Series 66: Financial Profile / Ret. and Educ. Savings Plans (Education Savings Plans)

The maximum contribution a grandfather and grandmother can make to a 529 plan for a grandchild without gift tax consequence in 2020 is:

$150,000 Donors contributing to a 529 plan can make a 1-time lump sum contribution to a 529 plan equal to 5 years of contributions based on the annual gift tax exclusion of $15,000 (in 2020). Using the 5 year rule, each grandparent may contribute 5 times the annual maximum ($15,000 x 5) or $75,000. A couple could double that amount to $150,000 without gift tax consequences

The maximum annual contribution to a Coverdell Education Savings Account is:

$2,000 The maximum annual contribution to a Coverdell Education Savings Account for a single beneficiary is $2,000.

The maximum permitted annual contribution to a Coverdell Education Savings Account is:

$2,000 The maximum contribution to a Coverdell Education Savings Account is $2,000 per year per child. The contribution is not deductible; and when distributions are taken to pay for the child's qualified education expenses, the distributions are not taxable.

The maximum permitted annual contribution into a Coverdell ESA is:

$2,000 in any number of Coverdell ESAs per beneficiary per year Anyone can open a Coverdell Education Savings Account for a beneficiary, but the total of all contributions in all accounts cannot exceed $2,000 per beneficiary in a year. Assume that a Coverdell ESA is set up by a kid's parents who contribute $1,000, another Coverdell ESA is set up by the same kid's grandparents who contribute $600, and now, the kid's uncle wants to set up a Coverdell ESA for the same kid and contribute - the uncle's contribution cannot exceed $400, since the total of all contributions in all accounts cannot exceed $2,000 per child per year.

A father and mother established a 529 plan for their son when he was age 12. The son has just turned 18 and is entering college. The father gets the first tuition and boarding bill from the college for $22,000. Since the son will be commuting home every other weekend, the father withdraws $25,000 from the 529 plan to pay for the college bill and the commuting expenses. Which statement is TRUE?

$3,000 of the distribution is subject to both regular income tax and a penalty tax 529 plan distributions can only be used to pay for "qualifying" higher education expenses - tuition, books, and room and board, in the amount that would be paid under tuition assistance plans. So the $22,000 tuition and boarding bill from the college is "qualified," and is not taxable. However, the extra $3,000 withdrawn to pay for commuting is not qualified and is taxable and, in addition, is subject to penalty tax.

What is the maximum amount that an individual can contribute to a 529 plan without gift tax consequences in 2020?

$75,000 Contributions to a 529 plan above the Federal gift tax exclusion amount ($15,000 in 2020) will subject the donor to gift tax. A 1-time gift of 5 times the exclusion amount may be given without gift tax (5 x $15,000 = $75,000 in 2020).

If the beneficiary of a Coverdell Education Savings Account receives a full scholarship for education expenses, which statement concerning distributions is TRUE?

Distributions to the beneficiary are subject to income tax but no penalty tax When a beneficiary receives a full scholarship, distributions from a Coverdell ESA will be subject to income tax, but no penalty tax.

The beneficiary of a Section 529 account may: I be the beneficiary of a custodial account under UGMA as well II not be the beneficiary of a custodial account under UGMA as well III be the beneficiary of a Coverdell Education Savings Account as well IV not be the beneficiary of a Coverdell Education Savings Account as well

I and III Beneficiaries of Section 529 Education Plans can also be beneficiaries of Coverdell Education Savings Accounts and Custodial Accounts.

The parent of 2 children in grade school is looking to make investments to fund her children's post-secondary education. Which products are specifically designed to meet this objective? I UTMA Account II Zero Coupon Bond III AA Municipal Bonds IV 529 Plan

I and IV Both UTMA accounts and 529 Plans permit the child to be named as the owner of the account, with the custodian or trustee managing the assets for the benefit of the child. Thus, the funds cannot be used for any other purpose than the benefit of the child and furthermore, 529 plans cannot be used for any other purpose than to pay for college. In contrast, zero coupon bonds and municipal bonds cannot be held directly by a child and there is no say as to how they will be used.

A family is considering opening a Coverdell Education Savings Account for their child. Which statements are TRUE? I One contribution of a maximum of $2,000 is permitted per child per year II Each parent can contribute $2,000 ($4,000 total) per child per year III Any contribution is tax deductible IV Any contribution is not tax deductible

I and IV Contributions to a Coverdell Education Savings Account are limited to $2,000 per year per recipient of the contribution. Contributions are not tax deductible. Earnings in the account build tax deferred and the funds can be withdrawn with no tax due to pay qualified education expenses.

Which statements are TRUE about Coverdell Education Savings Accounts? I Contributions can continue until the beneficiary reaches age 18 II Contributions can continue until the beneficiary reaches age 30 III Distributions for the beneficiary must be completed upon reaching age 18 IV Distributions for the beneficiary must be completed upon reaching age 30

I and IV Contributions to a Coverdell Education Savings Account must stop once the beneficiary reaches age 18. Distributions must be completed upon reaching age 30.

Which statements are TRUE? I Funds in a 529 plan can only be used with no limitations for higher education expenses II Funds in a 529 plan can be used without limitation 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

I and IV Funds that are in a 529 plan can be used to pay for higher education expenses without limit. Starting in 2018, up to $10,000 per year can be withdrawn from a 529 plan to pay for lower levels of education. The rules for Coverdell ESAs are much more liberal. Funds in a Coverdell ESA can be used without limit to pay for any "qualifying" educational expense, and these include elementary school, middle school, and high school related expenses, in addition to higher education (college) expenses.

Distributions from a Coverdell Education Savings Account will be tax-advantaged if used to pay expenses for: I Elementary schools II Secondary schools III Private colleges IV Religious colleges

I, II, III & IV A Coverdell Education Savings Account can be used for elementary, secondary, or higher education expenses. The funds in the account can be used to pay for public, private, or religious schools. Also note, in contrast, that 529 plans, until 2018, could only be used to pay for higher education expenses. However, tax amendments effective in 2018 permit $10,000 per year to be used from a 529 plan to pay for education costs below the college level.

Prior to recommending a specific 529 college savings plan to a customer, a representative should consider which of the following? I Customer's investment objective(s) II Age of the beneficiary III Number of years until the funds are needed IV Performance history of the recommended investment

I, II, III, IV All of the choices should be considered when recommending a specific 529 college savings plan to a customer: investment objective(s); age of the beneficiary; number of years until the funds are needed; and the performance history of the recommended investment.

Under which TWO of the following circumstances can a non-taxable distribution be made from a Section 529 Plan? I The beneficiary does not go to college II The beneficiary gets a full scholarship III The beneficiary goes to vocational school IV The beneficiary gets married

II and III Payments from Section 529 plans made to colleges, universities, vocational schools, and any other accredited post-secondary education institution are not taxable. 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.

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

II and III 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). Each State sets its own limit and the amount can be very high. Note that any gift above the $15,000 Federal gift tax exclusion (in 2020) will result in gift tax liability for the donor.

What options are available for a Coverdell Education Savings Account that is not used by the time the beneficiary is age 30? I The account balance is distributed tax-free to the educational institution selected by the beneficiary II The account balance is distributed to the beneficiary and distributions are taxed to the beneficiary III The account balance is rolled over to a family member who is under 30 years of age IV The account balance is rolled over to an IRA for the beneficiary

II and III only A Coverdell Education Savings Account that is not used by the time the beneficiary is age 30 can be rolled over to a family member who is not yet 30 and remain tax-free, or the account balance must be distributed to the beneficiary and is subject to regular tax plus a 10% penalty tax. There is no such thing as a rollover from a Coverdell to an IRA; and the proceeds must be used to pay for qualified education expenses of the beneficiary to be tax-free. If the proceeds are donated to an educational institution, this is not a qualified distribution and the amount distributed is subject to regular income tax plus a 10% penalty tax.

Which of the following statements concerning 529 plans are TRUE? I Contributions are tax deductible to the donor II Distributions to pay for qualified higher education expenses are tax-free III The beneficiary can be changed to another family member without tax consequences IV Any plan balance must be distributed to the beneficiary at age 30

II and III only Contributions to a 529 plan are not tax deductible. Distributions for qualified higher education expenses are tax-free. The beneficiary can be changed to another family member without tax consequences. There is no requirement that the plan balance be distributed to the beneficiary at any age, so this differs from the requirement for Coverdell ESAs that the funds be used by age 30.

High-earning individuals are prohibited from contributing to: I Traditional IRAs II Roth IRAs III Coverdell ESAs

II and III only There is no income "phase-out" for Traditional IRA contributions. However, high-earning individuals are subject to the phase-out rules and are prohibited from contributing to either Roth IRAs or Coverdell ESAs.

What will happen to a Coverdell Education Savings Account if the beneficiary does not use it?

The amount in the account is distributed to the beneficiary and taxed to the beneficiary At age 30, the account must be distributed to the beneficiary and then the distributions will be taxed to the beneficiary and the 10% penalty tax will be applied.

Which statement is TRUE about the use of funds held in a 529 plan?

The funds can be used to pay for college or higher education in the United States or in foreign institutions that qualify Funds in a 529 plan can be used to pay for college or higher education in the United States and in foreign schools that qualify for Title IV federal student aid. There are about 800 foreign schools that are eligible. Also note that starting in 2018, up to $10,000 per year can be withdrawn from a 529 Plan to pay for below-college level education expenses, but that is not addressed in this question.

Which statement is TRUE about the use of funds held in a 529 plan?

The funds can be used to pay for higher education in the United States or in foreign institutions that qualify Funds in a 529 plan can be used to pay for college or higher education in the United States and in foreign schools that qualify for Title IV federal student aid. There are about 800 foreign schools that are eligible. Also note that starting in 2018, up to $10,000 per year can be withdrawn from a 529 Plan to pay for below-college level education expenses, but that is not addressed in this question.

What are the income tax consequences of a distribution from a Coverdell Education Savings Account in excess of the amount of education expenses?

There is income tax plus a 10% penalty on the excess distribution Excess distributions from a Coverdell ESA represent funds that are not being used to pay for qualified education expenses. They are subject to income tax plus a 10% penalty tax.

Contributions to which of the following accounts may be income tax deductible?

Traditional IRA A contribution to a Traditional IRA is deductible if the individual with earned income making the contribution is not covered by another qualified plan; or if that individual is covered by another qualified plan, but is a low-earner (there is an income phase-out for high-earners).Contributions to Coverdell ESAs, Roth IRAs, and 529 Plans are not deductible for federal income tax purposes.

A grandmother who resides in State A sets up a 529 plan for her granddaughter in that State. After applying to a number of colleges, the granddaughter decides to go to a college in a different State. Can the grandmother move the 529 plan to the State where her granddaughter wants to go to college?

Yes, as long as the change happens only once in 12 months 529 rollovers are permitted every 12 months without any tax penalty. The grandmother (who has control over the account) can move it to the State where the granddaughter is going to college and such a rollover is permitted once every 12 months.

A parent who is a custodian in a UTMA account can use custodial funds to pay for all of the following EXCEPT:

clothing expenses necessitated by a growth spurt A parent has a legal obligation to pay for a child's necessary living expenses such as food, clothing, and shelter. Custodial account funds are intended to be used for supplemental support such as education, medical care, spending money, summer camp, and activities. Because this custodian is the parent, the parent is not supposed to use custodial funds to pay for a child's basic living needs such as food and clothing.

A distribution from a Section 529 Plan would be taxable if the beneficiary:

does not go to college Payments from Section 529 plans made to colleges, universities, vocational schools, and any other accredited post-secondary education institution, are not taxable. 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.

Section 529 plans are used to fund:

higher education needs Section 529 plans are state sponsored savings plans used to fund higher education. The tax law was revised at the beginning of 2018 to also allow up to $10,000 to be withdrawn from the account to pay for lower levels of education.

Funds expended from a Coverdell ESA to pay for qualified education expenses are:

tax-free Contributions to a Coverdell ESA are not deductible. Earnings build in the account without tax. Distributions from the account used to pay for qualified education expenses are tax-free.

A potential client writes a letter to a Registered Investment Adviser, stating the following: "Gentlemen: I have an 18 month old daughter for whom I want to start saving for her college education. I wish to invest with the objectives of high levels of safety, high levels of income and medium volatility. Could you propose investments that meet my needs?" The RIA should respond that:

the investment objectives of high levels of safety, high levels of income and medium volatility are incompatible There is no such thing as an investment with a high level of safety that gives a high level of income. Safer assets produce lower income with lower risk (volatility). Riskier assets produce higher income with higher risk levels. The customer's objectives are incompatible and he should be told this.