Series 7: Retirement Plans (Education And Health Savings Plans)

When discussing a 529 Plan with a client, which statement can be made?

"The amount contributed to the plan will not be deductible from federal income tax, but it is usually deductible from state income tax" 529 Plan contributions are not deductible at the federal level. However, most states that have income taxes allow a deduction for contributions made to a plan established by that state. This is a tax benefit of making 529 Plan contributions. Each state imposes its own limit on how much can be contributed to a 529 Plan. Any unexpended funds in the account can be given to another family member to pay for their college and maintain tax-deferred status, but if there are funds that are not used, they become taxable (on the growth in the account plus a 10% penalty tax, because the contribution was made with after-tax dollars).

The maximum annual contribution to a Coverdell Education Savings Account is:

$2,000 The maximum annual contribution to a Coverdell Education Savings Account for a single beneficiary is $2,000.

A distribution of $15,000 is taken from a Coverdell Education Savings Account in a given year, but only $13,000 is used for the beneficiary's qualified education expenses in that year. The tax consequence is:

$2,000 is taxable and a 10% penalty will be imposed Since contributions to Coverdell Education Savings Account are not deductible, normally, distributions from a Coverdell Education Savings Account to pay for qualified education expenses are not taxable. However, if distributions are taken in a given year in excess of the qualified education expenses incurred in that year, then the excess portion is taxable - with the taxable amount being the portion of the distribution that represents the "build-up" in the account above the original contribution amount. This "build-up" was never taxed. In addition, a 10% penalty tax applies as well. The moral of this tale is, use the money in the account to pay for qualified education expenses only; and use it all up for this purpose!

Distributions from a Coverdell Education Savings Account must cease when the beneficiary reaches the age of:

30 Distributions from Coverdell Education Savings Accounts must stop when the beneficiary reaches age 30. Any unexpended funds can be transferred to another related beneficiary (under age 18) for his or her qualified education expenses.

A grandmother wishes to make a gift into her grandson's 529 college savings plan. What is the maximum that can be contributed without incurring gift tax liability?

5 times the annual gift tax exclusion amount A tax benefit offered by 529 plans is a 1-time gift that can be made into the account equal to 5 times the current gift tax exclusion, without the donor worrying about having to pay gift tax. Since the current exclusion is $15,000 in 2020, 5 times this amount or $75,000 can be donated as a 1-time gift and not be subject to gift tax.

What type of education savings plan permits an adult donor to be the beneficiary?

529 Plan An unusual feature of 529 Plans is that the donor and the beneficiary can be the same person. There is no age limit on who can be the account beneficiary. Custodial accounts can only be opened by an adult for a minor. Contributions to a Coverdell Education Savings Account can only be made to someone who is below age 18.

A woman in the highest tax bracket has $105,000 to invest for her teenage child's college education. She wants to make sure that, if he doesn't attend college, that he will not have access to these funds. She should be advised to make the investment in a:

529 Plan The keys here are that the parent wishes to maintain control and wishes to save for college. A 529 plan allows the parent to maintain control - the kid has no access to the account. There are no income limits on opening a 529 Plan, and this parent is in the highest tax bracket. She cannot open a Coverdell ESA because these are not available to high earners. An UTMA account would allow the kid to control the account at the age of transfer, so this is not the best choice. A growth mutual fund would be taxable each year, while the purchase of a growth mutual fund in a 529 plan would grow tax free. The 529 plan is the way to go!

Which statement is TRUE about earnings limitations on the following plans?

A 529 Plan can be opened by a high-earning individual employed by a corporation Coverdell ESAs and Roth IRAs cannot be opened by high-earning individuals - there is an income phase out range. 529 Plans can be established by anyone, with no income limits. Keogh Plans do not have income limitations, but they can only be opened based on self-employment income.

Which statement is TRUE about Coverdell Education Savings Accounts?

Contributions are not tax deductible; Distributions are not taxable Contributions to Coverdell Education Savings Accounts are not tax deductible; and distributions from Coverdell Education Savings Accounts to pay education expenses are not taxable.

Which statement is TRUE?

Contributions to both a 529 and Coverdell ESA are not tax deductible Contributions to both Coverdell ESAs and 529 plans are not tax deductible. Earnings build tax-deferred in both. Distributions from both, when used to pay for appropriate educational expenses, are not taxable. Coverdell ESA distributions can be used without limit to pay for all levels of education. 529 plan distributions can only be used without limit to pay for college and higher; distributions to pay for education below the college level are limited to $10,000 per year. High earning individuals cannot open a Coverdell; there is no similar restriction on a 529 plan. Coverdell ESA contributions are limited to $2,000 per child per year; 529 plan contribution limits are set by each state and are much higher.

Health Saving Accounts (HSAs) are: I employer-established II employee-established III funded with tax-deductible contributions IV funded with non tax-deductible contributions

I and III Health Savings Accounts (HSAs) were first authorized by Congress starting in the beginning of 2004. They are a tax advantaged medical savings account that is owned by the individual. They are established by corporate employers as part of their health insurance plans, and only plans that have a high deductible can set up HSAs for employees. More employers are adopting these high-deductible plans coupled with HSAs as a way of reducing, or slowing the growth of, their health insurance expenses. The HSA permits the employer or employee to make a deductible contribution in 2020 of up to $3,550 for a single individual; or $7,100 for a family; to the account. The contribution amount is indexed for inflation annually. The account is invested in a similar manner to an IRA. It grows tax-deferred and withdrawals to pay for qualified medical expenses are tax-free.

A high-earning individual can open and contribute to which of the following accounts? I UGMA Account II Roth IRA III Coverdell ESA

I only Custodial accounts opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can be opened by any adult for any minor, with no limitation on the income of the donor in determining whether the account can be opened. On the other hand, high-earning individuals are prohibited from opening either a Roth IRA or a Coverdell Education Savings Account.

Which of the following are characteristics of Coverdell ESAs? I Can be transferred to any person at any time II Transfer is limited to a family member under age 30 III Tax free distributions are to be used only for educational purposes IV Tax free distributions can be used for any purpose that benefits the student

II and III Coverdell Education Savings Accounts allow for $2,000 a year to be contributed to pay for a child's education expenses. There is no tax deduction for the contribution and the account grows tax free, as long as the funds are used to pay for school expenses. These are not terribly popular because they are not available to high earners. The funds in the account must start being used at age 18 (but they can be used earlier than this) and the account must be depleted by age 30. Any undepleted funds at age 30 can be transferred to another family member going to school who is also under age 30. If there are unused funds at age 30 that are not transferred, they are taxed.

A customer that earns $50,000 per year wishes to invest $20,000 to pay for his 9-year old son's future college expenses. Which statements are TRUE? I The customer can contribute all $20,000 to a Coverdell Education Savings Account II The customer can contribute all $20,000 to a UTMA account III The customer can contribute a maximum of $2,000 to a Coverdell Education Savings Account and can contribute the remaining $18,000 to a UTMA Account IV The customer can contribute a maximum of $2,000 to a UTMA account and can contribute the remaining $18,000 to a Coverdell Education Savings Account

II and III Custodial accounts opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can be opened by any adult for any minor, with no limitation on the income of the donor in determining whether the account can be opened. There is also no limitation on the amount than can be donated into a custodial account, but no deduction can be taken for the donation. The rules on Coverdell Education Savings accounts are different. Any adult can open the account, but contributions are limited to $2,000 per year per child. The contribution amount is not deductible, but earnings build tax-deferred in the account. Finally, distributions taken to pay for that child's higher education expenses are not taxable. High earning individuals are prohibited from opening a Coverdell Education Savings Account (there is a phase out that starts with individuals earning $110,000 and is fully phased out at $220,000 of income in 2020). Since this person makes $50,000 per year, he or she can open a Coverdell ESA and can contribute $2,000. (There is no limit to the amount that anyone can contribute to a custodian account.)

Which statement is TRUE about changing the beneficiary on a Coverdell Education Savings Account?

The beneficiary can be changed to any relative of the same or later generation The donor controls the funds in a Coverdell ESA and the funds can be transferred from one beneficiary to another beneficiary (e.g., transfer of the funds from a daughter to an account for a son). Note that the money cannot be transferred to a relative that is in an older generation, however.

Which statement is TRUE regarding the 529 college savings plan established by state A?

The beneficiary may use the funds to attend college in any state A contributor can open a college savings plan in any state; and the beneficiary can use the funds to attend a college in any state. Note, however, that a tax deduction at the state level may not be available to the donor for monies deposited to another state's plan. 529 plans may be established by persons who are not the parent of the beneficiary.

Which of the following is a FALSE statement about 529 Plans?

The donor and the beneficiary cannot be the same person An unusual feature of 529 Plans is that the donor and the beneficiary can be the same person. There is no age limit on who can be the account beneficiary. The other statements are true. The donor maintains control over the assets in the plan; the contribution made by the donor may be deductible at the state level (but not at the federal level); and distributions to pay for qualified higher education expenses (as well as up to $10,000 of below college education expenses annually) are tax free.

A husband and wife are self-employed and have 3 children, ages 4, 7, and 9. They have a combined income of $300,000. They wish to open Coverdell ESAs for each of their children to pay for qualified education expenses. Which statement is TRUE?

They are prohibited from opening an account for each child because they earn too much Both Roth IRAs and Coverdell ESAs are not available to high-earning individuals. There is an income phase-out range, above which contributions are prohibited to either of these. For 2020, the top end of the income phase out range for individuals is $110,000 and for couples it is $220,000.

ABLE account distributions are tax-free when used to pay for qualifying:

disability expenses ABLE accounts are state-sponsored investment accounts that are used to pay for qualifying disability expenses. Up to $15,000 per year can be contributed (non-deductible). Earnings build tax-deferred and distributions to pay for qualifying disability expenses are tax-free.

If a distribution from a Coverdell Education Savings Account in a given year exceeds the beneficiary's qualified education expenses in that year, the:

excess distribution is taxable and a 10% penalty is imposed Since contributions to Coverdell Education Savings Account are not deductible, normally, distributions from a Coverdell Education Savings Account to pay for qualified education expenses are not taxable. However, if distributions are taken in a given year in excess of the qualified education expenses incurred in that year, then the excess portion is taxable - with the taxable amount being the portion of the distribution that represents the "build-up" in the account above the original contribution amount. This "build-up" was never taxed. In addition, a 10% penalty tax applies as well. The moral of this tale is, use the money in the account to pay for qualified education expenses only; and use it all up for this purpose!

When recommending a 529 plan to a client, the registered representative should inform the customer about the:

fact that the contribution might be deductible at the state level 529 plans are state-sponsored college savings plans. Any dollar limit on 529 plan contributions is set by the state and the contribution may be deductible from state income tax (but not from federal income tax). This is the point that must be disclosed of the choices offered. There are no income phase outs on who can contribute to a 529 plan; the donor retains control of the assets at all times; and an account can be opened for an adult who wants to save for higher education (and the donor and beneficiary can be the same person, so you can open a 529 plan for yourself!).

LGIPs offered by municipal broker-dealers are:

investment vehicles available to local government entities that permit investment of excess funds An LGIP is a "Local Government Investment Pool." It is an investment fund set up under state law that is only offered to local municipal governmental entities in that state. For example, if a town in a state has collected its real estate taxes, but has not yet spent those funds, it can put the balance in that state's LGIP. The LGIP is managed to provide a safe investment return. The MSRB takes the stance that if an LGIP retains a broker-dealer to market its offerings in that state, then it is a municipal fund security subject to MSRB rules. On the other hand, if the LGIP uses its own employees to market itself to local state governmental entities, then it is not subject to MSRB rules.

Section 529 plans generally permit:

non-taxable distributions to the recipient to pay for higher education Any adult can open a Section 529 account to pay for the higher education expenses of a beneficiary. Starting in 2018, up to $10,000 per year can be withdrawn to pay for education below the college level, and starting in 2020, up to $10,000 per year can be used to pay off qualified education loans. There is no tax deduction for the contribution; earnings build tax-deferred; and distributions to pay qualified higher education expenses are not taxable.

Section 529 plans are established by the:

state State sponsored education savings programs are "Section 529" plans.