Education and Health Savings Plans

Question 1

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

A. $2,000 in a single account
B. $2,000 total in any number of accounts
C. $4,000 in a single account
D. $4,000 total in any number of accounts

Answer 1

The best answer is B.

The maximum permitted annual contribution is $2,000 per beneficiary per year for Coverdell Education Savings Accounts.

Question 2

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 I

Answer 2

The best answer is 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.

Question 3

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

Answer 3

The best answer is 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.

Question 4

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

Answer 4

The best answer is D.

Contributions to Coverdell Education Savings Accounts are not tax deductible - no if’s, and’s, or but’s!

Question 5

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

Answer 5

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 2019, the top end of the income phase out range for individuals is $110,000 and for couples it is $220,000.

Question 6

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 to the beneficiary must be completed upon reaching age 18
IV Distributions to the beneficiary must be completed upon reaching age 30

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 6

The best answer is B.

Contributions to Coverdell Education Savings Accounts must stop once the beneficiary reaches age 18. Distributions must be completed upon reaching age 30.

Question 7

Distributions from a Coverdell Education Savings Account must cease when the beneficiary reaches the age of:

A. 16
B. 18
C. 21
D. 30

Answer 7

The best answer is D.

Distributions from Coverdell Education Savings Accounts must stop when the beneficiary reaches age 30. Any unexpended funds can be transferred to another related beneficiary (under age 18) for his or her qualified education expenses.

Question 8

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

Answer 8

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.

Question 9

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

Answer 9

The best answer is 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!

Question 10

A customer that earns $300,000 per year wishes to set aside funds for his 12 year old daughter’s future college expenses. Which statements are TRUE?

I The customer can open a UTMA account for the daughter to deposit the funds
II The customer cannot open a UTMA account for the daughter to deposit the funds
III The customer can open a Coverdell ESA account for the daughter to deposit the funds
IV The customer cannot open a Coverdell ESA account for the daughter to deposit the funds

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 10

The best answer is B.

Custodian 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.

Question 11

A high earning individual can open and contribute to which of the following accounts?

I UGMA Account
II Roth IRA
III Coverdell ESA

A. I only
B. I and II
C. II and III
D. I, II, III

Answer 11

The best answer is A.

Custodian 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.

Question 12

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

Answer 12

The best answer is 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).

Question 13

Which statement is TRUE about Coverdell ESAs?

A. Assets grow tax-deferred and distributions are not taxable if used for qualified educational purposes
B. Contributions into the account are tax deductible to the donor
C. Any adult, regardless of income level, can open or contribute into the account
D. Distributions are taxable at long term capital gains rates

Answer 13

The best answer is A.

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

Question 14

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

Answer 14

The best answer is C.

State sponsored education savings programs are “Section 529” plans. Coverdell Education Savings Accounts are a Federal plan.

Question 15

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

Answer 15

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. 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).

Question 16

Which statement is TRUE about federal taxation of contributions to 529 plans?

A. Contributions are tax deductible to the donor
B. Contributions amounts above the gift tax exclusion amount are taxable to the recipient
C. Contribution amounts above the gift tax exclusion amount are taxable to the donor
D. The full contribution is taxable to the donor

Answer 16

The best answer is 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.

Question 17

What type of education savings plan permits an adult donor to be the beneficiary?

A. Custodian account opened under UTMA
B. 529 Plan
C. Coverdell Education Savings Plans
D. Any of the above

Answer 17

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.

Custodian 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.

Question 18

Section 529 plans generally permit:

A. tax deductible contributions by the donor
B. tax free withdrawals for first time home buyers
C. taxable distributions to the recipient to pay for higher education
D. non-taxable distributions to the recipient to pay for higher education

Answer 18

The best answer is D.

Any adult can open a Section 529 account to pay for the higher education expenses of a beneficiary. Starting in 2018, up to $10,000 per year can be withdrawn to pay for education below the college level. There is no tax deduction for the contribution; earnings build tax-deferred; and distributions to pay qualified higher education expenses are not taxable.

Question 19

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

Answer 19

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. 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.

Question 20

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

Answer 20

The best answer is 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.

Question 21

Which statement is FALSE regarding Section 529 Accounts?

A. Any adult can open an account for any beneficiary
B. Account contributions are not deductible, but earnings build tax-deferred
C. Non-taxable distributions may be made to pay for qualified higher education expenses
D. Non-taxable distributions may only be made to educational institutions in the state that sponsors the plan

Answer 21

The best answer is D.

Any adult can open a Section 529 account for a beneficiary. Contributions are not tax deductible, but earnings build tax-deferred. Distributions to pay for qualified higher education expenses are not taxable; and these distributions can be made to any qualified educational institution in any state.

Question 22

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

Answer 22

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.

Question 23

Which statement is TRUE?

A. Contributions to a 529 plan are tax deductible while contributions to a Coverdell are not tax deductable
B. Contributions to a 529 plan are not tax deductible while contributions to a Coverdell are tax deductable
C. Contributions to both a 529 and Coverdell ESA are tax deductible
D. Contributions to both a 529 and Coverdell ESA are not tax deductible

Answer 23

The best answer is D.

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.

Question 24

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

Answer 24

The best answer is 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 2019.

Question 25

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

Answer 25

The best answer is 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!).

Question 26

The beneficiary of a Section 529 account may:

I be the beneficiary of a Custodian account under UGMA as well
II not be the beneficiary of a Custodian 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

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 26

The best answer is A.

Beneficiaries of Section 529 Education Plans can also be beneficiaries of Coverdell Education Savings Accounts and Custodian Accounts.

Question 27

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

Answer 27

The best answer is 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!

Question 28

A customer has a 3-year old child and wishes to begin saving for the kid’s college education using a tax advantaged investment. The best investment option to meet the customer’s objective is a(n):

A. zero-coupon bond investment
B. age weighted 529 plan
C. Coverdell ESA
D. UGMA account

Answer 28

The best answer is B.

Any of the choices offered could be used to save for a kid’s college education. However, the annual accretion on a zero-coupon bond is taxable, unless the investment is held in a tax deferred account, such as an IRA. Earnings in UGMA (custodian) accounts are also taxable each year. So we have narrowed down the best choices to either the Coverdell ESA or the age-weighted 529 plan.

Coverdell ESAs allow a maximum annual contribution of $2,000 per year per child (non-deductible) and grow tax-free. However, they are not available to high earning individuals (no information is given in the question about the customer’s income, so this is not a consideration here).

State sponsored 529 Plans allow much bigger contributions to be made. They grow tax-free as well and are not subject to income limitations. Since college is expensive, socking away more money is definitely better! Furthermore, an “age weighted” 529 plan varies the investment mix based upon the beneficiary’s age - in early years weighting the investments towards growth; and in later years, when distributions are needed for college, weighting the investment mix towards income. Thus, an “age weighted” 529 plan is the best choice to meet the customer’s objective.

Question 29

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

Answer 29

The best answer is 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.

Question 30

ABLE accounts are:

A. used to save funds on a tax-deferred basis and may only be used to pay for medical expenses
B. used to save funds on a tax-deferred basis to pay for the ongoing care of disabled children below age 21
C. regulated by the MSRB
D. regulated by FINRA

Answer 30

The best answer is C.

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.

Question 31

All of the following statements are true about Health Savings Accounts EXCEPT:

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

Answer 31

The best answer is D.

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 $6,900 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. There are no income phase out rules for HSAs.

Question 32

Which statements are TRUE about HSAs?

I HSAs have the same contribution limits as IRAs
II HSAs have lower contribution limits than IRAs
III HSAs are funded with tax-deductible contributions
IV HSAs are funded with non tax-deductible contributions

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 32

The best answer is 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.

Question 33

Health Saving Accounts (HSAs) are:

I employer-established
II employee-established
III funded with tax-deductible contributions
IV funded with non tax-deductible contributions

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 33

The best answer is A.

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.