Free CFP Exam Flashcards

1) Understanding the client's personal and financial circumstances, 2) Identifying and selecting goals, 3) Analyzing current course of action, 4) Developing recommendations, 5) Presenting recommendations, 6) Implementing recommendations, 7) Monitoring progress.

The process of collecting quantitative data (income, expenses, assets, liabilities) and qualitative data (values, attitudes, expectations) to develop a comprehensive financial plan. Both types are essential for effective planning.

The balance sheet (statement of financial position) showing assets, liabilities, and net worth, and the cash flow statement showing income and expenses. Foundation for financial planning analysis.

Liquid savings to cover unexpected expenses or income loss. Generally recommended to hold 3-6 months of living expenses. Higher amounts for self-employed, single-income households, or those with variable income.

The concept that money available today is worth more than the same amount in the future due to earning potential. Key to calculating present value, future value, and making investment decisions.

Marginal rate is the tax on the next dollar of income (highest bracket). Effective rate is total tax divided by total income. Effective rate is always lower due to progressive tax brackets.

Standard deduction is a fixed amount reducing taxable income ($14,600 single, $29,200 married filing jointly in 2024). Itemized deductions include mortgage interest, state taxes (capped at $10,000), and charitable contributions.

Tax on profit from selling capital assets. Short-term (held ≤1 year) taxed as ordinary income. Long-term (held >1 year) taxed at 0%, 15%, or 20% depending on income. Net Investment Income Tax adds 3.8% for high earners.

Selling investments at a loss to offset capital gains and reduce tax liability. Up to $3,000 in net losses can offset ordinary income annually. Wash sale rule prevents repurchasing substantially identical securities within 30 days.

A parallel tax system designed to ensure high-income taxpayers pay a minimum amount of tax. Eliminates many deductions and applies rates of 26% and 28%. ISO exercises can trigger AMT liability.

Employer-sponsored defined contribution plan. 2024 employee contribution limit: $23,000 ($30,500 if 50+). Pre-tax contributions reduce current income; Roth option available. Employer match is essentially free money.

Traditional: tax-deductible contributions (if eligible), tax-deferred growth, taxable withdrawals, RMDs at 73. Roth: after-tax contributions, tax-free growth, tax-free qualified withdrawals, no RMDs during owner's lifetime.

Mandatory withdrawals from tax-deferred retirement accounts beginning at age 73 (SECURE 2.0). Calculated using IRS life expectancy tables. Penalty for missing RMD is 25% of the amount not withdrawn.

Retirement benefits based on 35 highest-earning years. Full retirement age is 66-67 depending on birth year. Benefits reduced if taken early (62), increased if delayed (up to 70). Spousal benefits equal 50% of worker's PIA.

Simplified Employee Pension for self-employed and small business owners. Employer contributions only, up to 25% of compensation or $69,000 (2024). Easy administration, no annual filing requirements.

Defined benefit (pension): employer promises specific retirement benefit based on formula. Defined contribution (401k): employee/employer contribute to individual account; benefit depends on investment performance.

The amount that can pass tax-free at death. 2024 federal exemption: $13.61 million per person ($27.22 million for married couples with portability). Amounts above exemption taxed at 40%.

The amount one person can gift to another annually without using lifetime exemption or filing a gift tax return. 2024 exclusion: $18,000 per recipient ($36,000 for married couples gift-splitting).

A trust that can be modified or revoked during the grantor's lifetime. Avoids probate, provides privacy, and allows for incapacity planning. Assets in trust receive stepped-up basis at death.

A trust that owns life insurance policies to remove proceeds from the insured's estate. Properly structured, death benefits pass estate and income tax-free to beneficiaries. Three-year lookback rule applies.

Legal document authorizing someone to act on another's behalf. Durable POA remains effective if principal becomes incapacitated. Financial POA handles financial matters; healthcare POA handles medical decisions.

When inherited property's cost basis is adjusted to fair market value at death. Eliminates capital gains tax on appreciation during decedent's lifetime. Does not apply to IRAs or annuities.

Framework for constructing portfolios to maximize expected return for a given level of risk. Emphasizes diversification benefits and the efficient frontier. Developed by Harry Markowitz in 1952.

The process of dividing investments among different asset classes (stocks, bonds, cash) based on goals, risk tolerance, and time horizon. Primary driver of portfolio returns and risk.

A measure of systematic risk relative to the market. Beta of 1 = market risk. Beta >1 = more volatile than market. Beta <1 = less volatile. Used in CAPM to calculate expected return.

A measure of investment volatility showing dispersion of returns around the mean. Higher standard deviation = more risk. Used to compare risk of different investments and portfolios.

Risk-adjusted return measure calculated as (Portfolio Return - Risk-Free Rate) / Standard Deviation. Higher Sharpe ratio indicates better risk-adjusted performance. Used to compare investment options.

Investment strategy of investing fixed amounts at regular intervals regardless of market conditions. Reduces impact of volatility and prevents market timing. Effective for long-term investors.

Periodically adjusting portfolio holdings to maintain target asset allocation. Can be calendar-based or threshold-based. Maintains risk level and may enhance returns through selling high and buying low.

Pure death protection for a specified period (10, 20, 30 years). No cash value accumulation. Most affordable coverage per dollar of death benefit. Ideal for temporary needs like mortgage or child-rearing.

Permanent insurance with guaranteed level premiums, death benefit, and cash value growth. Higher premiums than term but provides lifelong protection. Cash value grows tax-deferred.

Methods include Human Life Value (capitalized earnings), Needs Approach (financial obligations), and Capital Retention. Consider income replacement, debt payoff, education funding, and final expenses.

Replaces income when unable to work due to illness or injury. Own-occupation covers inability to perform your specific job. Any-occupation covers inability to perform any job for which qualified.

Covers costs of nursing home, assisted living, or home health care. Benefit triggers: inability to perform 2+ ADLs or cognitive impairment. Tax-qualified policies have favorable tax treatment.

Excess liability coverage above auto and homeowners policy limits. Typically provides $1-5 million additional coverage. Protects against catastrophic liability claims and lawsuits.

Tax-advantaged education savings account. Contributions grow tax-free; qualified withdrawals tax-free. $18,000 annual gift exclusion per beneficiary; 5-year gift averaging available. State tax deductions may apply.

Tax-advantaged account for education expenses. Maximum contribution: $2,000/year per beneficiary. Can be used for K-12 and higher education. Income limits apply to contributors.

Free Application for Federal Student Aid determines eligibility for financial aid. Expected Family Contribution (now Student Aid Index) calculates how much family can contribute. Assets in child's name weighted more heavily.

Tax credit up to $2,500 per student for first four years of college. 100% of first $2,000 plus 25% of next $2,000 in qualified expenses. 40% refundable. Income limits apply.

Tax credit of 20% of first $10,000 in qualified expenses (max $2,000/return). Available for undergraduate, graduate, and professional courses. No limit on years claimed. Income limits apply.

Eight principles: Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism, Diligence, and Comply with the Law. All CFP professionals must adhere to these principles.

CFP professionals must act as fiduciaries when providing financial advice, placing client interests above their own. Includes duties of loyalty, care, and following client instructions.

A conflict that could affect the objectivity of advice. Must be disclosed to clients. Examples: compensation arrangements, referral fees, proprietary products, and personal financial interests.

CFP professionals must keep client information confidential except when required by law, authorized by client, or necessary to establish claims/defenses. Extends beyond client relationship termination.

CFP professionals must provide written disclosures about services, compensation, conflicts of interest, and disciplinary history. Must be provided before or at engagement and updated as changes occur.

CFP professionals must act with care, skill, prudence, and diligence when providing advice. Includes conducting thorough analysis and making reasonable recommendations based on client's situation.

CFP Board requirements for how financial planning is conducted. Include gathering information, analyzing data, developing recommendations, presenting plans, implementing strategies, and monitoring progress.

CFP professionals must disclose how they are compensated (fee-only, commission, fee-based). Must explain potential conflicts created by compensation structure and how they are managed.

Process for investigating and adjudicating alleged violations. Sanctions range from private censure to permanent revocation of certification. CFP professionals must self-report certain events.

CFP professionals must complete 30 hours of CE every two years, including 2 hours of ethics. Ensures ongoing competence and awareness of regulatory changes and best practices.