Four Key Financial Concepts I Learned While Preparing for the CFP® Exam

Chukwudi Uraih, MBA
4 min readJan 21, 2025

--

Studying for the Certified Financial Planner™ (CFP®) exam has been an intense but rewarding experience. As I prepare to sit for the exam in March, I’ve realized that a great financial advisor does far more than just sell investments and insurance — we help clients make informed financial decisions that impact their long-term wealth.

Through this journey, I’ve deepened my understanding of key financial principles that are often overlooked but can make a huge difference in a person’s financial future. Here are four critical financial planning concepts from the tax section that every client should know.

1. The Power of Tax-Efficient Investing

Taxes can significantly erode investment returns, but smart planning can reduce the impact. One key strategy is using tax-advantaged accounts like Roth IRAs, Health Savings Accounts (HSAs), and 401(k)s to optimize tax efficiency.

Many people assume that all investments are taxed the same way, but where you hold your investments can make a major difference in your after-tax returns. Tax-deferred accounts (like traditional IRAs and 401(k)s) allow investments to grow tax-free until withdrawal, while Roth accounts provide tax-free withdrawals in retirement.

💡 Example: Suppose you invest in a taxable brokerage account. If you sell an asset at a profit, you’ll owe capital gains taxes — 15% or 20% for long-term gains (depending on your income) and your ordinary tax rate for short-term gains. However, if you hold that same investment inside a Roth IRA, those gains grow tax-free and are never taxed upon withdrawal (if you follow the rules).

Lesson: Understanding the difference between tax-deferred, tax-free, and taxable accounts can help maximize after-tax wealth.

2. The Importance of Marginal Tax Brackets

Most people don’t realize that not all their income is taxed at the same rate — only the portion that falls into a higher tax bracket is taxed at that rate.

The U.S. tax system is progressive, meaning that as your income increases, you pay a higher tax rate only on the portion of income that falls into the higher bracket. Many people mistakenly believe that earning more money will push all of their income into a higher bracket — this is a myth.

💡 Example: Suppose your taxable income is $90,000. Some of your income is taxed at 10%, some at 12%, and the rest at 22%. Understanding this allows for strategic tax planning, such as deferring income or increasing deductions to stay in a lower bracket.

Lesson: A smart tax strategy can save thousands over time by timing deductions and income strategically.

3. The Three Types of Income and How They Are Taxed Differently

Many people think of income as one thing — just money they earn. But the IRS sees three different types of income, and each is taxed differently:

  1. Earned Income (Active Income) — This includes wages, salaries, and self-employment income. It is subject to ordinary income tax rates plus payroll taxes (Social Security & Medicare).
  2. Portfolio Income (Investment Income) — This includes interest, dividends, and capital gains from investments. It is taxed at lower capital gains rates (0%, 15%, or 20%) if held long-term but taxed at ordinary income rates if short-term.
  3. Passive Income — This includes rental income, royalties, and income from limited partnerships. Passive losses can only offset passive income, meaning it’s treated very differently from earned income.

Understanding how each type of income is taxed allows for smarter financial decisions.

💡 Example: If a high-income individual earns $100,000 from their job (earned income), they’ll be taxed at their marginal rate (e.g., 24%). But if they earn $100,000 in long-term capital gains, they might only pay 15% tax. Similarly, if they receive $100,000 in rental income but have $50,000 in passive losses from another investment property, they can offset part of that income for tax purposes.

Lesson: Structuring your income sources wisely can significantly reduce your tax burden and increase after-tax wealth.

4. The Concept of Boot in Tax-Free Exchanges

A like-kind exchange (also known as a 1031 exchange) allows real estate investors to swap one investment property for another without triggering immediate capital gains taxes. However, if you receive cash or other property (known as “boot”) in the exchange, you may owe taxes on that portion.

Boot can come in different forms, such as cash received, a reduction in debt, or non-like-kind property. Many investors mistakenly believe that as long as they’re rolling over the majority of the proceeds, the exchange is fully tax-free — but any boot received is immediately taxable.

💡 Example: Suppose an investor sells a rental property for $500,000 and uses a 1031 exchange to purchase a new property worth $450,000. Since they received $50,000 in cash (boot), that portion is immediately taxable, even though the rest of the transaction remains tax-deferred.

Lesson: When engaging in a tax-free exchange, avoid receiving boot to prevent unexpected tax liabilities.

Final Thoughts: Financial Planning Is More Than Just Investments

Preparing for the CFP® exam has reinforced the importance of understanding tax laws, income structures, and investment strategies to maximize financial success. A good financial advisor isn’t just about stock picks or insurance policies — it’s about designing a comprehensive financial system that minimizes taxes, builds wealth, and secures financial independence.

If you’re looking for a system-driven approach to financial planning, I’d love to help. Whether you need a DIY tool to assess your financial health or a one-on-one consultation, I’ve created resources that can help you get on track.

📊 Check out my new financial tools here 👉 [Link to Store]

Let’s build a financial future that works for you! 💡💰

--

--

Chukwudi Uraih, MBA
Chukwudi Uraih, MBA

Written by Chukwudi Uraih, MBA

I am a systems thinker who thinks he is a data scientist who wants to help you get financially free.

No responses yet