctor visits and outpatient treatment.
102. What is the primary goal of life insurance in financial planning?
A. Investment growth
B. Income replacement
C. Tax deduction
D. Estate tax shelter
Answer: B. Income replacement
Explanation: Life insurance provides financial support to dependents if the insured dies prematurely.
103. Which type of analysis measures a security’s intrinsic value based on financial data?
A. Technical analysis
B. Trend analysis
C. Fundamental analysis
D. Behavioral analysis
Answer: C. Fundamental analysis
Explanation: Fundamental analysis uses financial statements and ratios to determine a stock’s fair value.
104. Which estate planning tool is commonly used to avoid probate?
A. Will
B. Power of attorney
C. Revocable living trust
D. Testamentary trust
Answer: C. Revocable living trust
Explanation: Revocable trusts allow assets to pass outside of probate and offer flexibility during life.
105. In modern portfolio theory, the efficient frontier represents:
A. Portfolios with the lowest standard deviation
B. The highest possible return for a given level of risk
C. Only bond portfolios
D. Portfolios without diversification
Answer: B. The highest possible return for a given level of risk
Explanation: The efficient frontier includes optimal portfolios that maximize return for each level of risk.
106. Which ratio measures a client’s ability to pay short-term obligations?
A. Debt-to-equity ratio
B. Emergency fund ratio
C. Current ratio
D. Net worth ratio
Answer: C. Current ratio
Explanation: The current ratio compares current assets to current liabilities to assess short-term liquidity.
107. What is the tax treatment of qualified dividends in the U.S.?
A. Taxed at ordinary income rates
B. Tax-free
C. Taxed at long-term capital gains rates
D. Subject to self-employment tax
Answer: C. Taxed at long-term capital gains rates
Explanation: Qualified dividends are taxed at favorable long-term capital gains rates, generally 0%, 15%, or 20%.
108. Which of the following is not an acceptable reason to terminate a client relationship under CFP Board standards?
A. Lack of payment
B. Unethical client behavior
C. Personality conflict
D. Poor investment performance due to the market
Answer: D. Poor investment performance due to the market
Explanation: Poor market returns alone are not a justifiable reason to terminate a relationship under the CFP Board’s ethical standards.
109. What is the primary tax benefit of a Health Savings Account (HSA)?
A. Tax-free growth
B. Tax-deductible contributions
C. Tax-free withdrawals for qualified expenses
D. All of the above
Answer: D. All of the above
Explanation: HSAs provide a triple tax benefit—contributions are deductible, grow tax-free, and distributions are tax-free if used for qualified medical expenses.
110. What is the primary purpose of an emergency fund in personal financial planning?
A. Pay for vacations
B. Fund retirement
C. Cover unexpected expenses without debt
D. Invest in high-risk opportunities
Answer: C. Cover unexpected expenses without debt
Explanation: Emergency funds prevent reliance on high-interest debt during financial emergencies.
111. Which type of retirement plan is subject to ERISA?
A. Traditional IRA
B. Roth IRA
C. SEP IRA
D. 401(k)
Answer: D. 401(k)
Explanation: Employer-sponsored 401(k) plans are governed by ERISA rules for fiduciary duties and reporting.
112. What is the goal of tax-loss harvesting?
A. Increase taxable income
B. Avoid capital gains
C. Defer or offset capital gains
D. Reduce income from dividends
Answer: C. Defer or offset capital gains
Explanation: Selling securities at a loss can reduce capital gains taxes by offsetting realized gains.
113. What is the required minimum distribution (RMD) age for traditional IRAs as of 2025?
A. 70½
B. 72
C. 73
D. 75
Answer: C. 73
Explanation: The SECURE 2.0 Act raised the RMD age to 73 starting in 2023.
114. What is the primary benefit of a stretch IRA (when available)?
A. Immediate withdrawal
B. Lifetime tax-free income
C. Extended tax-deferred growth for beneficiaries
D. Avoids all taxation
Answer: C. Extended tax-deferred growth for beneficiaries
Explanation: Before the SECURE Act, stretch IRAs allowed non-spouse beneficiaries to take distributions over their lifetime.
115. What is the main difference between a defined benefit and a defined contribution plan?
A. One has matching, the other does not
B. One guarantees a payout, the other depends on contributions
C. One is tax-free, the other is tax-deferred
D. One uses mutual funds, the other uses ETFs
Answer: B. One guarantees a payout, the other depends on contributions
Explanation: Defined benefit plans promise a set income in retirement; defined contribution plans rely on contributions and investment growth.
116. What estate planning technique can reduce estate taxes and benefit grandchildren directly?
A. SLAT
B. Crummey trust
C. Generation-skipping trust
D. Pour-over will
Answer: C. Generation-skipping trust
Explanation: A GST allows transfers to grandchildren without incurring a second layer of estate tax.
117. When using Monte Carlo analysis in retirement planning, what does a 90% success rate imply?
A. Plan is underfunded
B. Plan works in 9 out of 10 modeled scenarios
C. Client has a 10% chance of high returns
D. Plan assumes zero inflation
Answer: B. Plan works in 9 out of 10 modeled scenarios
Explanation: A 90% success rate indicates the plan is sustainable in 90% of modeled market conditions.
118. What type of mutual fund share class typically charges a front-end load?
A. Class A
B. Class B
C. Class C
D. No-load fund
Answer: A. Class A
Explanation: Class A shares often charge an upfront sales commission, known as a front-end load.
119. What is the main benefit of diversifying internationally in a portfolio?
A. Increased domestic exposure
B. Elimination of all risk
C. Reduced correlation with U.S. markets
D. Guaranteed higher returns
Answer: C. Reduced correlation with U.S. markets
Explanation: International diversification helps reduce portfolio volatility by spreading risk across different economies.
120. What does time-weighted return measure?
A. Return considering cash flows
B. Return over a fixed period, ignoring cash flows
C. Total return after taxes
D. Only bond performance
Answer: B. Return over a fixed period, ignoring cash flows
Explanation: Time-weighted return isolates investment performance by eliminating the impact of external cash flows.
