CFP Practice Questions (2026) — Free Sample Questions with Answers

Answer: C

Recommend a comparable outside fund instead, so that no conflict exists: Avoiding the conflict by recommending what he considers a second-best fund would put his own interests ahead of the client's best interest.

Rely on the firm's account agreement, which states that the firm "may receive additional compensation": Boilerplate does not give sufficiently specific facts for the client to give informed consent.

Disclose the higher payout and its possible effect, get Keiko's informed consent, and manage it: Correct. The Duty of Loyalty requires full disclosure of a Material Conflict of Interest with specific facts, the client's informed consent, and properly managing the conflict.

Recommend the fund but waive his extra payout on Keiko's purchase, so no disclosure is needed: Waiving his own payout reduces his personal conflict, but the firm still benefits from its proprietary fund, so that Material Conflict must still be disclosed and managed.

Duty of Loyalty: avoid, or fully disclose with specific facts and obtain informed consent, and then properly manage every Material Conflict of Interest.

Answer: C

1. Inflation-adjusted rate: I/Y = [(1.07 / 1.05) − 1] × 100 = 1.9048.
2. BGN; N = 4; I/Y = 1.9048; PMT = 30,000; FV = 0; solve PV = $116,677 (needed at 18, in today's dollars).
3. END; N = 10; I/Y = 1.9048; FV = 116,677; PMT = 0; solve PV = $96,614.

$55,273: Ignores education inflation: discounts $30,000 a year at 7% only.

$59,313: Finds the age-18 need in today's dollars ($116,677) but discounts it 10 years at the 7% nominal rate, mixing real and nominal values.

$96,614: Correct. Working in today's dollars at the inflation-adjusted rate of 1.9048%: the age-18 need is $116,677, and its present value 10 years earlier at 1.9048% is $96,614.

$116,677: This is the amount needed at age 18 in today's dollars, not discounted back to today.

When costs are stated in today's dollars, use the inflation-adjusted rate for every step, including discounting to today.

Answer: A

1. Loan payoff: cash −$22,000 and auto loan −$22,000, so net worth is unchanged.
2. Furniture on credit: personal property +$6,000 and credit cards +$6,000, so net worth is unchanged.
3. ETF decline: invested assets −$25,000 ($60,000 → $35,000), so net worth falls by $25,000.
4. Net worth = total assets $1,047,000 − total liabilities $398,000 = $649,000 (= $674,000 − $25,000).

$649,000: Correct. The loan payoff and the furniture purchase change assets and liabilities by equal amounts; only the $25,000 market decline lowers net worth: $674,000 − $25,000 = $649,000.

$674,000: Treats the $25,000 decline as irrelevant until the ETF is sold; the statement of financial position uses current fair market values.

$696,000: Ignores the market decline and counts the $22,000 loan payoff as a gain in net worth, forgetting that cash fell by the same amount.

$1,047,000: This is total assets after the changes ($1,088,000 − $22,000 + $6,000 − $25,000), not net worth.

Paying a debt with cash, or buying an asset on credit, changes assets and liabilities equally and leaves net worth unchanged; changes in fair market value do change it.

Answer: C

A shorter 30-day elimination period: Reduces out-of-pocket cost at the start of care, but a 90-day wait is manageable with their assets; it is not the biggest risk.

A return-of-premium rider: Refunds premiums at death but does not protect the purchasing power of the benefit.

A compound inflation protection rider: Correct. With care decades away, compound inflation protection keeps the $6,000 monthly benefit in line with rising care costs.

A nonforfeiture (shortened benefit period) rider: Preserves some benefits if she stops paying premiums, but leaves the benefit's value exposed to inflation.

For younger LTC buyers, compound inflation protection is usually the most valuable rider because care costs compound over decades.

Answer: B

1. Required insurance = 0.80 × 400,000 = $320,000.
2. Recovery fraction = 280,000 / 320,000 = 0.875.
3. Payment = 0.875 × 50,000 − 2,500 = 43,750 − 2,500 = $41,250.

$32,500: Divides coverage by the full replacement cost ($280,000 / $400,000) instead of by the 80% required amount.

$41,250: Correct. Required coverage = 80% × $400,000 = $320,000; ($280,000 / $320,000) × $50,000 = $43,750; less the $2,500 deductible = $41,250.

$43,750: Applies the coinsurance penalty but forgets to subtract the deductible.

$47,500: Ignores the coinsurance penalty and subtracts only the deductible.

Coinsurance: payment = (insurance carried ÷ insurance required) × loss − deductible, capped at the policy limit and the loss.

Answer: D

Write covered calls on the shares: Generates premium income but offers protection only up to the premium received.

Buy protective puts on the shares for the full 12 months: Provides the floor, but the put premium is a significant cash cost he cannot easily pay.

Sell the same stock short against the box for the next 12 months: Locks in the value completely, but a short against the box is a constructive sale under §1259, which triggers the gain he wants to defer.

Buy out-of-the-money puts and sell out-of-the-money calls: Correct. A collar uses the call premium to pay for the put, setting a floor about 10% down at little or no net cost; giving up gains above the call strike suits his modest expectations, and he keeps the shares and defers the gain.

Protective put = floor at a cost; covered call = income with capped upside; collar = both, at low or zero net cost.

Answer: C

1. 2026 MFJ 32% bracket: $403,550–$512,450, so the marginal rate is 32%.
2. MAGI exceeds $250,000, so taxable interest also bears the 3.8% NIIT; municipal interest is exempt from both.
3. TEY = 3.6 / (1 − 0.32 − 0.038) = 3.6 / 0.642 = 5.61%.

4.89%: Multiplies the municipal yield by (1 + tax rate) instead of dividing by (1 − tax rate).

5.29%: Uses only the 32% bracket and ignores the 3.8% NIIT that would apply to taxable interest above $250,000 MAGI.

5.61%: Correct. Their marginal rate on taxable interest is 32% + 3.8% NIIT = 35.8%; TEY = 3.6% / (1 − 0.358) = 5.61%.

6.08%: Uses the 37% top bracket; $460,000 of MFJ taxable income falls in the 32% bracket ($403,550–$512,450).

TEY = tax-exempt yield ÷ (1 − marginal rate); for high-income clients include the 3.8% NIIT that taxable interest would bear.

Answer: A

Sell equity funds and buy bond funds inside the IRAs, where the trades are not taxed: Correct. Equities are 62.1% vs a 50% ±5 target; trading inside the IRAs restores the target with no capital gains.

Sell part of Fund P in the taxable account, since it is the most volatile equity holding: Realizes part of a $180,000 unrealized gain when tax-free trades in the IRAs are available.

Amend the IPS target to 60% equities to match the current allocation: Changes the policy to fit the drift rather than their stated moderate risk tolerance.

Wait until equities exceed the band by another 10 percentage points to let gains run: Ignores the IPS rebalancing rule and lets risk rise further.

Rebalance to the IPS target when a band is breached, preferring trades in tax-deferred accounts to avoid realizing gains.

Answer: B

1. Ordinary taxable income = $150,000 − $70,000 = $80,000.
2. Tax on $80,000 (MFJ 2026): 10% × $24,800 = $2,480; 12% × ($80,000 − $24,800) = 12% × $55,200 = $6,624; total $9,104.
3. Gains stack on top of ordinary income, from $80,000 to $150,000. The 0% band runs to $98,900, so $18,900 is taxed at 0%.
4. Remaining gain $70,000 − $18,900 = $51,100 × 15% = $7,665 (all below the $613,700 start of the 20% band).
5. Total tax = $9,104 + $7,665 = $16,769.

$9,104: Taxes only the ordinary income and treats all of the gain as 0% because the $80,000 of ordinary income is below $98,900; the 0% rate applies only until total taxable income reaches $98,900.

$16,769: Correct. Ordinary income is taxed first ($9,104); the gains stack on top, so $18,900 fills the rest of the 0% band (to $98,900) and $51,100 is taxed at 15%.

$19,604: Taxes the entire $70,000 of gain at 15% and ignores the $18,900 that still falls in the 0% band.

$22,424: Runs all $150,000 through the ordinary brackets; qualified dividends and long-term gains use the 0%/15%/20% rates.

Long-term gains and qualified dividends are stacked on top of ordinary taxable income; only the part of the 0% band that ordinary income leaves unused is available to the gains.

Answer: A

Payroll taxes rise, the company's QBI falls, and the risk of wage reclassification drops: Correct. Higher wages carry FICA, are deductible by the S corporation (reducing pass-through QBI), and bring pay in line with reasonable compensation.

The added salary counts as qualified business income, increasing the QBI on which his deduction is based: W-2 wages paid to an owner-employee are not QBI; they reduce QBI at the S corporation level.

The extra $130,000 is taxed at the 21% corporate rate before passing through to him: An S corporation generally pays no entity-level income tax.

His K-1 income rises because S corporation wages are not deductible by the corporation: Wages are deductible by the S corporation, so K-1 income falls.

Reasonable S corporation compensation adds payroll tax and lowers K-1 (QBI) income, but cuts the risk of reclassification.

Answer: A

Annual RMDs in years 1–9, with the account emptied by the end of year 10: Correct. A non-eligible designated beneficiary is subject to the 10-year rule, and because she died after her RBD, annual RMDs must continue during the period.

No distributions until the end of the 10th year after her death, when the account must be emptied: This applies when the owner dies before the required beginning date.

RMDs over his single life expectancy for as long as he lives: Lifetime stretch is limited to eligible designated beneficiaries (spouse, minor child, disabled, chronically ill, or not more than 10 years younger).

Full distribution by the end of the fifth year after her death: The five-year rule applies to non-designated beneficiaries such as an estate when the owner died before the RBD.

A non-eligible designated beneficiary must empty the IRA within 10 years; if the owner died on or after the RBD, annual RMDs also apply in years 1–9.

Answer: D

1. Inflation-adjusted rate: I/Y = [(1.07 ÷ 1.03) − 1] × 100 = 3.8835.
2. Income need: BGN; N = 25; I/Y = 3.8835; PMT = 70,000; FV = 0; solve PV = $1,150,133.
3. Fixed pension: BGN; N = 25; I/Y = 7; PMT = 20,000; FV = 0; solve PV = $249,387 (a level payment is discounted at the nominal rate).
4. Capital needed = $1,150,133 − $249,387 = $900,746.

$623,467: Discounts the inflating income need at the nominal 7%; payments that rise with inflation must be valued at the inflation-adjusted rate.

$821,523: Nets the pension against the need before discounting, as if the $20,000 also rose with inflation; a fixed pension loses real value every year.

$874,066: Values both streams in END mode; the payments start today, so both are annuities due.

$900,746: Correct. PV of the inflating need (BGN, 3.8835%) $1,150,133 minus PV of the level pension (BGN, 7%) $249,387 = $900,746.

Value an inflating need at the inflation-adjusted rate and a level (non-COLA) pension at the nominal rate, then subtract; netting the pension against the need first overstates what the pension is worth.

Answer: C

Add Tamsin as joint owner with right of survivorship on the brokerage and checking accounts: Gives Tamsin access but defeats the equal-shares goal at death and exposes the accounts to Tamsin's creditors.

Retitle the home and brokerage account into a new revocable living trust: Valuable, but it also needs capacity and does not cover medical decisions or the assets left outside the trust; the durable POA and directive come first.

Have her sign a durable POA and health care directive now, while she still has capacity: Correct. Her capacity may decline, so signing the core incapacity documents while she clearly can is the most time-sensitive step.

Have Tamsin petition the court to be appointed as Winifred's guardian and conservator: Guardianship is the court process Winifred wants to avoid and is unnecessary while she can still sign documents.

When capacity is declining, execute the durable POA and health care directive first, while the client can still validly sign them.

Answer: C

1. Gift splitting treats each spouse as giving $50,000.
2. Each spouse subtracts the 2026 annual exclusion: $50,000 − $19,000 = $31,000.
3. Combined taxable gifts = 2 × $31,000 = $62,000; no tax is due because each spouse's $15,000,000 exclusion absorbs it.

$0: Confuses taxable gifts with gift tax payable; the taxable gifts use exclusion but no tax is owed.

$31,000: This is each spouse's taxable gift, not the combined total.

$62,000: Correct. Split $50,000 each; each excludes $19,000, leaving $31,000 each, or $62,000 combined.

$81,000: Applies only one $19,000 exclusion, as if gift splitting had not been elected.

With gift splitting, each spouse reports half the gift and applies his or her own $19,000 annual exclusion; the remainder uses lifetime exclusion before any tax is due.

Answer: C

Show her the interest-rate gap and recommend paying off the card from the house fund permanently: Financially sound, but it ignores the mental account she has said she will not touch, so she is unlikely to act.

Keep both balances and raise the card payment to $600 a month from her budget: Reduces the debt slowly but leaves her paying 24% while cash sits at 0.5%.

Pay off the card from the house fund and set an automatic monthly transfer to rebuild the fund: Correct. Framing the payoff as a loan from the house fund that is automatically repaid keeps the "house" label intact while eliminating 24% interest.

Move the card balance to a 0% promotional card and leave the house fund untouched: With a $600 fee and about $10,200 left when the 27% rate starts, the transfer only postpones the problem while $30,000 sits at 0.5%.

Mental accounting treats money as non-fungible; effective advice reframes the action so it fits the client's labelled accounts.