CFP - Retirement Savings and Income Planning (18% of the exam) - Section F.47

Types of retirement plans

Defined benefit and cash balance plans; defined contribution plans including 401(k), 403(b), 457, profit sharing, money purchase and ESOPs; SEP and SIMPLE IRAs; traditional and Roth IRAs. Items identify the plan type from its features and its fit for an employer or individual.

Internal Revenue Code Section 401(k)Internal Revenue Code Section 403(b)Internal Revenue Code Section 457

Practice question for this objective

Free sampleRetirement Savings and Income Planningmedium

Nadia is 48, runs a marketing consultancy as a sole proprietor and has no employees and no intention of hiring any. She wants the plan that will accept the largest contribution for her this year. Assume her net earnings from self-employment for plan purposes are 100,000 dollars, that the employer contribution in either a SEP arrangement or a one-participant plan is capped at 25 percent of that figure, that the elective deferral limit is 24,500 dollars, that the SIMPLE IRA deferral limit is 17,000 dollars with a 3 percent employer match, and that the overall annual additions limit is 71,000 dollars. Which plan should her planner recommend, and what total goes in?

AA SEP arrangement, accepting 25,000 dollars, being 25 percent of her net earnings
BA one-participant 401(k) plan, accepting 49,500 dollars of deferral and employer money Correct
CA SIMPLE IRA, accepting 20,000 dollars of deferral plus the required employer match
DA one-participant 401(k) plan, accepting 24,500 dollars of elective deferral only

A one-participant 401(k) accepts an elective deferral plus an employer contribution, so it usually beats a SEP or SIMPLE at moderate self-employment income. The comparison turns on whether the plan accepts employee deferrals as well as employer money. A SEP accepts employer contributions only, capped here at 25 percent of 100,000 dollars, which is 25,000 dollars. A SIMPLE IRA accepts a 17,000 dollar deferral and a 3 percent match of 3,000 dollars, so 20,000 dollars. A one-participant 401(k) accepts both: the 24,500 dollar deferral plus the same 25,000 dollar employer contribution, giving 49,500 dollars, which is tested against the 71,000 dollar annual additions limit and comfortably fits. At higher net earnings the employer piece alone eventually reaches the annual additions limit and the gap between the plans narrows, but at this income level the deferral is what makes the difference.

Why A is wrong: A SEP is funded only by employer contributions, so it stops at 25,000 dollars here; it is simple to run but it leaves the whole elective deferral amount unused, which is why it is not the maximising choice.

Why B is correct: A one-participant 401(k) accepts both the 24,500 dollar elective deferral and a 25,000 dollar employer contribution, giving 49,500 dollars, which is below the 71,000 dollar annual additions limit.

Why C is wrong: The SIMPLE deferral of 17,000 dollars plus a 3 percent match of 3,000 dollars totals 20,000 dollars, so the lower deferral ceiling makes it the weakest option for someone whose only aim is the largest contribution.

Why D is wrong: This picks the right plan but assumes a self-employed owner cannot also make an employer contribution to it; a sole proprietor wears both hats and may fund the employer share as well as deferring.

See more CFP practice questions, answers explained.

Exam traps in Retirement Savings and Income Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

Nothing further, because the 72,000 dollar annual additions limit applies to her across every plan she takes part in and the Halloran Systems plan has already used 30,500 dollars of it
Why it is wrong: This is tempting because the elective deferral limit genuinely is a personal limit that follows the individual, but the annual additions limit is a per-plan limit tested employer by employer, so an unrelated employer's plan does not consume it.
Replace the 401(k) with a SEP individual retirement account and fund it at the maximum employer percentage of her compensation
Why it is wrong: A SEP is subject to the same annual additions ceiling that already caps her 401(k), so swapping one for the other shelters no additional money and would in fact remove her elective deferral and catch-up.
The deferred amounts must be held in a trust for the exclusive benefit of participants, in the same way as the assets of the hospital's own 403(b) plan
Why it is wrong: Exclusive benefit trust protection applies to governmental 457(b) plans and to qualified and 403(b) arrangements, but a non-governmental 457(b) is deliberately left unfunded so that the deferral is not taxed on vesting.

Examworthy is not affiliated with or endorsed by CFP Board. Original, blueprint-aligned practice material only.