A candidate, let's call him Alex, meticulously memorized the 2026 contribution limits for every plan type. On exam day, he faced a simulation about a client, a 58-year-old doctor with a high income, a small staff, and a desire to maximize tax-deferred savings. Alex confidently recommended a SEP-IRA. He failed the testlet. The correct answer was a cash balance plan, a choice that required judgment about the client's goals, not just recalling a contribution limit.
This is the central trap of retirement planning on the TCP exam. It’s not a memory test; it’s a judgment test.
Retirement plan selection on the CPA TCP exam tests your ability to recommend the most suitable plan for a client by analyzing their goals, age, income, and business structure. It requires applying knowledge of contribution limits, tax implications, and rules for plans like 401(k)s, SEP-IRAs, and cash balance plans.
Key facts
- Exam Section
- Tax Compliance & Planning (TCP)
- Official Body
- American Institute of Certified Public Accountants (AICPA)
- Passing Score
- 75 on a 0-99 scale
- Question Format
- Multiple-Choice Questions (MCQs) and Task-Based Simulations (TBS)
- Key Regulations
- Internal Revenue Code (IRC), SECURE 2.0 Act of 2022
- Contribution Limit (2026 Employee 401k)
- $23,000 (plus catch-up, subject to inflation adjustment)
The AICPA reports that pass rates for the new discipline sections are still stabilizing, reinforcing the need for mastery over specialized topics like this. (AICPA)
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What is Retirement Plan Selection and Why It Matters for the CPA Exam
Retirement plan selection on the TCP exam is the application of tax law to advise individuals and businesses on the most advantageous way to save for retirement. This isn't just about knowing the difference between a Roth and a Traditional IRA. It's about structuring a recommendation for a client, which could be a sole proprietor, an S-corporation with 50 employees, or a partner in a law firm.
The AICPA tests this through both MCQs and more complex Task-Based Simulations. An MCQ might ask for a specific contribution limit. A TBS, however, will provide you with client documents—tax returns, memos, emails—and ask you to evaluate several retirement plan options, perform calculations, and justify your recommendation.
The most common mistake is focusing exclusively on maximizing the current-year tax deduction. Candidates forget to consider other critical factors that examiners love to test:
- Administrative Burden: A small business owner might prefer a SIMPLE IRA or SEP-IRA over a 401(k) due to lower complexity and cost.
- Employee Demographics: A business with mostly young, lower-paid employees has different needs than a professional services firm with older, high-income partners.
- Future Flexibility: Does the client need the ability to take loans (available in a 401(k) but not an IRA) or make discretionary contributions?
Thinking like a real CPA means weighing these qualitative factors alongside the hard numbers. VoraPrep’s adaptive learning engine has over 9,500 questions designed to build this exact judgment skill. You can try VoraPrep's free CPA practice questions to see how we test these concepts.
Key Concepts and Rules You Must Know
To pass, you must have a firm grasp of the core mechanics and the decision tree for choosing a plan. Here are the non-negotiable topics.
The Roth Conversion Pro-Rata Rule (A Classic Trap)
This is one of the most frequently tested computational traps. When a client converts a traditional IRA to a Roth IRA, the taxable amount of the conversion depends on whether the traditional IRA contains any after-tax (non-deductible) contributions. If it does, you must use the pro-rata rule.
The rule states that any distribution or conversion is considered to be a mix of pre-tax and after-tax money. You cannot simply convert only the after-tax basis to avoid taxes.
Notice the word "ALL". The IRS requires you to aggregate all of your traditional, SEP, and SIMPLE IRAs to perform this calculation. This is the detail that trips up most candidates.
Cash Balance Plans
Think of a cash balance plan as a hybrid. It's technically a defined benefit plan but looks and feels like a defined contribution plan to the employee. Each participant has a "hypothetical account" that grows with two types of credits: a pay credit (e.g., 5% of salary) and an interest credit (either a fixed or variable rate).
Why it matters on the exam: Cash balance plans allow for much larger tax-deductible contributions for older, high-income business owners than a 401(k) or SEP-IRA would. If you see a scenario with a 55-year-old partner wanting to "supercharge" her retirement savings, a cash balance plan is a likely correct answer.SECURE 2.0 Act Provisions
The SECURE 2.0 Act made several changes, but one is prime for testing due to its specificity. For 2026, individuals age 50 or over can make a "catch-up" contribution to their 401(k) of $7,500 (subject to inflation adjustment).
However, the Act created a new, higher limit for those ages 60, 61, 62, and 63. Their catch-up limit is the greater of $10,000 or 150% of the standard catch-up amount. This is a perfect detail for an MCQ designed to separate candidates who are current on tax law from those who are not.
IRA Distributions and Key Thresholds
You must know the basic rules for getting money out of an IRA.
- Early Withdrawal Penalty: Distributions before age 59½ are generally subject to a 10% penalty on top of ordinary income tax. Know the major exceptions, such as death, disability, first-time home purchase (up to $10,000), and higher education expenses.
- Required Minimum Distributions (RMDs): The SECURE Act pushed the starting age for RMDs. For 2026, it is age 73 for individuals who reach age 72 after Dec 31, 2022.
- Contribution Limits (2026 Projections): While subject to change, you must know the baseline figures.
| Plan Type | Key 2026 Contribution Limit (Projected) | Best For... |
|---|---|---|
| Traditional/Roth IRA | $7,000 + $1,000 catch-up (50+) | Individuals |
| SEP-IRA | Lesser of 25% of comp or $69,000 | Self-employed or small businesses with no employees |
| SIMPLE IRA | $16,000 + $3,500 catch-up (50+) | Small businesses (<100 employees) wanting an easy setup |
| 401(k) / 403(b) | $23,000 employee deferral + employer match | Businesses of any size; allows for loans and Roth option |
| Solo 401(k) | Same as 401(k), but owner acts as both "employee" and "employer" | Self-employed with no employees (other than a spouse) |
This is not about memorizing a chart. It’s about understanding the "Best For..." column. The exam tests your ability to apply this knowledge to a client fact pattern.
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Worked Example with Step-by-Step Solution
Let's apply the pro-rata rule in a realistic scenario.
Dr. Chen, age 45, wants to convert $50,000 from her traditional IRA to a Roth IRA in 2026 to take advantage of a low-income year. She has two traditional IRAs:
- IRA #1 (Rollover): Fair Market Value (FMV) of $350,000. This account contains only pre-tax funds from a previous employer's 401(k).
- IRA #2 (Contributory): FMV of $50,000. Over the years, she made $20,000 in non-deductible (after-tax) contributions to this IRA. The other $30,000 is earnings.
At the end of 2026, the total value of her traditional IRAs is $400,000 ($350,000 + $50,000). Her total after-tax basis is $20,000.
How much of her $50,000 conversion is taxable?
This is a classic exam question. Let's walk through it with the VoraPrep judgment-first method.
The Tempting Wrong Answer
Many candidates fall into this trap: They look only at IRA #2, from which the funds are being withdrawn. They assume that since the $50,000 conversion is coming from an account that contains $20,000 of basis, then ($20,000 / $50,000) = 40% of the conversion is tax-free. They would calculate a tax-free amount of $20,000 (40% of $50k) and a taxable amount of $30,000.
This is incorrect because it ignores the aggregation rule of IRC §408(d)(2).
The Correct Step-by-Step Solution
The examiner is testing your knowledge that all traditional IRAs must be treated as one single account for this calculation.
Step 1: Aggregate All Traditional IRA Balances
First, determine the total value and total basis across all of Dr. Chen's traditional IRAs at year-end.
- Total FMV: $350,000 (IRA #1) + $50,000 (IRA #2) = $400,000
- Total After-Tax Basis: $0 (IRA #1) + $20,000 (IRA #2) = $20,000
Step 2: Calculate the Tax-Free Percentage
Now, apply the pro-rata formula to find the portion of any distribution that is a non-taxable return of basis.
- Formula: (Total Basis) / (Total FMV)
- Calculation: $20,000 / $400,000 = 0.05 or 5%
This means that 5% of any money taken out of any of her traditional IRAs in 2026 is tax-free.
Step 3: Apply the Percentage to the Converted Amount
Finally, apply this percentage to the specific amount she converted.
- Conversion Amount: $50,000
- Tax-Free Portion: $50,000 * 5% = $2,500
- Taxable Portion: $50,000 * 95% = $47,500
$47,500 of the conversion is taxable as ordinary income. The remaining $2,500 is a tax-free return of her basis.
This type of multi-step calculation, rooted in a specific IRC provision, is exactly what you'll see on the TCP exam. For more in-depth examples, review the exam details and format breakdown on our site.
Practice Questions: Test Yourself on Retirement Plan Selection
Theory is one thing, but applying it under pressure is another. VoraPrep has 47 practice questions specifically on retirement plan selection. Here are a few samples modeled after real exam questions.
Sample Q1: Precision Manufacturing, an S-corp, wants to establish a retirement plan that maximizes contributions for its owner, age 58, while minimizing administrative complexity. The company has 10 other employees, all under age 35. Which of the following plans would likely be the most suitable recommendation?Answer: C. A cash balance plan is a defined benefit plan that allows for significantly higher contributions for older owners than defined contribution plans like SEPs or 401(k)s. While a 401(k) is a good option, the key phrase "maximizes contributions for its owner" points toward the higher limits of a cash balance plan. A and B have lower contribution limits and less flexibility.Sample Q2: Javier is a 40-year-old self-employed graphic designer operating as a sole proprietor. For 2026, he expects net self-employment earnings of $120,000. He has no employees and wants the ability to take a loan from his retirement plan if needed. Which plan should he establish?
Answer: B. The key differentiator is the "ability to take a loan." Plan loans are permissible from a 401(k) but not from any type of IRA (SEP, SIMPLE, or Roth). A Solo 401(k) allows him to contribute as both the "employee" and "employer" and includes loan provisions, making it the superior choice over a SEP-IRA for this specific goal.Sample Q3: Innovate Corp. sponsors a cash balance plan. Sarah, a 55-year-old partner, had a hypothetical account balance of $500,000 at the beginning of 2026. Her plan provides a 5% pay credit and a 4% interest credit. Her 2026 compensation is $300,000. What is her hypothetical account balance at the end of 2026?
Answer: D. This tests the mechanics of a cash balance plan.
- Pay Credit: $300,000 * 5% = $15,000
- Interest Credit: ($500,000 beginning balance + $15,000 pay credit) 4% = $515,000 4% = $20,600. Note: The interest credit typically applies to the sum of the opening balance and the current year's pay credit.
- Ending Balance: $500,000 + $15,000 + $20,600 = $535,600.
Want to drill down on more questions like these? Our adaptive engine will find your weak spots and serve you questions to strengthen them. You can practice all Retirement plan selection questions in VoraPrep.
Study Tips and Exam-Day Strategy
Success on this topic comes from a smart study process, not just brute force.
Create a Decision Tree: Don't just make flashcards of limits. Create a flowchart. Start with the client type (Individual, Sole Prop, S-Corp, C-Corp). Then branch based on goals (Maximize savings? Simple admin? Employee benefits?). This mirrors the judgment process you'll use on the exam. Connect to Other Topics: Retirement plan contributions are deductions that affect a client's Adjusted Gross Income (AGI). This has knock-on effects for other tax calculations, like limitations on medical expense deductions or the Qualified Business Income deduction. Understanding these links is key for TBSs. For a refresher, see our guide on CPA Regulation: Qualified business income (199A). Final Week Review: In the week before your exam, do not learn new concepts. Instead, review the key numbers: 2026 contribution limits, catch-up amounts (especially the 60-63 rule), and the RMD age. Rework the pro-rata rule example until the aggregation concept is second nature.On exam day, when you see a retirement plan question, take a breath and identify the client's primary objective first. The entire question revolves around that single point.