CFP CFP Retirement Savings and Income Planning: practice questions with answers

Question 1

Zuri, age 52, wants retirement income equal to $80,000 a year in today's dollars, starting at age 67 and lasting 25 years. She assumes 3% annual inflation before and during retirement and a 6% nominal annual return during retirement. Each year's withdrawal is taken at the beginning of the year and rises with inflation. How much capital does she need at age 67?

1. A $1,447,685
2. B $1,688,881
3. C $2,191,612
4. D $2,255,446

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Answer: D. 1. First-year income at 67 in future dollars: $80,000 x 1.03^15 = $124,637.
2. Inflation-adjusted discount rate: (1.06 / 1.03) - 1 = 2.9126%.
3. Capital needed = present value of a 25-year annuity due of $124,637 at 2.9126% (BGN mode: PMT 124,637, N 25, I/YR 2.9126, FV 0) = $2,255,446.

Using the inflation-adjusted rate keeps the withdrawals level in real terms; beginning-of-year withdrawals require annuity-due (BGN) mode.

Question 2

Wilhelmina, a single taxpayer, received $24,000 of Social Security benefits in 2026. Her other income was $30,000 of taxable pension and IRA distributions plus $2,000 of tax-exempt municipal bond interest. For a single filer the base amount is $25,000 and the adjusted base amount is $34,000. How much of her Social Security benefits is included in gross income?

1. A $20,400
2. B $13,000
3. C $11,300
4. D $9,500

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Answer: B. Provisional income = $30,000 + $2,000 tax-exempt interest + 50% x $24,000 = $44,000.

Taxable amount (IRC Section 86) = the smaller of:
- 85% x $24,000 = $20,400, or
- 85% x ($44,000 - $34,000) = $8,500, plus the smaller of $4,500 (50% x [$34,000 - $25,000]) or 50% of benefits ($12,000) = $4,500; total $13,000.

So $13,000 of Wilhelmina's benefits is taxable.

Question 3

Fernwood Bakery's calendar-year 401(k) plan uses the most restrictive eligibility rules the law allows for elective deferrals. Which employee may the plan exclude from participating for all of 2026?

1. A Cora, who turns 20 in October 2026 and has worked 1,800 hours in each of the last two years
2. B Ana, 30, who joined in January 2025 and worked 1,200 hours in 2025
3. C Ben, 24, who worked 650 hours in 2024 and 720 hours in 2025
4. D Dev, 52, a part-timer who has worked 1,050 hours in each of the last three years

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Answer: A. Under IRC Section 410(a) a plan can require at most age 21 and one year of service (1,000 hours in a 12-month period), with entry no later than the earlier of the next plan year start or six months after meeting the conditions. Under SECURE 2.0, from 2025 plan years a 401(k) must also let long-term part-time employees (age 21 and at least 500 hours in each of two consecutive years) make elective deferrals. Only Cora, who will still be under 21 at the end of 2026, can be excluded for all of 2026.

Question 4

Dario, 38, joined his employer's SIMPLE IRA plan, and the first contribution to his SIMPLE IRA was deposited in May 2025. He leaves the company in September 2026 and wants to move his SIMPLE IRA balance. Which statement is correct?

1. A He can roll it into a traditional IRA tax-free at any time, because a SIMPLE IRA is treated like any other IRA.
2. B He can roll it into his new employer's 401(k) plan tax-free immediately, as long as that plan accepts rollovers.
3. C He can move it to a traditional IRA, but as he is under 59½ the distribution faces the usual 10% additional tax.
4. D Only a SIMPLE IRA can receive it tax-free until May 2027; a traditional IRA rollover now is taxed plus a 25% additional tax.

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Answer: D. The two-year period starts on the date the first contribution is deposited in the participant's SIMPLE IRA (May 2025), so it runs until May 2027. During it, a tax-free rollover or transfer is possible only to another SIMPLE IRA (IRC 408(d)(3)(G)); a move to a traditional IRA or an employer plan is a distribution, taxable as ordinary income and, because Dario is under 59½ with no exception, subject to the 25% additional tax of IRC 72(t)(6) instead of 10%. After May 2027 he can roll to a traditional IRA or eligible plan.

Question 5

Lazlo, 45, changes jobs and asks for his entire $200,000 pre-tax 401(k) balance to be paid to him. The plan withholds the required 20% and sends him a check for $160,000, which he deposits in a rollover IRA 30 days later. He does not replace the amount withheld. What amounts must he include in income and pay as additional tax on early distributions for the year?

1. A No taxable income, because the $40,000 withheld counts toward his rollover
2. B $40,000 of taxable income and no additional tax, because the tax was already withheld
3. C $200,000 of taxable income and a $20,000 additional tax
4. D $40,000 of taxable income and a $4,000 additional tax

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Answer: D. An eligible rollover distribution paid to the participant is subject to mandatory 20% withholding (IRC 3405(c)). Lazlo rolled $160,000 within 60 days, but the $40,000 withheld was not rolled over, so it is a taxable distribution. He is 45 and separated before the year he reached 55, so the 10% additional tax applies: $40,000 x 10% = $4,000. The $40,000 withheld is credited against his income tax. A direct trustee-to-trustee rollover would have avoided both the withholding and the shortfall.

Question 6

Imogen owns 100% of a closely held C corporation and wants to sell her shares to a newly formed ESOP and defer the capital gain under IRC section 1042. Which of the following is a requirement for the deferral?

1. A The company must be an S corporation at the time of the sale.
2. B She must reinvest the proceeds in qualified replacement property within 60 days after the sale.
3. C Immediately after the sale, the ESOP must own at least 30% of the company's stock.
4. D She must have held the shares for at least five years before the sale.

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Answer: C. IRC 1042 lets a shareholder of a domestic C corporation defer gain on selling stock to an ESOP if: the ESOP owns at least 30% of the stock immediately after the sale; the seller held the shares for at least three years; and the seller buys qualified replacement property (securities of domestic operating corporations) within the period from 3 months before to 12 months after the sale. Basis in the replacement property carries over, so gain is deferred until it is sold, or avoided entirely if held until death.