Certified Financial Planner (CFP) Retirement Savings and Income Planning Syllabus

List four core tax advantages of a qualified retirement plan to the employer and employee.

(1) Employer contributions are currently tax-deductible, (2) employee pre-tax deferrals reduce current taxable income, (3) earnings grow tax-deferred inside the plan, and (4) special tax treatment may apply to distributions (e.g., NUA, 10-year averaging for certain participants, rollover deferral).

What is the primary purpose of ERISA, and which plans does it generally cover?

The Employee Retirement Income Security Act of 1974 sets minimum standards to protect private-sector plan participants—covering participation, vesting, funding, fiduciary conduct, and reporting/disclosure. It applies to private employer plans but generally NOT to governmental or most church plans.

State ERISA's "prudent expert" fiduciary standard of care.

A fiduciary must act with the care, skill, prudence, and diligence that a prudent person familiar with such matters (an expert) would use—acting solely in the interest of participants and beneficiaries, diversifying investments to minimize large losses, and following the plan documents.

Under ERISA, what is a prohibited transaction and name two examples.

A prohibited transaction is a dealing between the plan and a "party in interest" that risks self-dealing. Examples: the plan lending money to or buying property from the employer/fiduciary, or a fiduciary using plan assets for personal benefit. Such transactions trigger excise taxes and fiduciary liability.

How does a Roth IRA differ from a Traditional IRA in terms of contribution deductibility and qualified-distribution taxation?

Traditional IRA contributions may be tax-deductible (subject to income/active-participant limits) and qualified withdrawals are fully taxable. Roth IRA contributions are never deductible (after-tax), but qualified distributions of both contributions and earnings are entirely tax-free.

What are the 2025 IRA contribution limit and catch-up amount, and what type of income is required to contribute?

For 2025 the IRA contribution limit is $7{,}000 with a $1{,}000 age-50 catch-up (total $8{,}000). Contributions require earned (compensation) income, and total contributions cannot exceed compensation for the year.

What are the two requirements for a Roth IRA distribution to be "qualified" (tax- and penalty-free on earnings)?

(1) The 5-year holding period must be met (5 tax years from the first Roth contribution), AND (2) the distribution occurs after age 59½, death, disability, or for a first-time home purchase (up to $10{,}000 lifetime).

In what order are Roth IRA distributions deemed withdrawn (ordering rules)?

(1) Regular contributions first (always tax- and penalty-free), then (2) conversion amounts (FIFO, taxable portion first, subject to a 5-year penalty clock per conversion), then (3) earnings last (taxable/penalized unless the distribution is qualified).

What is a backdoor Roth IRA, and what tax trap can affect it?

A backdoor Roth is a nondeductible Traditional IRA contribution followed by a conversion to a Roth, used by high earners over the Roth income limits. The pro-rata rule (IRC §72) is the trap: if the taxpayer holds other pre-tax IRA balances, the conversion's taxable portion is prorated across ALL IRA assets, so it is not entirely tax-free.

Compare the contribution mechanics of a SEP IRA versus a SIMPLE IRA.

A SEP is funded only by employer contributions (no employee deferrals), up to the lesser of 25% of compensation or the §415(c) limit ($70{,}000 in 2025). A SIMPLE IRA allows employee salary deferrals ($16{,}500 in 2025, plus $3{,}500 catch-up) with a mandatory employer match (up to 3%) or 2% nonelective contribution.

For a self-employed individual, why is the effective SEP contribution rate about 20% rather than 25%?

Because the 25% rate applies to net compensation after subtracting the contribution itself (and one-half SE tax). The self-employed equivalent of 25% of "salary" becomes $\frac{0.25}{1+0.25}=20\%$ of net self-employment earnings.

What makes a Solo (Individual) 401(k) able to allow larger contributions than a SEP at moderate income levels?

A Solo 401(k) lets the owner contribute BOTH as employee (elective deferral up to $23{,}500 in 2025, plus catch-up) AND as employer (profit sharing up to 25% of compensation). The combined total is capped at the §415(c) limit ($70{,}000 in 2025, plus catch-up), allowing more than a SEP's employer-only contribution at the same income.

Who can establish a SIMPLE IRA, and what is the key eligibility restriction for the employer?

An employer with 100 or fewer employees (earning at least $5{,}000) that maintains no other qualified plan. Employees who earned $5{,}000 in any two prior years and are expected to earn $5{,}000 in the current year must be eligible.

What type of organizations can offer a 403(b) plan, and what is its distinguishing investment characteristic?

403(b) (tax-sheltered annuity) plans are offered by public schools, 501(c)(3) tax-exempt organizations, and certain ministers. Investments are limited to annuity contracts and mutual funds (held in custodial accounts)—not individual stocks/bonds directly.

What is the special 403(b) "15-year rule" catch-up provision?

Employees of qualifying organizations with at least 15 years of service may contribute up to an extra $3{,}000 per year (lifetime max $15{,}000) above the regular elective deferral limit. This is in addition to (and applied before) the age-50 catch-up.

Distinguish a governmental 457(b) plan from a 401(k) regarding early-distribution penalties and catch-up.

A governmental 457(b) has NO 10% early-withdrawal penalty for distributions before age 59½ (after separation from service). It also offers a special "final 3-year" catch-up allowing up to double the normal deferral limit, which cannot be used in the same year as the age-50 catch-up.

What is the key risk difference between a governmental 457(b) and a tax-exempt (nongovernmental) 457(b) plan?

Governmental 457(b) assets are held in trust for participants (protected from the employer's creditors). Nongovernmental (tax-exempt) 457(b) assets remain the employer's property subject to its creditors, making them effectively unfunded/top-hat plans for select management.

What distinguishes a nonqualified deferred compensation (NQDC) plan from a qualified plan in terms of ERISA and tax treatment?

NQDC plans are generally exempt from ERISA's funding/participation/vesting rules (often "top-hat" for executives), can discriminate in favor of HCEs, but the employer's deduction is deferred until the employee recognizes income, and benefits are unfunded and subject to the employer's creditors.

What is IRC §409A and what is the consequence of violating it in an NQDC plan?

§409A governs the timing of deferral elections and distributions in NQDC plans. Violations cause immediate income inclusion of all vested deferrals, a 20% additional federal penalty tax, plus interest—penalizing the employee.

Compare a rabbi trust and a secular trust used to informally fund NQDC.

A rabbi trust holds assets for the executive but remains subject to the employer's creditors (so the executive avoids current taxation but bears insolvency risk). A secular trust protects assets from creditors, but because the benefit is no longer subject to substantial risk of forfeiture, the employee is taxed currently.

At what age must Required Minimum Distributions (RMDs) begin under current law (SECURE 2.0)?

RMDs must begin at age 73 (for individuals reaching 72 after 2022); the applicable age rises to 75 in 2033. The first RMD may be delayed until April 1 of the year following the year the participant reaches the applicable age (the required beginning date).

How is the annual RMD amount calculated?

$$\text{RMD}=\frac{\text{Account balance as of prior Dec.\ 31}}{\text{Distribution period (life expectancy factor)}}$$ The factor comes from the IRS Uniform Lifetime Table (or Joint Life Table if the sole beneficiary is a spouse more than 10 years younger).

What is the penalty for failing to take an RMD under SECURE 2.0, and how can it be reduced?

The excise tax is 25% of the shortfall (reduced from the prior 50%), and it drops to 10% if the failure is corrected within a 2-year correction window. Roth IRAs have no RMDs during the owner's lifetime; Roth 401(k)s no longer require lifetime RMDs starting 2024.

State the general 10% early-distribution penalty rule and list four common exceptions.

A 10% additional tax applies to taxable distributions taken before age 59½. Exceptions include: death, disability, substantially equal periodic payments (SEPP/72(t)), unreimbursed medical expenses over 7.5% of AGI, qualified higher-education expenses (IRAs), first-time home purchase up to $10{,}000 (IRAs), and IRS levy.

What is the "Rule of 55" exception to the early-withdrawal penalty?

Distributions from an employer's qualified plan or 401(k) are penalty-free if the employee separates from service during or after the year they turn 55 (age 50 for qualified public-safety employees). It applies only to that employer's plan—NOT to IRAs or to amounts rolled into an IRA.

Explain the §72(t) Substantially Equal Periodic Payments (SEPP) exception and its required duration.

SEPP allows penalty-free pre-59½ withdrawals taken in substantially equal amounts using one of three IRS methods (RMD, fixed amortization, or fixed annuitization). Payments must continue for the longer of 5 years OR until age 59½; modifying them early triggers retroactive penalties plus interest.

What is the critical difference between a direct (trustee-to-trustee) rollover and a 60-day (indirect) rollover?

A direct rollover moves funds trustee-to-trustee with no withholding and no tax. An indirect rollover pays the participant, who must redeposit within 60 days; eligible rollover distributions from employer plans are subject to mandatory 20% federal withholding, which the participant must replace from other funds to roll over the full amount.

What is the one-rollover-per-12-months rule, and what is excluded from it?

An individual may make only one IRA-to-IRA 60-day rollover per 12-month period (aggregated across all IRAs). Direct trustee-to-trustee transfers, Roth conversions, and rollovers between IRAs and employer plans are NOT subject to this limit.

What is Net Unrealized Appreciation (NUA) and its tax benefit on employer stock in a qualified plan?

NUA is the growth of employer stock above its cost basis inside the plan. With a lump-sum distribution of the stock, the participant pays ordinary income tax only on the basis at distribution, and the appreciation is taxed at long-term capital gains rates when later sold—not as ordinary income.

At what ages can a worker claim Social Security retirement benefits, and what is the effect of claiming at 62 versus full retirement age (FRA)?

Benefits can start as early as age 62 (permanently reduced) up to age 70. Claiming at 62 reduces the benefit by roughly 25–30% below FRA. For those with FRA of 67, claiming at 62 yields about 70% of the full primary insurance amount (PIA).

How are delayed retirement credits applied to Social Security, and until what age do they accrue?

Delaying benefits past FRA earns delayed retirement credits of 8% per year (2/3 of 1% per month), accruing only until age 70. There is no benefit to delaying past 70.

How many quarters of coverage (credits) are generally required to be fully insured for Social Security retirement benefits?

40 quarters of coverage (credits), equivalent to about 10 years of covered employment. A worker can earn a maximum of 4 credits per year.

Describe the Social Security earnings test for beneficiaries below full retirement age.

For beneficiaries under FRA who are still working, $1 of benefits is withheld for every $2 of earnings above the annual limit ($23{,}400 in 2025). In the year FRA is reached, $1 is withheld for every $3 above a higher limit; after FRA there is no earnings test. Withheld benefits are recredited later as an increased benefit.

How is the taxability of Social Security benefits determined?

Taxation depends on "provisional income" (AGI + tax-exempt interest + one-half of Social Security benefits). Up to 50% of benefits become taxable above the first threshold and up to 85% above the second (e.g., for single filers, $25{,}000 and $34{,}000; for married filing jointly, $32{,}000 and $44{,}000). These thresholds are not indexed for inflation.

What is a spousal Social Security benefit and what is its maximum amount?

A spouse may claim a benefit based on the worker's record, up to 50% of the worker's primary insurance amount (PIA) if claimed at the spouse's full retirement age. Claiming the spousal benefit before the spouse's FRA permanently reduces it.

What is a survivor (widow/widower) Social Security benefit and the earliest claiming age?

A surviving spouse can receive up to 100% of the deceased worker's benefit. Survivor benefits can begin as early as age 60 (age 50 if disabled), at a reduced amount, or unreduced at the survivor's full retirement age.

What is a Qualified Longevity Annuity Contract (QLAC) and its planning purpose?

A QLAC is a deferred income annuity purchased inside a qualified plan or IRA that begins payments at an advanced age (up to 85). Amounts in a QLAC are excluded from the RMD base, deferring required distributions, and it hedges longevity risk with guaranteed lifetime income. The 2025 purchase limit is $210{,}000.

Compare the wage replacement ratio concept used in retirement planning.

The wage replacement ratio estimates the percentage of pre-retirement gross income needed to maintain the same lifestyle in retirement—typically 70%–80%. It is lower than 100% because retirees stop saving for retirement, pay lower payroll/FICA taxes, and often have reduced work-related expenses.

What is the difference between a Roth conversion and a Roth contribution regarding income limits and taxation?

Roth contributions are limited by modified AGI phase-outs and the annual contribution cap. Roth conversions have NO income limit and NO dollar cap, but the pre-tax amount converted is included in ordinary taxable income in the year of conversion. Conversions are a key strategy in low-income years.

Explain the SECURE Act 10-year rule for most non-spouse inherited IRA beneficiaries.

Most non-spouse "non-eligible designated beneficiaries" who inherit after 2019 must fully empty the inherited IRA by the end of the 10th year after death. If the decedent had already begun RMDs, annual RMDs are also required in years 1–9 plus full depletion by year 10. Eligible designated beneficiaries (spouse, minor child, disabled, chronically ill, or beneficiary <10 years younger) may still use life-expectancy stretch.