Financial Advisor Education Planning

Question 1

Which education savings account allows tax-free withdrawals for qualified K–12 tuition up to $10,000 per year AND has no annual contribution limit set by the IRS?

Accepted Answer

529 savings plan

Answer

A 529 savings plan allows tax-free growth and withdrawals for qualified education expenses, including up to $10,000 per year in K–12 tuition (after the Tax Cuts and Jobs Act). There is no IRS-imposed annual contribution limit (though contributions are subject to gift tax rules). Coverdell ESAs also allow K–12 expenses but cap contributions at $2,000 per year.

Question 2

The annual contribution limit per beneficiary for a Coverdell Education Savings Account is:

Accepted Answer

$2,000

Answer

Coverdell ESAs cap total annual contributions at $2,000 per beneficiary, regardless of how many accounts exist or how many contributors participate. Contributions also phase out for higher-income taxpayers (MAGI above $95,000 single / $190,000 married). This relatively low limit makes 529 plans more popular for families saving large amounts.

Question 3

Under the FAFSA Simplification Act (effective 2024–25 award year), how are distributions from a grandparent-owned 529 plan treated on the FAFSA?

Accepted Answer

They are no longer reported and do not affect the student's financial aid calculation

Answer

The FAFSA Simplification Act eliminated the question about cash gifts and third-party support received by students. As a result, distributions from grandparent-owned 529 plans are no longer reported on the FAFSA and do not reduce financial aid eligibility. This removed a significant planning obstacle that previously discouraged grandparent 529 ownership.

Question 4

A client's child receives a full athletic scholarship to college. Which statement BEST describes the tax treatment of any 529 plan withdrawals up to the scholarship amount?

Accepted Answer

Withdrawals avoid the 10% early withdrawal penalty, but earnings are still subject to income tax

Answer

When a beneficiary receives a scholarship, the 10% additional tax (penalty) on non-qualified withdrawals is waived for amounts up to the scholarship amount. However, the earnings portion of the withdrawal is still included in gross income and taxed at ordinary income rates. The account can also be kept for graduate school or transferred to another family member.

Question 5

The American Opportunity Tax Credit (AOTC) provides a maximum annual credit of how much, and for how many years of post-secondary education?

Accepted Answer

$2,500 per year for the first four years of post-secondary education

Answer

The AOTC provides up to $2,500 per year for the first four years of post-secondary education. It is 40% refundable (up to $1,000), making it valuable even for lower-income families. The credit phases out at higher MAGI levels. The Lifetime Learning Credit is a separate, less generous credit with no year limit.

Financial Advisor Practice Test

Financial Advisor Practice Test

Financial Advisor Education Planning