Which of the following statements regarding Coverdell Education Savings Accounts are TRUE?
After-tax contributions of up to an indexed maximum per student per year are allowed.
Contributions may not be made for students past their 18th birthday.
Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member.
Your customer has a Coverdell Education Savings Account for each of four preteen daughters. Using the 2012 contribution limits, what is the maximum amount of pretax contributions that he can make to each ESA?
C) $0.00
Pre-tax contributions cannot be made to Coverdell ESAs. The customer is allowed to make a $2,000 after-tax contribution annually for each student until her 18th birthday.
If Janet established a Coverdell Education Savings Account for her grandson, in each successive year, she may contribute:
D) $2,000.00
Under current regulations, the maximum contribution to a Coverdell Education Savings Account is $2,000 annually.
Which of the following statements about Coverdell Education Savings Accounts (ESAs) is (are) NOT true?
D) Contributions are tax deductible, subject to a modified AGI phaseout.
Contributions to an ESA are not tax deductible.
What is the maximum amount a taxpayer may contribute each year to a Coverdell Education Savings Account (ESA) for one student?
A) $2,000.00
The most an individual may contribute to an ESA for one student is $2,000 per year. There is no limit on the number of students on whose behalf a taxpayer may contribute, however. A taxpayer with 5 grandchildren could contribute a total of $10,000 to 5 ESAs.
Which of the following plans does NOT allow a catch-up contribution for individuals who are at least 50 years old?
C) 529
The catch-up provision is for individuals who reach age 50 before the close of the taxable year. This provision allows these individuals to contribute an additional amount per year to a qualified retirement plan or IRA. A 529 plan is not a retirement plan.
What is the total amount that may be invested in a Coverdell Education Savings Account in 1 year?
B) The current maximum per child.
An indexed maximum contribution may be invested in each child's Coverdell Education Savings Account every year. For instance, if a couple has three children, they may invest the current maximum into each of three accounts.
A customer would like to set aside some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is TRUE?
A) The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over to an ESA established in the name of a family member.
The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member.
Which of the following is true concerning a Coverdell Education Savings Account (ESA)?
) The maximum contribution is $2,000 per beneficiary.
C) The beneficiary may be the contributor's child or grandchild or child of a friend of the contributor.
D) A beneficiary's unused balance may be rolled over to an ESA account for another child.
Unlike the Section 529 Plan, an ESA may be used to fund education at any level. The maximum contribution permitted for any beneficiary is $2,000 per year. The beneficiary need not be related to the contributor(s). ESA accounts may be rolled over to change investment vehicles or to change beneficiaries.
All of the following statements regarding 529 plans are true
A) the assets in the account are controlled by the account owner, not the
child.
C) contributions to a 529 plan may be subject to gift taxation.
D) states impose very high overall contribution limits.
Unlike Coverdell ESAs, the income level of the contributor will not affect annual contributions under a Section 529 plan.
All of the following statements regarding 529 plans are true
A) earnings accumulate tax free if the money is used for qualified educational
purposes.
C) anyone can make a contribution on behalf of a beneficiary.
D) a beneficiary of a 529 plan may also be the beneficiary of a Coverdell Education Savings Account.
Contributions are made with after-tax dollars. Withdrawals are tax free at the federal level if used for qualified higher education expenses.
A single individual earning $250,000 a year may:
not open a Coverdell ESA.
open a 529
college savings plan.
There are income limits that apply to Coverdell ESAs. Single individuals earning more than $110,000 per year are not permitted to open a Coverdell account, and married couples lose the ability to contribute when earnings exceed $220,000. However, there are no income limits restricting who is eligible to open and contribute to a Section 529 college savings plan.
A widower wants to fund a Section 529 plan for his daughter. What is the maximum amount he may initially contribute in 2013 without having to pay gift taxes?
A) $70,000
A special rule under Section 529 allows the donor to load front-end load contributions and avoid paying gift taxes. Five years worth may be used under this method (5 × $14,000 = $70,000). If he remarries, his wife may also consent to gift split, thereby doubling this amount to $140,000. Please note: The annual exclusion was increased to $14,000 effective January 1, 2013.
Ways in which a Section 529 Plan differs from a Coverdell ESA include:
higher contribution limits.
no earnings limitations.
Contributions to an ESA are limited to $2,000 per beneficiary per year, whereas the 529 limit is set by the plan sponsor, sometimes as high as $300,000. Unlike the ESA, where there is a ceiling on the earnings for a contributor, there is no limit for someone setting up a 529. Both Section 529 Plans and Coverdell ESAs enjoy tax-free distributions and plans may be established by almost anyone.
Many parents prefer to use a Section 529 Plan over a Coverdell ESA to finance their child's education plans because
contribution limits are higher
there are no earnings limits
Contributions to a Coverdell ESA are limited to $2,000 per beneficiary per year while those to a Section 529 Plan can be as high as $300,000 in some states. A married couple cannot make a Coverdell contribution if their income exceeds $220,000 while there is no earnings limit to contribute to a 529. The Coverdell ESA has an advantage over the 529 Plan in that the funds may be used for any level of education; it is not limited to post-secondary as is the 529. In neither case is the contribution tax-deductible on the federal level (although the Section 529 plans may have tax advantages in some states).
Which of the following statements is TRUE regarding Section 529 Plans?
Funds withdrawn for qualified education expenses are always free of federal income tax.
The maximum contribution limits are determined on a state level.
Section 529 Plan withdrawals are exempt from federal income tax if used for the right expenses. In almost all cases, if the plan is one operated by your state of residence, it will be exempt from your state's income tax. But, if you elect to contribute to a plan operated by another state, more than likely, any withdrawals will be subject to your state's income tax. Because the plans are state operated, the maximum contribution limits are set by each state.
Eight years ago, Joe Hampton, a resident of Georgia, opened a Section 529 Plan for his then 10-year old under the Georgia Higher Education Savings Plan. Now that the child is preparing to enter the University of Alabama, Joe asks you about the taxation on the money he will be withdrawing to pay for tuition. You would tell him that:
D) any funds withdrawn for tuition are exempt from both state and federal income tax.
In all cases, funds withdrawn from a Section 529 Plan that are used to pay for qualifying expenses (like tuition), are exempt from federal income tax. The general rule is that residents of a state never pay income tax on funds withdrawn from that state's plan. It is not important where the student goes to school; only the state of residence matters.
Among the differences between a Coverdell Education Savings Account and Section 529 plans are:
one has adjusted gross income limits, the other does not.
one has contribution limits set by federal law, the other by the
individual state.
if the money is not used, money reverts back to the donor in one and to the beneficiary in the other.
The Coverdell may only be used by persons who fall within certain income limits-no such limits apply to the 529 plan. The Coverdell has contribution limits set by federal law; each state sets its own 529 limit. If the money is not used for education, it reverts back to the donor in a 529 plan but to the beneficiary in a Coverdell.
All of the following statements regarding Coverdell ESAs and QTPs are correct
A) QTPs are extremely useful tools that provide significant tax savings, allow for substantial investments for a child's education and provide a tool for avoidance of gift and estate taxes if used correctly.
B) Coverdell ESAs are designed to offer tax benefits to those individuals who wish to save money for a child/grandchild's higher education expenses.
C) If a
portion or all of the withdrawal from a QTP is spent on anything other than qualified higher education expenses, the owner/contributor will be taxed at her own tax rate on the earnings portion of the withdrawal.
Coverdell ESAs currently permit up to $2,000 in annual contributions, whereas QTPs (Section 529 Plans) allow large contributions reaching as high as $250,000 and above.
As a client's only child is about to complete her college education, it is obvious that the 529 Plan used to accumulate funds has been overfunded. Which of the following might be suggested to minimize tax consequences?
Encourage the daughter to go to graduate school and use the money for qualified expenses there.
Rollover the funds to a member of the beneficiary's family
When there is money remaining in a Section 529 Plan after a student has completed college, withdrawal of that excess will result in the portion representing earnings being taxed at ordinary income tax rates plus a 10% penalty. Those taxes and penalties can be avoided if the funds are properly used, such as graduate school for the original beneficiary or designating a new beneficiary who is an immediate family member (as defined in the law) and rolling over the funds. There is no such thing as a rollover to a Coverdell ESA and money in a 529 Plan is not part of a qualified plan so rolling over to an IRA is out of the question.