Retirement Plans: Education and Health Savings Plans

A high earning individual can open and contribute to which of the following accounts? I UGMA Account II Roth IRA III Coverdell ESA Correct Answer A. I only StatusB B. I and II Incorrect Answer C. II and III StatusD D. I, II, III

The best answer is A. Custodian 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 statement is TRUE about Coverdell ESAs? StatusA A. Assets grow tax-deferred and distributions are not taxable if used for qualified educational purposes StatusB B. Contributions into the account are tax deductible to the donor StatusC C. Any adult, regardless of income level, can open or contribute into the account StatusD D. Distributions are taxable at long term capital gains rates

The best answer is A. 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.

High earning individuals can make contributions to: I UGMA Accounts II Roth IRAs III UTMA Accounts IV Coverdell ESAs Correct A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is A. Custodian 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.

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.

A customer that earns $300,000 per year wishes to set aside funds for his 12 year old daughter's future college expenses. Which statements are TRUE? I The customer can open a UTMA account for the daughter to deposit the funds II The customer cannot open a UTMA account for the daughter to deposit the funds III The customer can open a Coverdell ESA account for the daughter to deposit the funds IV The customer cannot open a Coverdell ESA account for the daughter to deposit the funds StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is B. Custodian 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 statements are TRUE? I Funds in a 529 plan can only be used without limit for higher education expenses II Funds in a 529 plan can be used without limit for any qualifying education expenses III Funds in a Coverdell ESA can only be used without limit for higher education expenses IV Funds in a Coverdell ESA can be used without limit for any qualifying education expenses StatusA A. I and III Correct B. I and IV StatusC C. II and III StatusD D. II and IV

The best answer is B. Whereas funds that are in a 529 plan can be used to pay for higher education expenses, up to $10,000 per year can be used to pay for education below the college level. In contrast, funds in a Coverdell ESA can be used without limit to pay for any "qualifying" educational expense, and these include elementary school, middle school, high school, college and vocational school.

Which statement is TRUE about the tax deductibility of 529 Plan contributions? StatusA A. Contributions are generally deductible at the federal level StatusB B. Contributions are generally deductible at the state level StatusC C. Contributions are generally deductible at the state level regardless of the state in which the plan was established StatusD D. Contributions are generally not deductible at either the federal or state level

The best answer is B. 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 (and a handful of states allow a tax deduction for contributions made to any state's 529 plan!). This is a tax benefit of making 529 Plan contributions.

An uncle opens a Coverdell ESA for his niece and makes deposits over a number of years. When she enters college, the niece withdraws $10,000 from her Coverdell ESA to pay for expenses. The student only uses $9,000 of the funds. The remaining $1,000: StatusA A. must be redeposited to the account StatusB B. is taxable at ordinary income tax rates to the niece StatusC C. is taxable at ordinary income tax rates to the uncle StatusD D. is not taxable and can be used by the niece for any purpose

The best answer is B. Any monies that are withdrawn from a Coverdell ESA by the beneficiary, that are not used to pay for qualified education expenses, are taxable as ordinary income.

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: StatusA A. $2,000 is taxable StatusB B. $2,000 is taxable and a 10% penalty will be imposed StatusC C. $15,000 is taxable StatusD D. $15,000 is taxable and a 10% penalty will be 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? StatusA A. The account may be opened by any adult StatusB B. Annual contributions are limited to $2,000 per beneficiary StatusC C. Earnings build in the account tax deferred StatusD 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.

Health Saving Accounts (HSAs): I can be established by all employers that offer health insurance plans II can only be established by employers that have high deductible health insurance plans III are funded with tax-deductible contributions IV are funded with non tax-deductible contributions StatusA A. I and III StatusB B. I and IV Correct C. II and III StatusD D. II and IV

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 2019 of up to $3,500 for a single individual; or $7,000 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.

State-sponsored education savings programs that permit contributions to build tax-deferred are known as: StatusA A. Coverdell Education Savings Accounts StatusB B. Education IRAs StatusC C. Section 529 plans StatusD D. Section 403(b) plans

The best answer is C. State sponsored education savings programs are "Section 529" plans. Coverdell Education Savings Accounts are a Federal plan.

When recommending a 529 plan to a client, the registered representative should inform the customer about the: StatusA A. income-phase outs that restrict who can contribute funds to the account StatusB B. right of the beneficiary to take control of the assets in the account at the age of majority StatusC C. fact that the contribution might be deductible at the state level StatusD 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 marketed by broker-dealers are: I defined as a type of investment company II defined as a municipal fund security III regulated by the MSRB IV regulated by the SEC StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

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.

Which of the following is a FALSE statement about 529 Plans? StatusA A. The donor maintains control over the assets in the plan StatusB B. The contribution may be deductible at the state level StatusC C. The donor and the beneficiary cannot be the same person StatusD D. Distributions to pay for qualified higher education expenses are tax-free

The best answer is C. 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.

High earning individuals are prohibited from making contributions to: I Traditional IRAs II Roth IRAs III Coverdell ESAs StatusA A. I only StatusB B. I and II only StatusC C. II and III only StatusD D. I, II, III

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 2019, the top end of the income phase out range for individuals is $110,000 and for couples it is $220,000.

Which statements are TRUE about federal taxation of contributions to 529 plans? I Contributions are tax deductible to the donor II Contributions are not tax deductible to the donor III A 1-time gift of up to 5 times the gift tax exclusion amount can be given that will not be subject to gift tax IV A 1-time gift of up to 10 times the gift tax exclusion amount can be given that will not be subject to gift tax StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

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 2019) 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 2019, 5 times this amount or $75,000 can be donated as a 1-time gift and not be subject to gift tax.

Which statements are TRUE about federal taxation of contributions to 529 plans? I Contributions are tax deductible to the donor II Contributions are not tax deductible to the donor III Contribution amounts above the gift tax exclusion amount are taxable to the donor IV Contributions amounts above the gift tax exclusion amount are not taxable to the donor StatusA A. I and III StatusB B. I and IV Correct Answer C. II and III Incorrect Answer D. II and IV

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 2019) 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 2019, 5 times this amount or $75,000 can be donated as a 1-time gift and not be subject to gift tax.

Monies that have accumulated in a Coverdell Education Savings Account that are not used by the beneficiary to pay for qualified educational expenses: StatusA A. may be rolled over into a Traditional IRA without any tax liability StatusB B. may be rolled over into a Roth IRA without any tax liability StatusC C. may be transferred to a Coverdell Education Savings Account for a sibling that so qualifies without any tax liability StatusD 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).

An ABLE account: I must be established prior to the beneficiary reaching age 18 II must be established prior to the beneficiary reaching age 26 III is used to pay only for the medical expenses incurred by a disabled individual IV is used to pay for the qualified ongoing expenses incurred by a disabled individual StatusA A. I and III StatusB B. I and IV StatusC C. II and III StatusD D. II and IV

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 regarding Section 529 Accounts? StatusA A. Any adult can open an account for any beneficiary StatusB B. Account contributions are not deductible, but earnings build tax-deferred StatusC C. Non-taxable distributions may be made to pay for qualified higher education expenses Correct D. Non-taxable distributions may only be made to educational institutions in the state that sponsors the plan

The best answer is D. Any adult can open a Section 529 account for a beneficiary. Contributions are not tax deductible, but earnings build tax-deferred. Distributions to pay for qualified higher education expenses are not taxable; and these distributions can be made to any qualified educational institution in any state.

Section 529 plans generally permit: I tax deductible contributions by the donor II non-tax deductible contributions by the donor III taxable distributions to the recipient to pay for higher education IV non-taxable distributions to the recipient to pay for higher education StatusA A. I and III StatusB B. I and IV StatusC C. II and III Correct D. II and IV

The best answer is D. 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. There is no tax deduction for the contribution; earnings build tax-deferred; and distributions to pay qualified higher education expenses are not taxable.

A tax deduction for a contribution to a Coverdell Education Savings Account is: StatusA A. permitted without limitation StatusB B. permitted only for persons earning below a statutory limit StatusC C. not permitted unless the monies remain in the account for at least 5 years Correct 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!

Distributions from a Coverdell Education Savings Account must cease when the beneficiary reaches the age of: StatusA A. 16 StatusB B. 18 StatusC C. 21 StatusD D. 30

The best answer is D. 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.