Education and Health Savings Plan
Which statement is TRUE? A Distributions from a Coverdell ESA and a 529 plan to pay for higher education costs are not taxable B Distributions from a Coverdell ESA and a 529 plan to pay for higher education costs are taxable at ordinary income rates C Distributions from a Coverdell ESA and a 529 plan to pay for higher education costs are taxable at long term capital gains rates D Distributions from a Coverdell ESA and a 529 plan to pay for higher education costs are tax free as long as the student attends an in-state school
A. 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. Students in either plan are not limited to attending in-state schools.
Many years ago, a customer opened a Coverdell ESA for his son, who is now age 16, and a savings account for his daughter, who is now age 18. The 18-year old daughter is entering college and does not have enough money in the savings account to pay for tuition. To pay the tuition bill, the customer: A can change the beneficiary on the Coverdell ESA from the son to the daughter B can use funds from the Coverdell ESA with the written approval of the son C can use funds from the Coverdell ESA with the written approval of the IRS D cannot use the funds in the Coverdell ESA
A. The beneficiary can be changed in a Coverdell Education Savings Account, so the funds from the 16-year old's Coverdell account can be transferred over into an account in the name of the daughter to help pay for the daughter's education costs. There is no approval of the 16-year old son required because the account is controlled by the donor - plus, minors cannot give approval!
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
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.
Which of the following is a FALSE statement about 529 Plans? A The donor maintains control over the assets in the plan B The contribution may be deductible at the state level C The donor and the beneficiary cannot be the same person D Distributions to pay for qualified higher education expenses are tax-free
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.
Which statements are TRUE when comparing UTMA Custodial Accounts to Coverdell Education Savings Accounts? I Contributions to UTMA accounts are limited to $2,000 annually II Contributions to Coverdell Education Savings Accounts are limited to $2,000 annually III Earnings in UTMA accounts are subject to Federal income tax IV Earnings in Coverdell Education Savings Accounts are subject to Federal Income tax A I and III B I and IV C II and III D II and IV
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 dollar amount that can be donated into the account. There is no tax deduction for the donor for the contribution, and earnings in the account are taxable annually to the minor. Because all of the funds in the account represent "after-tax" dollars, there is no tax liability when funds are withdrawn. Coverdell Education Savings accounts can be opened by any adult for a minor, with annual contributions into the account limited to $2,000. The contribution amount is not deductible. Earnings build tax-deferred; and when distributions commence, as long as they are used to pay for that minor's education expenses, the distribution is not taxable (a major tax benefit). Also note that high earning individuals cannot open Coverdell ESAs.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
An individual who has completed college has been working for 9 years and is now 30 years old. He is thinking about returning to school in a few years to complete his masters degree and wants to set up a 529 Plan with himself as the beneficiary. Can he do this? A No, because the donor and the beneficiary must be different persons in a 529 Plan B No, because 529 Plans cannot be opened after age 30 C No, because 529 Plans must have an independent trustee D Yes
D. 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. This individual can open a 529 Plan for himself and be both the donor and beneficiary.
Which statement is TRUE about earnings limitations on the following plans? A A Coverdell ESA can be opened by a high-earning individual employed by a corporation B A 529 Plan can be opened by a high-earning individual employed by a corporation C A Roth IRA can be opened by a high-earning individual employed by a corporation D A Keogh Plan can be opened by a high-earning individual employed by a corporation
B. 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.
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: A $2,000 is taxable B $2,000 is taxable and a 10% penalty will be imposed C $15,000 is taxable D $15,000 is taxable and a 10% penalty will be imposed
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!
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: A Coverdell ESA B 529 Plan C UTMA account D Growth mutual fund
B. 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!
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
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.
Which statement is TRUE about federal taxation of contributions to 529 plans? A Contributions are tax deductible to the donor B Contributions are capped at $10,000 annually C 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 D 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
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. Review
Aggregate contributions into 529 plans are: A subject to dollar limits at both the federal and state level B not subject to dollar limits at either the federal or state level C only subject to dollar limits at the federal level D only subject to dollar limits at the state level
D. There is no aggregate contribution limit on the amount that can be invested in 529 plans at the federal level; though most states have such limits (the intent is that the dollar amount is enough to meet reasonable higher education expenses, but not more than that amount). Also note that gifts given into a 529 plan will be subject to gift tax paid by the donor if they exceed the annual federal gift tax exclusion amount - $15,000 in 2020.
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
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.
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
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.
