CFP Exam Glossary
34 essential terms and definitions for CFP Exam. Each definition is written for exam preparation, covering the concepts as they are tested on the 2026 syllabus.
4
- 401(k) Plan
- 401(k) plan is an employer-sponsored defined contribution retirement plan that allows employees to make pre-tax or Roth after-tax salary deferral contributions, often with an employer matching contribution, subject to annual IRS contribution limits.
5
- 529 Plan
- 529 plan is a tax-advantaged savings plan designed to encourage saving for future education expenses, offering federal tax-free growth and withdrawals when used for qualified education expenses.
A
- Annual Gift Tax Exclusion
- Annual gift tax exclusion is the amount a person may give to any individual each year without incurring gift tax or using any portion of the lifetime estate and gift tax exemption.
B
- Bypass Trust
- Bypass trust (credit shelter trust) is an irrevocable trust created at the death of the first spouse that uses the decedent's estate tax exemption to shelter assets from estate tax at the surviving spouse's subsequent death, effectively preserving both spouses' exemptions.
C
- Charitable Remainder Trust
- Charitable remainder trust (CRT) is an irrevocable trust that distributes income to one or more non-charitable beneficiaries for a term of years or for life, with the remaining assets passing to a designated charity at termination, providing an income tax deduction at creation.
- Community Property
- Community property is a form of property ownership in certain states where most assets acquired during marriage are owned equally by both spouses, regardless of which spouse earned the income or holds title.
- Coverdell Education Savings Account
- Coverdell Education Savings Account is a tax-advantaged trust or custodial account used to pay qualified education expenses for a designated beneficiary, with annual contribution limits and income phase-outs for contributors.
D
- Defined Benefit Plan
- Defined benefit plan is an employer-sponsored retirement plan that promises a specified monthly benefit at retirement, typically calculated using a formula based on salary history, years of service, and age.
- Defined Contribution Plan
- Defined contribution plan is a retirement plan in which the employer, employee, or both make regular contributions to an individual account, with the retirement benefit determined by the contributions and investment performance of the account.
- Dollar Cost Averaging
- Dollar cost averaging is an investment strategy in which a fixed dollar amount is invested at regular intervals regardless of the asset's price, resulting in the purchase of more shares when prices are low and fewer shares when prices are high.
- Durable Power of Attorney
- Durable power of attorney is a legal document that grants an agent the authority to make financial or legal decisions on behalf of the principal, remaining effective even if the principal becomes incapacitated.
E
- ERISA
- ERISA (Employee Retirement Income Security Act) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry, providing protection for plan participants through fiduciary responsibilities, reporting, and disclosure requirements.
- Estate Tax Exemption
- Estate tax exemption is the amount of a decedent's taxable estate that is exempt from federal estate tax, adjusted periodically for inflation and transferable between spouses through portability.
F
- Fiduciary Duty
- Fiduciary duty is the highest standard of care in financial planning, requiring the financial planner to act solely in the client's best interest, with loyalty, prudence, and full disclosure of conflicts of interest.
G
- Generation-Skipping Transfer Tax
- Generation-skipping transfer tax (GSTT) is a federal tax imposed on transfers of property to beneficiaries who are two or more generations below the transferor, designed to prevent families from avoiding estate tax by skipping a generation.
H
- Health Savings Account
- Health savings account (HSA) is a tax-advantaged account available to individuals enrolled in a high-deductible health plan, offering a triple tax benefit of deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
I
- Irrevocable Life Insurance Trust
- Irrevocable life insurance trust (ILIT) is a trust that owns a life insurance policy, removing the death benefit from the insured's taxable estate while providing liquidity to pay estate taxes and other expenses.
J
- Joint Tenancy with Right of Survivorship
- Joint tenancy with right of survivorship is a form of co-ownership in which two or more persons hold equal undivided interests in property, with the surviving owner(s) automatically receiving the deceased owner's share outside of probate.
M
- Marginal Tax Rate
- Marginal tax rate is the tax rate applied to the last dollar of taxable income, determined by the taxpayer's position within the progressive federal income tax brackets.
- Medicare
- Medicare is a federal health insurance program for individuals aged 65 and older and certain younger people with disabilities, consisting of Part A (hospital insurance), Part B (medical insurance), Part C (Medicare Advantage), and Part D (prescription drug coverage).
- Modern Portfolio Theory
- Modern portfolio theory is a framework for constructing investment portfolios that maximizes expected return for a given level of risk through diversification, based on the premise that investors are risk-averse and markets are efficient.
P
- Probate
- Probate is the legal process by which a deceased person's will is validated by a court and their estate is administered, including the identification of assets, payment of debts, and distribution of remaining property to beneficiaries.
Q
- QTIP Trust
- QTIP trust (Qualified Terminable Interest Property trust) is a trust that qualifies for the marital deduction while allowing the grantor to control the ultimate disposition of trust assets after the surviving spouse's death, requiring all income to be distributed to the surviving spouse at least annually.
- Qualified Domestic Trust
- Qualified domestic trust (QDOT) is a trust that allows a surviving non-citizen spouse to receive assets from the deceased spouse's estate while qualifying for the marital deduction, with estate tax deferred until distributions are made.
- Qualified Plan
- Qualified plan is a retirement plan that meets IRS requirements under the Internal Revenue Code and ERISA, entitling the employer to a tax deduction for contributions and allowing employee contributions and earnings to grow tax-deferred.
R
- Required Minimum Distribution
- Required minimum distribution (RMD) is the minimum amount that must be withdrawn annually from tax-deferred retirement accounts beginning at the required age, calculated by dividing the prior year-end account balance by the applicable IRS life expectancy factor.
- Revocable Living Trust
- Revocable living trust is a trust created during the grantor's lifetime that can be amended or revoked at any time, allowing assets to pass to beneficiaries outside of probate while providing no estate tax benefits because assets remain in the grantor's taxable estate.
- Roth IRA
- Roth IRA is an individual retirement account funded with after-tax contributions, offering tax-free growth and tax-free qualified withdrawals in retirement, with no required minimum distributions during the owner's lifetime.
S
- Social Security Full Retirement Age
- Social Security full retirement age is the age at which a person is entitled to receive unreduced Social Security retirement benefits, currently ranging from 66 to 67 depending on the year of birth.
- Step-Up in Basis
- Step-up in basis is a tax provision that adjusts the cost basis of an inherited asset to its fair market value at the date of the decedent's death, eliminating the capital gains tax on appreciation that occurred during the decedent's lifetime.
T
- Tenancy by the Entirety
- Tenancy by the entirety is a form of joint property ownership available only to married couples that includes right of survivorship and protection from the creditors of one spouse.
- Traditional IRA
- Traditional IRA is an individual retirement account that allows contributions that may be tax-deductible, with earnings growing tax-deferred until withdrawn in retirement, at which point distributions are taxed as ordinary income.
U
- Unified Credit
- Unified credit is the tax credit applied against the federal estate and gift tax, effectively exempting a certain dollar amount of cumulative taxable transfers from tax over a person's lifetime and at death.
V
- Vesting
- Vesting refers to the process by which an employee earns a non-forfeitable right to employer-provided benefits in a retirement plan over time, with common schedules being cliff vesting (full vesting after a set period) and graded vesting (incremental vesting over several years).