Education Planning Flashcards

If a 529 plan distribution is used for non-qualified expenses, the earnings portion of the withdrawal is subject to:

Answer: Ordinary income tax plus a 10% federal penalty

Non-qualified 529 withdrawals trigger ordinary income tax on the earnings portion plus a 10% federal penalty tax.

Which of the following strategies can help reduce a student's financial aid impact when holding assets in a UTMA account?

Answer: Transfer assets to a parent-owned 529 plan before applying for aid

Moving UTMA assets to a parent-owned 529 shifts the assessment rate from 20% (student) to a maximum of 5.64% (parent), improving aid eligibility.

Under current tax law, up to how much per year per beneficiary can be withdrawn from a 529 plan tax-free for K-12 tuition?

Answer: $10,000

The Tax Cuts and Jobs Act of 2017 expanded 529 plans to allow up to $10,000 per year per beneficiary for K-12 tuition at public, private, or religious schools.

A 529 plan beneficiary change to a family member of the original beneficiary is:

Answer: A tax-free rollover if done properly

Changing the beneficiary to a member of the original beneficiary's family is a tax-free rollover with no penalty, as long as it qualifies as a family member under IRS rules.

Which of the following education-related expenses qualifies under the American Opportunity Tax Credit (AOTC)?

Answer: Course-related books, supplies, and equipment

The AOTC covers tuition, fees, and course-related books, supplies, and equipment required for enrollment; room/board and transportation do not qualify.

The superfunding (five-year election) strategy for 529 plans allows a lump-sum contribution of up to how much without gift tax consequences?

Answer: $75,000 per individual contributor

Superfunding allows a single contributor to front-load up to five years of the annual gift tax exclusion ($15,000 × 5 = $75,000, or $18,000 × 5 = $90,000 depending on the current exclusion year) into a 529 plan; at $15,000/year the limit is $75,000.

Which of the following is TRUE about the Coverdell ESA compared to the 529 plan?

Answer: Coverdell ESA can be used for K-12 expenses without the $10,000 annual cap

Unlike 529 plans which cap K-12 use at $10,000/year, Coverdell ESAs can be used for K-12 qualified education expenses without the same annual dollar restriction.