Chapter 14.6

Question 1

Coverdell

Answer 1

• Used to help save for education expenses
• Contributions are limited to $2,000/year
• Contributions can be made until the bene reaches age 18. Assets must be distributed before the bene reaches age 30.
• A 10% penalty will be assessed if the funds are not distributed before age 30.
• Contributions are not deductible but withdrawals are tax free.
• Benefits can be used to pay qualified higher education expenses as well as qualified elementary and secondary education expenses.
• Distributions not used for education are subject to ordinary income tax plus a 10% penalty
• These accounts are most appropriate for low and middle income level contributors

Question 2

529 Plans

Answer 2

Established by a state government and allow individuals to pay for a student’s qualified higher education expenses at any eligible educational institution. Contributions are not deductible. The earnings and qualified withdrawals are tax free.

Question 3

Prepaid Tuition Plan

Answer 3

Allows anyone to establish an account in the name of a student and lock-in the cost of a specific number of academic periods or units at current prices, but the units will be used in the future. Provides a hedge against increased tuition costs. They do not have investment risk.

Question 4

College Savings Plan

Answer 4

Allows anyone to contribute to an account that will be used to pay a beneficiaries qualified higher education expenses. The value of a College savings plan is based on the performance of the investments chosen by the account owner. The account owner of the college savings plan bears the investment risk.