Pursuing and Studying for the EA Exam (#2): A Financial Planner's Experience

Getting Introduced to the EA Exams

I'm no stranger to hard exams.  I remember preparing for the CFP® exam and swearing that it was the last, formal exam I'd ever pursue.  Yet, here I am knee-deep into earning the IRS Enrolled Agent (EA) designation.  I'm starting to think I've been lying to my friends all these years when I tell them, "I'm not a school person."

For those who may not know what the EA designation is, the EA is a designation awarded to those who are able to show fundamental competency around common tax topics.  Specifically, it's broken down into 3 core segments (and exams) - #1: Individuals, #2: Businesses, and #3: Practice and Procedures.

Last year, I decided I would pursue the designation in an attempt to gain a deeper understanding of the tax code, hoping that I'd be able to apply that knowledge directly for our financial planning clients.

So far, the process has been everything I wanted.  A few months ago, I passed Exam #1: Individuals.  It was hard, but fairly manageable for the average test-taker.  Fast forwarding to earlier this week, I passed Exam #2: Businesses.  Without a doubt, the second EA exam is significantly more difficult the first.  For that reason, it's worth sharing some of my personal experience and guidance for those who are brave enough to take the plunge and sign up for the challenge.

On the surface level alone, the Businesses exam is much more robust than the Individuals exam.  The study material alone is around twice the size of the first exam’s materials; my study booklet doubled from around 200 pages of material to around 400 pages.  To add to that, at this point in my career, I have completed a grand total of zero Business tax returns.  This is an important point to make, as most financial planners have dealt with most of the topics regarding Individual taxation.  Personally, I've prepared plenty of basic Individual tax returns for myself, family members, and others when I volunteer (through Orgs like VITA and Tax-Aid).  Basically, the Businesses exam was completely foreign territory and studying new material felt like walking into the abyss.

Google Searching for EA Exam Tips Online

I'd like to think I'm an above-average Googler when I need information, but finding study tips for the EA felt impossible!  When you're dealing with exams as robust as the EA, anything that can help calm your nerves is worth its weight in gold.  So hopefully I can help ease some tension and share some of my takeaways with you.

In this post, I'll share some of my thoughts and takeaways on the experience, which might be helpful for anyone going through (or thinking about going through) the IRS Enrolled Agent process.  While there are 3 exams in total, I believe Exam #2 causes the most anxiety out of the three, so it's worth diving in and de-constructing the process of that exam in particular.

Whether you're doing initial research into the designation or you're a few days away from taking the actual exam, somewhere along the way, you'll probably find yourself asking or wondering about questions like this:

• Who should pursue the EA designation?

• How hard is the EA exam #2?

• What EA exam #2 Pass Rates?

• What is the most efficient way to study?

• What study materials should I use?

• How many hours does it take to study for EA exam #2?

• What are some other great tips to know before for the exam?

Who Should Pursue the Enrolled Agent Designation?

As a comprehensive financial planner, client meeting topics are far and wide.  Sometimes we spend an hour discussing cash flow and investments, while other meetings are spent as counselors and coaches to help people achieve their goals.  Invariably, in all of those meetings, there always seems to be a few, interesting tax questions asked by our clients, whether directly or indirectly.  Tax just seems to touch everything! 

Since we don't hold ourselves as 'tax professionals,' it's always (a little too) easy for us to say 'It's probably a good idea to check with your accountant on that one." 

I know I'm not supposed to know everything, but I had finally hit the point where I was tired of not knowing certain answers to our clients' tax questions.  That is frankly why I decided to pursue the EA designation.

It's important to note that although the exams do not teach you to be an all-knowing tax professional, I can honestly say that I feel significantly more confident in my tax knowledge than before my EA studies.  I understand the fundamentals of taxation and all of the major components to look out for, but I'm probably a few years away from reaching 'expert' level. 

How Hard is the EA Exam #2?

For me, I'd rank the exam as 'really hard.'  But it's important to understand that when you say something is 'hard' or 'not hard,' it is purely relative to whatever you're comparing it to; this is otherwise known as benchmarking. 

Firstly, it was hard for me; I began the process with elementary school knowledge on many of the tested subjects.  Conversely, the EA material might come easier to some folks who have already been exposed to the subjects in the past.  Next, I'm comparing this exam to other exams I've taken.  Since I have the most experience with the CFP® exam process, that's what I use as my benchmark for basically everything now. 

If the CFP® exam was a 9 on the difficulty scale, then the EA Exam #2 is a 7 or an 8, depending on your prior experience.  The questions aren’t as difficult as the CFP's are (as they seemingly find pleasure in tricking you), but the material does go much deeper into taxation.  While the CFP® exam is a mile wide and an inch deep, the EA exam is probably a little less than ¾ of a mile wide and around 1.5 inches deep.  It's also important to note that the actual EA exam takes around 2 hours or more to complete, while the CFP takes most people around 5 hours to complete. 

So, while it's less material than the CFP, it is roughly twice the amount of material as exam #1.  When people refer to the EA exam being difficult, they are usually talking about exam #2 in particular. 

What are EA Exam #2 Pass Rates?

For reference, exam #1's pass rates are above 75%, while exam #2's pass rates are typically around 60%.  Those numbers alone should tell you about the stark difference between #1 and #2.

About a week before the exam, I found myself searching to know what my odds were for passing (and failing).  Looking back, learning this information did not help my anxiety or my attitudes whatsoever.  Knowing the stats beforehand is great, but if you want to increase your odds of passing the exam, don't worry about the stats and focus on efficient preparation.

What's the most Efficient Way to Study?

I learned a hard lesson during my CFP studies after I failed the exam on my first try.  Essentially, I was studying incorrectly. 

Firstly, if the exam is a multiple-choice test held on a computer, then you should prepare by taking multiple-choice quizzes on a computer regularly.  Similar to training for a race, if you are signed up to run the 100M dash, you should prepare by running set sprints regularly, not long distance jogs.

Next, you'll also want to focus on the topics that are most likely to be tested over.  Said differently, there are a ton of topics that you can study, but the reality is that not all of the topics will be in equilibrium.  You need to focus on the particular subjects that will be covered, and breeze past the topics that have low probability of showing up on the exam. So how will you know what to focus on?  Obviously there is no way to know which exact questions will be on the exam, but I did discover a way to direct my extra efforts.

Here's how you can learn what to focus on: 

Firstly, you should have access to a large question bank that you're using for practice quizzes.  As you are creating a quiz, you should be able to see how many questions are available for each particular topic.  For example, in my Gleim account, I can go to 'Create a Practice Exam' (which I used just about every day).  From there, I can choose which section(s) I want to be quizzed over at that time, along with the number of questions I want to be on this quiz.  As an example, if I wanted to be quizzed over 'Corporate Formation: Recognize Gain and Loss,' I can see that there are 74 available practice questions.  Compared to a random section, like 'Other Deductions: Business Use of Home,' you'll see that there are only 2 questions for that entire section. 

So if there are 74 practice questions available for one section and only 2 questions available for another, that is Gleim's way of telling me that I should really know the in's and out's of Gains and Losses in Corporations.  Now that I'm on the other side of the exam, there were indeed several questions over this subject (and none over the other subject with only 2 practice questions).

This is obviously not an exact science, but if you're like me and you like to focus on the 20% that will yield you 80% of your results (ie. the 80/20 principle), then this could be a tactic for you to use.

What Study Materials should I use?

This is probably the most common question for anyone wanting to get started preparing for a large exam. 

Personally, I used Gleim to prepare for my exams.  I can't speak to any other preparation materials, as I have no experience with any of them.  That said, Gleim was recommended to me by a trusted colleague and it had everything I needed.

I will add that Gleim is a business and they will always try to up-sell you into 'premium' services.  The package I purchased had access to some of the extra bells and whistles and, being frank, I didn't really use any of them.

All you need is access to as many practice questions as possible, along with a reference book that you can use whenever you don't fully understand the answers to your practice questions.

How Many Hours does it take to study for the EA Exam #2?

This another question that caused me a little bit of anxiety before the exam.  Everything I had read online told me I needed to spend 80 hours or more studying for exam #2.  I didn't tally up my study hours for this exam, but 80 hours sounded like a lot and I don't think I reached that amount.

The key to passing any large exams is to put in the hours and practice, which requires practicing each and every day for several weeks.  That said, I think that studying efficiently goes much further than simply putting in 'more hours' than the next person.  As long as you go into each and every study session with good intentions and focus on leaving the session with 2-3 nuggets of wisdom after each one, you'll be well on your way to passing exam #2.

In total, I did practice quizzes every morning before work, along with quizzes and additional reading and review every weekend.  The final two weeks leading to the exam, I pulled 'two-a-days' and studied in the evenings as well.  I did this over 6-7 weeks.

What are some other great tips to know before the exam?

During your final week of review, you'll want to make sure you know the 'easy stuff' like the back of your hand.  The single most important (last minute) piece of advice is to know that the 'easy' questions count just as much as the 'hard' questions.

If you're having a hard time with a particular concept, it's okay to move on and focus on other 'easier' material if you believe it will be tested.  In my personal opinion, it's better to have 100% fluency over half of the exam, as opposed to 50% fluency over everything.   There is nothing better than being in the exam and flying through 5 questions in a row because you could answer them in your sleep.

Night-time Routine and Relaxation Saved my Score

During the days leading up to my exam, my stress levels were at all-time highs.  Frustratingly, high stress in the evening took their toll on my sleeping patterns and I wasn't getting as many ZZZ's as I needed.  We all know that a good night's sleep can work wonders on the body and mind, but test anxiety will do whatever it can to chop that number in half and ruin your momentum.

The night before the EA Exam #2, I did one quick final review (30-40 min of reading personal notes only - no quizzes) of the last topics I wanted to see, then I closed everything and took the rest of the evening to enjoy myself.  At that point, the hard work had already been done and it was time to focus on winding down for the evening.

I closed my laptop and made a trip to the gym to make sure I sweat out my stress and lifted weights until it burned.  After the workout, I ate a clean (and nutritious) meal while I watched my favorite TV show over a beer (yes, I had a beer directly after my workout - it was delicious).  I went on to get the best sleep I'd had in days and rode that momentum all the way until the Prometric employee handed me a piece of white paper that said, "Congratulations!  You passed the Special Enrollment Examination Part 2 - Businesses."

It's no secret that this exam is hard and there will be a million ways to lower your confidence right before the exam.  If you've put in the hard word for weeks and studied with great intent, you'll be more surprised (and impressed) with everything you know on test day.

Happy testing.

Moving Away From Family

All four authors of this blog are CFP® professionals working for fee-only registered investment advisory firms. That is what our blog and study group is about. However, an additional commonality is that we all moved to a new state in order to start out job. As a result, we often talk about the challenges living in a new area as well.

Moving to a new state can be intimidating. Sometimes my friends from high school who have not moved away from home comment how they could never do so because they would miss their family too much. That is a valid argument but one that, in my experience, does not have to be true. I am closer with my family now that I live in a different state than compared to when I lived with them. I call my grandmother about once a week. I write letters to my aunt. I text my uncle about the Buffalo Sabres games. I frequently speak with my parents on the phone and exchange emails with my mother. Proximity does not equal closeness and lack of proximity does not equal distance as it relates to family relationships. By making an effort to keep in touch with family, I have become closer with them despite the distance of living apart. 

Others may have different circumstances. Talking on the phone is certainly not the same as seeing someone in person. However, for those who might be hesitant to move away for fear of missing family, I would encourage them to consider the possibility that it might actually bring them closer together. That has been my experience.

The Importance of Reading to Gain Perspective

I am currently reading The Man Who Knew: The Life and Times of Alan Greenspan by Sebastion Mallaby. An 800 page book about a 20th century economist and central banker would understandably not interest most people. I am really enjoying it however, and I think it is a book that those in the financial industry should read. This is because The Man Who Knew is incredibly valuable in the perspective it provides.

It is easy to lose perspective and get caught up in the day-to-day. It is easy to think that every issue is new and that each event that happens to us is the most significant thing. However, this is simply not the case. Ryan Holiday notes the following:

Perhaps the reason you're having trouble is you forgot the purpose of reading. It’s not just for fun. Human beings have been recording their knowledge in book form for more than 5,000 years. That means that whatever you’re working on right now, whatever problem you’re struggling with, is probably addressed in some book somewhere by someone a lot smarter than you. Save yourself the trouble of learning from trial and error–find that point. Benefit from that perspective.

A recent example would be the Dow Jones Industrial Average pass 20,000 for the first time ever. A big deal right? Well, maybe not so much. Morgan Housel and Michael Batnick observed that for the Dow to reach 2,000,000 in this century, it needs to compound at 5.7%. Considering the Dow has grown 7.14% a year for the last 75 years, this is certainly possible. 

This is why books like The Man Who Knew, When Genius Failed, The Match King, Barbarians at the Gate, and America’s Bank are important. Ecclesiastes 1:9 says, “What has been will be again, what has been done will be done again; there is nothing new under the sun.” Circumstances do change, and it is certainly imperative to understand that change is inevitable, but reading books about the history of one’s industry can add a perspective that will be valuable for approaching future problems. With that in mind, I would encourage you to read The Man Who Knew by Sebastion Mallaby.