Lesson 6 - Educational Planning

Question 1

EE Educational bonds

1) Who will own the bonds?
2) Is a Gift of a EE Educational bond a complete gift?
3) What can they be used for? What can’t they be used to fund?
4) What are the rules?

Answer 1

1) The PARENTS.
2) Not if the parent will own the bond.
3) Fund eligible education expenses. CAN’T be used to fund Room and board!!
4) 4 rules:
- Normally purchased in parent’s name (the purchaser can be anyone but the student, age 24+ at the time of issue).
- Bonds CANNOT be issued in the name of the child OR in a custodial account.
- Bonds MUST be redeemed in a year in which the owner (e.g. parent) pays qualified higher education expenses, defined as tuition and fees only for education saving bond purposes.

Question 2

College Savings 529 (Not Prepaid Tuition)

1) What schools included, undergrad, grad?
2) Include Room and Board?
3) Refunds any penalty?
4) Who can take over if die?

Answer 2

1) INCLUDES Graduate school AND now, after TCJA, kindergarten through 12th grade up to $10,000 per year. ALSO under SECURE Act, allows to pay student loans up to a limit of $10,000 (lifetime) for any person(s).
2) YES, actually!!!!!
3) Yes, a 10% penalty except for Death.
4) Successor owner can be named usually.

Question 3

Coverdell ESAs

1) What is it?
2) How much can contribute and to whom?
3) Who can contribute?
4) Able to contribute to a qualified tuition program (529 prepaid or regular) in the same year?
5) Are there Coverdell phaseouts to contribute?
6) What are qualified expenses?
7) Any deadline to use the funds?
8) Can be rolled over to a beneficiary who is another family member of the original beneficiary?
9) Allowed to pay off loans with?
10) What allowed to invest in?

Answer 3

1) A Coverdell Education Savings Account (ESA) is set up in a trust or custodial type of account where NON-deductible contributions accumulate tax-deferred earnings and can be distributed and used for the payment of qualified education expenses. When used for Qualified expenses = no taxes and no penalties!
2) Individuals may contribute up to $2,000 per year to a Coverdell ESA for the benefit of each child under age 18. ACTUALLY, contributions are limited to $2,000 PER YEAR PER STUDENT, REGARDLESS of the number of donors to the account.
3) The child, parents, grandparents, or others.
4) Yes!
5) Yes. Single taxpayers: $95-$110k of MAGI and $190k-$220k MAGI for MFJ.
6) COLLEGE and”qualified ELEMENTARY and SECONDARY EDUCATION expenses.” Includes: tuition, fees, ACADEMIC TUTORING, SPECIAL NEEDS SERVICES, books, supplies, and other equipment incurred in connection with the enrollment or attendance of the designated beneficiary at a public, private, OR RELIGIOUS school that provides elementary or secondary education (K-12). ALSO includes ROOM AND BOARD, UNIFORMS, TRANSPORTATION, supplementary items, and services including EXTENDED DAY PROGRAMS (after school) required or provided by such schools. ALSO, any computer technology or certain equipment or internet access and related services.
7) By age 30 (30-day grace period)
8) Yes, actually!
9) No, not allowed!
10) Coverdell ESAs offer greater investment flexibility, with the investor able to invest funds of his/her choice, including individual stocks and bonds!