Retirement Plans: Education and Health Savings Plans
A high-earning individual can open and contribute to all of the following accounts EXCEPT: A Coverdell ESA B 401(k) C 403(b) D UGMA Account for her niece
The best answer is A. 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. High income earners are permitted to contribute to all ERISA plans, Traditional IRAs, SEP and SIMPLE retirement plans, 529 Plans, and 403(b) plans. On the other hand, high-earning individuals are prohibited from opening either a Roth IRA or a Coverdell Education Savings Account.
Section 529 plans are established by the: A state B donor C recipient D custodian
The best answer is A. State sponsored education savings programs are "Section 529" plans.
The maximum annual contribution to a Coverdell Education Savings Account is: A $2,000 B $2,500 C $3,000 D $4,000
The best answer is A. The maximum annual contribution to a Coverdell Education Savings Account for a single beneficiary is $2,000.
What type of education savings plan permits an adult donor to be the beneficiary? A Custodial account opened under UTMA B 529 Plan C Coverdell Education Savings Plans D Any of the above
The best answer is B. 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 customer has a 3-year old child and wishes to begin saving for the kid's college education using a tax advantaged investment. The best investment option to meet the customer's objective is a(n): A zero-coupon bond investment B age weighted 529 plan C Coverdell ESA D UGMA account
The best answer is B. Any of the choices offered could be used to save for a kid's college education. However, the annual accretion on a zero-coupon bond is taxable, unless the investment is held in a tax deferred account, such as an IRA. Earnings in UGMA (custodial) accounts are also taxable each year. So we have narrowed down the best choices to either the Coverdell ESA or the age-weighted 529 plan. Coverdell ESAs allow a maximum annual contribution of $2,000 per year per child (non-deductible) and grow tax-free. However, they are not available to high earning individuals (no information is given in the question about the customer's income, so this is not a consideration here). State sponsored 529 Plans allow much bigger contributions to be made. They grow tax-free as well and are not subject to income limitations. Since college is expensive, socking away more money is definitely better! Furthermore, an "age weighted" 529 plan varies the investment mix based upon the beneficiary's age - in early years weighting the investments towards growth; and in later years, when distributions are needed for college, weighting the investment mix towards income. Thus, an "age weighted" 529 plan is the best choice to meet the customer's objective.
If a distribution from a Coverdell Education Savings Account in a given year exceeds the beneficiary's qualified education expenses in that year, the: A excess distribution is not taxable B excess distribution is taxable and a 10% penalty is imposed C entire distribution is not taxable D entire distribution is taxable and a 10% penalty tax is imposed
The best answer is B. 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 comparing Section 529 plans to Coverdell Education Savings Accounts, which statement is FALSE? A The account may be opened by any adult B Annual contributions are limited to $2,000 per beneficiary C Earnings build in the account tax deferred D Distributions to pay for higher education expenses are not taxable
The best answer is B. There is a maximum $2,000 annual contribution into a Coverdell Education Savings Account; there is no maximum annual contribution into a Section 529 account - any contribution limits are set by the state (and are typically quite high). Any adult can open either type of account for a beneficiary; contributions to either are not tax deductible; earnings build tax-deferred in both; and distributions to pay for qualified higher education expenses are not taxable for both.
A 529 plan is set up for a child in state A. The child attends a college in state B. Which statement is TRUE? A The funds in the 529 Plan are not portable and can't be used to pay for college in state B B The funds in the 529 Plan are portable and can be used to pay for college in state B C The funds must be transferred into a 529 Plan in state B if they are going to be used to pay for college in state B D The child must renounce his or her residency in state A and become a resident of state B in order to use the funds in the 529 Plan for college in state B
The best answer is B. As long as the funds are used to pay for college, 529 Plans are completely portable - the money can be used to pay for college in any state.
Which statement is TRUE about Coverdell ESAs? A Contributions into the account are tax deductible to the donor B Assets grow tax-deferred and distributions are not taxable if used for qualified educational purposes C Any adult, regardless of income level, can open or contribute into the account D Unexpended funds can be transferred with a 10% transfer tax to another relative in the same or younger generation as the beneficiary
The best answer is B. Contributions to Coverdell ESAs are limited to $2,000 per child per year and are not tax deductible. Earnings build tax-deferred and when distributions are taken to pay for qualifying educational expenses, the amount distributed is not taxed. If the distribution is not used to pay for qualifying educational expenses, then it is taxable at ordinary income tax rates. High earning adults are prohibited from opening Coverdell ESAs. Unexpended funds can be transferred without tax liability to another relative in the same or younger generation as the beneficiary.
Which statement is TRUE about Coverdell Education Savings Accounts? A Contributions can continue until the beneficiary reaches age 18; distributions to the beneficiary must be completed upon reaching age 18 B Contributions can continue until the beneficiary reaches age 18; distributions to the beneficiary must be completed upon reaching age 30 C Contributions can continue until the beneficiary reaches age 30; distributions to the beneficiary must be completed upon reaching age 18 D Contributions can continue until the beneficiary reaches age 30; distributions to the beneficiary must be completed upon reaching age 30 Review
The best answer is B. Contributions to Coverdell Education Savings Account must stop once the beneficiary reaches age 18. Distributions must be completed upon reaching age 30.
When discussing a 529 Plan with a client, which statement can be made? A "There is no limit to the amount that can be contributed to the plan, because, as you know, college is very expensive" B "If the beneficiary completes college without all the funds being spent, the unexpended funds can be used to pay for first time home purchase expenses without tax being due" C "The amount contributed to the plan will not be deductible from federal income tax, but it is usually deductible from state income tax" D Contributions are made into the account with pretax dollars
The best answer is C. 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).
When recommending a 529 plan to a client, the registered representative should inform the customer about the: A income-phase outs that restrict who can contribute funds to the account B right of the beneficiary to take control of the assets in the account at the age of majority C fact that the contribution might be deductible at the state level D fact that the beneficiary of the account can only be a minor
The best answer is C. 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: A investment vehicles available to the general public that permit tax-deferred saving for higher education B investment vehicles available to the general public that permit tax-deferred saving for education below the college level C investment vehicles available to local government entities that permit investment of excess funds D investment vehicles available to local government entities that permit borrowing of funds as needed
The best answer is C. 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.
Monies that have accumulated in a Coverdell Education Savings Account that are not used by the beneficiary to pay for qualified educational expenses: A may be rolled over into a Traditional IRA without any tax liability B may be rolled over into a Roth IRA without any tax liability C may be transferred to a Coverdell Education Savings Account for a sibling that so qualifies without any tax liability D are tax-deferred until a Traditional IRA is established by the beneficiary
The best answer is C. Coverdell Education Savings Account permit a maximum annual non-deductible contribution of $2,000 to pay for qualified education expenses. Contributions must cease at age 18. The monies in the account must be used by age 30. Any unexpended funds in the account can be transferred to another family member for their qualified education expenses (like a younger brother or sister). If the funds are not used by age 30, or transferred to a sibling that so qualified, then they become taxable (the taxable amount is the "build-up" in the account - the amount above the original non-tax deductible contribution).
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 statement is TRUE? A The customer can contribute all $20,000 to a Coverdell Education Savings Account B The customer can contribute up to $6,000 to a UTMA account C 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 D 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
The best answer is C. 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 $95,000 and is fully phased out at $110,000 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 custodial account.)
Which statement is TRUE about HSAs? A HSAs have a $2,500 maximum annual contribution B HSAs have the same contribution limits as IRAs C HSAs are funded with tax-deductible contributions D HSAs are funded with non tax-deductible contributions
The best answer is C. 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.
Under which circumstance can a non-taxable distribution be made from a Section 529 Plan? A The beneficiary does not go to college B The beneficiary wants to buy a house C The beneficiary goes to vocational school D The beneficiary gets married
The best answer is C. Payments from Section 529 plans made to colleges, universities, vocational schools, and any other accredited post secondary education institution are not taxable. 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. In addition, refunds made because of death or disability of the beneficiary, or because the beneficiary received a scholarship, are not taxable. Distributions made for any other reason are taxable.
High earning individuals are prohibited from making contributions to: A Traditional IRAs B 401(k)s C Coverdell ESAs D 403(b)s
The best answer is C. Any individual with earned income can open a Traditional IRA (whether the contribution will be deductible requires that the individual not be covered by another qualified plans and that person's income cannot be too high). High earning individuals are prohibited from contributing to Roth IRAs or Coverdell ESAs. 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.
A single mother has 2 children, ages 5 and 9. She earns $150,000 per year and wishes to open Coverdell ESAs for each child to pay for qualified education expenses. Which statement is TRUE? A She can open the account for each child and make an annual $2,000 tax-deductible contribution for each B She can open the account for each child and make an annual $2,000 non tax-deductible contribution for each C She is prohibited from opening an account for each child because she earns too much D She is prohibited from opening an account for each child because Coverdell ESAs are only available to married couples with children
The best answer is C. 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.
Which statement is TRUE about federal taxation of contributions to 529 plans? A Contributions are tax deductible to the donor B Contribution amounts above the gift tax exclusion amount are taxable to the recipient C Contribution amounts above the gift tax exclusion amount are taxable to the donor D The full contribution is taxable to the donor
The best answer is C. Contributions to 529 plans are not federally tax deductible. Any gifts above the annual gift tax exclusion amount ($15,000 in 2020) are subject to gift tax. Gift tax is paid by the donor, not the recipient. Note that 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.
An ABLE account: A must be established prior to the beneficiary reaching age 21 B must be depleted by the time the beneficiary reaches the age of 26 C may only pay for the housing expenses incurred by a disabled individual D is used to pay for the qualified ongoing expenses incurred by a disabled individual
The best answer is D. ABLE accounts were enacted by Congress in late 2014. ABLE stands for "Achieving a Better Life Experience Act." It allows each state to set up a "municipal fund security" regulated by the MSRB that permits an account to be established to pay for the ongoing expenses of a disabled person. One of the key features of an ABLE account is that accumulated savings do not affect that person's eligibility for other Federal benefits (it used to be the case that having too much in assets would disqualify that person from other Federal benefits such as Medicaid). Up to $15,000 per year (the Federal gift tax exclusion amount) can be contributed to an ABLE account, with no tax deduction. The account grows tax-deferred, and payments to pay for qualified expenses are tax-free. Qualified expenses include medical care, transportation, housing, education, and assistive technology. The account must be established before the disabled individual reaches age 26, and proof that the beneficiary is disabled or blind must be provided. ABLE accounts are permitted under Section 529A of the Internal Revenue Code. Do not confuse these with 529 Plans, which are a municipal fund security to save for education expenses.
Which statement is FALSE about both Coverdell ESAs and 529 Plans? A Distributions from both are tax-free when used to pay for qualified education expenses B Contributions to both are not deductible from federal income tax C Tax-free distributions from both can be used to help pay for primary school D There is no limit on the amount that can be contributed into each
The best answer is D. Contributions to Coverdell Education Savings Accounts (ESAs) and 529 Plans are not deductible. The maximum Coverdell ESA contribution is $2,000 per year per child. The maximum amount that can be contributed to a 529 Plan is set by each state - and the amounts are very high. Earnings in both build tax-deferred, and when distributions are taken to pay for qualified education expenses, they are tax-free. Funds in a Coverdell ESA can be used to pay for all levels of education, and also for vocational school. Funds in a 529 Plan were originally only allowed to be used to pay for college or higher, but now up to $10,000 per year can be used to pay for below-college level education expenses, and starting in 2020, up to $10,000 per year can be used to pay off qualified education loans.
Which account would be established to pay for the expenses of a disabled younger individual? A Coverdell ESA B 529 Plan C 401(k) Account D ABLE Account
The best answer is D. Disabled individuals under age 26 can have an account set up to help pay for living, education and medical expenses called an "ABLE" account. Up to $15,000 per year can be contributed. There is no deduction for the contribution, but the account grows tax free as long as distributions are used to pay for the disabled individual's expenses. Coverdell Education Savings Accounts can be used to pay for education expenses at all levels, with a maximum annual $2,000 non-deductible contribution. They are not very popular at broker-dealers because of the low annual dollar contribution limit, and they are subject to an income phase-out rule. 529 Plans are state-sponsored college savings plans. The contribution amount is set by each state and can be very high, since college is expensive! There is no deduction for the contribution, but the account grows tax free when used to pay for qualified higher education expenses. (Also note that $10,000 per year can be withdrawn to pay for below-college level expenses). 401(k) accounts are corporate sponsored salary reduction retirement plans.
Which statement is TRUE regarding the 529 college savings plan established by state A? A Contributors must be a parent of the beneficiary B Contributors must be residents of state A C The beneficiary may use the funds only to attend college in state A D The beneficiary may use the funds to attend college in any state
The best answer is D. 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.
A tax deduction for a contribution to a Coverdell Education Savings Account is: A permitted without limitation B permitted only for persons earning below a statutory limit C not permitted unless the monies remain in the account for at least 5 years D not permitted
The best answer is D. Contributions to Coverdell Education Savings Accounts are not tax deductible - no if's, and's, or but's!
Which statement is TRUE about Coverdell Education Savings Accounts? A Contributions are tax deductible; Distributions are taxable B Contributions are tax deductible; Distributions are not taxable C Contributions are not tax deductible; Distributions are taxable D Contributions are not tax deductible; Distributions are not taxable
The best answer is D. Contributions to Coverdell Education Savings Accounts are not tax deductible; and distributions from Coverdell Education Savings Accounts to pay education expenses are not taxable.
