SIE c.7.s.3

A distribution from a Section 529 Plan would be taxable if the beneficiary: A. does not go to college B. gets a full scholarship C. goes on disability D. goes to vocational school The best answer is A. 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 Starting in 2018, up to $10,000 per year can be withdrawn to pay for education below the college level, and starting in 2020, up to $10,000 per year can be used to pay off qualified education loans.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.

A

High-earning individuals can make contributions to: A. UGMA Accounts B. Roth IRAs C. Spousal Roth IRAs D. Coverdell ESAs 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. On the other hand, high-earning individuals are prohibited from opening either a Roth IRA or a Coverdell Education Savings Account.

A

The maximum annual contribution to a Coverdell Education Savings Account is: A. $2,000 B. $2,500 C. $3,000 D. $4,000

A

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.

B

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: A. must be redeposited to the account B. is taxable at ordinary income tax rates to the niece C. is taxable at ordinary income tax rates to the uncle 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.

B

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.

B

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.

B

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.

B

Which statement is TRUE about a Coverdell Education Savings Account? A. Distributions must stop when the beneficiary reaches age 18 B. Distributions must stop when the beneficiary reaches age 30 C. There is no limit on the annual amount that can be contributed D. The funds in the account can only be used to pay for higher education expenses The best answer is B. Coverdell ESAs limit annual contributions to $2,000 per year per beneficiary. The funds can be used to pay for all levels of education. Contributions must stop at age 18, and the funds must be used up by age 30. High-earning individuals cannot contribute - there is a phase-out as income levels increase.

B

Which statement is TRUE about changing the beneficiary on a Coverdell Education Savings Account? A. The beneficiary cannot be changed on a Coverdell ESA B. The beneficiary can be changed to any relative of the same or later generation C. The beneficiary can be changed to any relative D. The beneficiary can be changed to another individual attending school The best answer is B. 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.

B

Which statement is TRUE? A. Funds in a 529 plan can only be used for college B. Up to $10,000 in funds in a 529 plan can be used to pay for education below the college level. C. Funds in a Coverdell ESA can only be used for in-state colleges D. Only $10,000 in funds in a Coverdell ESA can be used yearly to pay for education at the college level 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. Also, starting in 2020, up to $10,000 per year can be used to pay off qualified education loans. 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. Neither a Coverdell ESA nor 529 limit students to education within state borders.

B

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.)

C

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? A. 1 times the annual gift tax exclusion amount B. 2 times the annual gift tax exclusion amount C. 5 times the annual gift tax exclusion amount D. 10 times the annual gift tax exclusion amount The best answer is C. 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.

C

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.

C

State-sponsored education savings programs that permit contributions to build tax-deferred are known as: A. Coverdell Education Savings Accounts B. Education IRAs C. Section 529 plans 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.

C

Which statement about 529 Plans is FALSE? A. Contribution limits are established by each state B. Distributions used to pay for qualified higher education expenses are not federally taxable C. Amounts contributed are generally deductible from federal income tax D. Earnings in the account grow tax deferred 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 (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. Contribution limits are established by each state. Earnings in the account grow tax deferred. Distributions used to pay for qualified education expenses are tax free.

C

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!

D

All of the following statements are true about Health Savings AccountsEXCEPT: A. HSAs are only appropriate for those individuals covered by high-deductible health insurance plans B. HSAs can be set up to include dependents of the covered individual C. HSA contributions are tax deductible D. HSA contributions are subject to phase-out when an individual's income exceeds $250,000

D

LGIPs marketed by broker-dealers are investment vehicles offered to: A. the general public B. wealthy accredited investors C. major institutional investors D. local governmental entities in that state

D

The purpose of an ABLE account is to: A. save funds on a tax-deferred basis to pay for medical expenses B. save funds on a tax-deferred basis to pay for education expenses below the college level C. save funds on a tax-deferred basis to pay for education expenses and the college level or higher D. save funds on a tax-deferred basis to pay for the ongoing care of disabled individuals

D

Which statement is TRUE about 529 Plans? A. Assets may only be used to pay tuition to schools located in the state that established the 529 Plan B. Contributions into the plan can only be made by the parents of the beneficiary C. Assets held in the plan can only be used to pay for qualified educational expenses at the college level or higher D. Withdrawals from the plan used to pay for nonqualified educational expenses may be subject to a penalty tax The best answer is D.

D