Education Savings Vehicles

Question 1

5 Types of Tax-Advantaged Savings Vehicles

Answer 1

• 529 Plans (QTP: Qualified Tuition Programs)
• Coverdell Education Savings Accounts (ESAs)
• US Savings Bonds (Series EE/I bonds)
• Roth individual retirement accounts (IRAs)
• Uniform Gift to Minors Act (UGMA)

Question 2

529 Plan (QTP: Qualified Tuition Programs)
  Annual contribution amount
  Income limit
  Earnings tax status
  Fed tax deduction

Answer 2

• Annual contribution amount: very high (depends on state); contribution not deductible
• Contributor Income limit: none
• Earnings tax status: tax free Fed and State
• Fed tax deduction: none (30+ states offer state tax deduction)
• All states have at least one state-sponsored savings plan
• Custodian (person that sets up the account) has control of the funds until they are withdrawn
• Has one designated beneficiary
• Not limited to attending school in the state that sponsors plan

Covers

• tuition
• fees
• books
• room and board (must be enrolled at least half time)
• equipment (computer, internet, etc.)

10% penalty applied to earnings above $10,000 of student loan distributions over life of beneficiary

Question 3

Coverdell ESA

• Annual contribution amount
• Income limit
• Earnings tax status
• Fed tax deduction

Answer 3

• Annual contribution amount: $2,000 per beneficiary
• Income limit: $110,000 per parent
• Earnings tax status: tax free
• Fed tax deduction: none
• contribute before 18th birthday (unless special needs beneficiary)
• used before age 30 (or within 30 days of death of beneficiary)

Covers

• tuition
• fees
• books
• room and board (must be enrolled at least half time)
• equipment (computer, internet, etc.)
• tutors
• can be made until tax deadline of following year
• can be multiple accounts, but still not exceed $2,000 in contributions/year
  
  • excess contributions must be removed within 6 months or 6% penalty applied to excess
• subject to income phaseout

Same calculation to determine taxable portion of any distribution as 529

Question 4

Series EE/I bonds

• Annual contribution amount
• Income limit
• Earnings tax status
• Fed tax deduction

Answer 4

• Annual contribution amount: $10,000 per individual
• Income limit: yes
• Earnings tax status: tax free
• Fed tax deduction: none

Income limit
; MAGI < $93,150 ($147,250 if married filing jointly), with income phase-outs
- filing status can’t be married filing separately

Savings bonds are rolled over to a 529 plan

Bonds must be

• issued after 1989, or a series I bond
• issued in the name of client or client and spouse, who were at least 24 years old before issued

Proceeds can be used to

• make contributions to a QTP
• make contributions to a Coverdell ESA

Same calculation for taxable income if amount received exceeds amount needed

Question 5

Roth IRA

• Annual contribution amount
• Income limit
• Earnings tax status
• Fed tax deduction

Answer 5

• Annual contribution amount: $6,000
• Income limit: Yes
• Earnings tax status: taxable
• Fed tax deduction: none

Account owner can always withdraw (but not replace) contributions for any reason without tax consequence

Not typically figured into EFC, allowing for greater need-based financial aid

TAXES
10% penalty on nonqualified distributions is waived if money is sued for qualified education purposes, but distributions are still subject to ordinary income taxes

If the child is <19, or full-time student <23, unearned income may be taxed at tax rates for trusts and estates (37% rate reached quickly)
if the child is >19 then taxes at rate for trusts and estates

Question 6

529 Plan basic types

Answer 6

• Prepaid tuition plans

- Savings plans

Question 7

529/QTP

Adjusted Qualified Education Expenses (AQEE)

and

Taxable part of distributed QTP earnings

Answer 7

AQEE: Total qualified education expenses - tax free educational assistance

Tax-free earnings = Form 1099-Q QTP distribution earnings x ($ AQEE / $ QTP distribution)

Taxable earnings = QTP distribution earnings - tax-free earnings

Taxable earnings = QTP distribution earnings - QTP distribution earnings x ($ AGEE / $ QTP distribution)
= QTP distribution earnings (1 - $ AGEE / $ QTP distribution)

Question 8

10% Tax Penalty (and exceptions)

Answer 8

on a distribution not used for qualified educational expense, clients also must pay a 10% additional amount included in income

EXCEPT (“ADD A Credit”)

Assistance (scholarship, grant, etc.)
Death
Disability
Academy (military)
Credit (American Opportunity Tax Credit or Lifetime Learning Credit)

Rolled over within 60 days of the distribution for the beneficiary or the family member of the original beneficiary. Could also just change the name of the beneficiary.

Family Member

Question 9

UTMA / UGMA Accounts

Answer 9

Uniform Transfer to Minors Account
Uniform Gifts to Minors Account

Custodian manages the account but considered property of minor.
First $1,100 of income is tax free
Next $1,100 of income is taxed at minor’s tax rate
All additional income taxed at parents’ tax rate