Education and Health Savings Plans
Maximum income limits that reduce permitted contributions do NOT apply to: I IRAs II Spousal IRAs III Roth IRAs IV Coverdell Education Savings Accounts A. I and II B. III and IV C. I and III D. II and IV
A. As one's income increases, permitted contributions to Roth IRAs and Coverdell Education Savings Accounts are phased out (so high earning persons cannot contribute to these accounts). However, there is no income limit for making a contribution to a Traditional IRA or spousal IRA (however, if the contributor is covered by another qualified retirement plan and earns too much, the permitted contribution may not be tax deductible).
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
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 Starting in 2018, up to $10,000 per year can be withdrawn to pay for education below the college level. 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.
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!
The maximum annual contribution to a Coverdell Education Savings Account is: A. $2,000 B. $2,500 C. $3,000 D. $4,000
A. The maximum annual contribution to a Coverdell Education Savings Account for a single beneficiary is $2,000.
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
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 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
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 statements are TRUE about Coverdell ESAs? I Assets grow tax-deferred and distributions are not taxable if used for qualified educational purposes II Contributions into the account are tax deductible to the donor III Any adult, regardless of income level, can open or contribute into the account IV Unexpended funds can be transferred without tax liability to another relative in the same or younger generation as the beneficiary A. I and III B. I and IV C. II and III D. II and IV
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 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
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.
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!
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 A. I and III B. I and IV C. II and III D. II and IV
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.
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
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
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
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.
High earning individuals are prohibited from making contributions to: I Traditional IRAs II Roth IRAs III Coverdell ESAs A. I only B. I and II only C. II and III only D. I, II, III
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 A. I and III B. I and IV C. II and III D. II and IV
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.
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 A. I and III B. I and IV C. II and III D. II and IV
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: A. Coverdell Education Savings Accounts B. Education IRAs C. Section 529 plans D. Section 403(b) plans
C. State sponsored education savings programs are "Section 529" plans. Coverdell Education Savings Accounts are a Federal plan.
Which statements are TRUE regarding the 529 college savings plan established by state A? I Contributors must be residents of state A II Contributors may be residents of any state III The beneficiary may use the funds only to attend college in state A IV The beneficiary may use the funds to attend college in any state A. I and III B. I and IV C. II and III D. II and IV
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.
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 A. I and III B. I and IV C. II and III D. II and IV
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.
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. 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 statements are TRUE about Coverdell Education Savings Accounts? I Contributions are tax deductible II Contributions are not tax deductible III Distributions are taxable IV Distributions are not taxable A. I and III B. I and IV C. II and III D. II and IV
D. An annual contribution of $2,000 may be made to a Coverdell Education Savings Account for a child under age 18. The contribution is not deductible; and any distributions used to pay for qualified education expenses are not taxable.
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 statements are TRUE? I The name of the beneficiary on a Coverdell ESA can be changed to another beneficiary II The name of the beneficiary on a Coverdell ESA cannot be changed to another beneficiary III The name of a beneficiary (minor) on a UTMA account can be changed to another beneficiary IV The name of a beneficiary (minor) on a UTMA account cannot be changed to another beneficiary A. I and III B. I and IV C. II and III D. II and IV
D. 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). In comparison, custodian accounts opened under UGMA or UTMA cannot be transferred to another minor - gifts into custodian accounts are irrevocable and cannot be transferred.
Aggregate contributions into 529 plans are: I subject to dollar limits at the federal level II subject to dollar limits at the state level III not subject to dollar limits at the federal level IV not subject to dollar limits at the state level A. I and II B. III and IV C. I and IV D. II and III
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).