PFS Education Planning & Financial Analysis 1 — Questions and Answers
Question 1: What is the maximum annual contribution per beneficiary to a Coverdell Education Savings Account (ESA)?
- $500
- $2,000 (Correct answer)
- $5,000
- No statutory limit
Correct answer: $2,000
The annual contribution limit for a Coverdell ESA is $2,000 per beneficiary from all contributors combined, subject to contributor income phase-outs.
Question 2: A 529 college savings plan's primary federal tax advantage is:
- A federal income tax deduction for contributions
- Tax-free growth and tax-free withdrawals for qualified education expenses (Correct answer)
- A federal tax credit equal to 20% of contributions
- Exclusion of contributions from all gift tax rules
Correct answer: Tax-free growth and tax-free withdrawals for qualified education expenses
At the federal level, 529 plan earnings grow tax-deferred and qualified withdrawals for education expenses are completely income-tax-free.
Question 3: The 529 plan 'superfunding' strategy (5-year gift tax averaging) allows a contributor to:
- Contribute unlimited amounts without any gift tax consequences
- Front-load up to 5 years' worth of annual gift tax exclusions into a 529 in one year (Correct answer)
- Deduct large lump-sum contributions from federal income taxes
- Transfer excess 529 funds to a Roth IRA tax-free
Correct answer: Front-load up to 5 years' worth of annual gift tax exclusions into a 529 in one year
Superfunding lets a contributor elect to treat a large one-time 529 contribution as if made equally over 5 years, using up to 5× the annual gift tax exclusion without gift tax.
Question 4: UGMA/UTMA custodial accounts differ from 529 plans most significantly because UGMA/UTMA assets:
- Can only be used for qualified education expenses
- Offer superior income tax treatment compared to 529 plans
- Become the minor's unrestricted property at the age of majority (Correct answer)
- Are excluded from FAFSA financial aid calculations
Correct answer: Become the minor's unrestricted property at the age of majority
UGMA/UTMA assets legally transfer to and become the minor's own property at age 18–21 (varies by state) and may be spent on anything, not just education.
Question 5: Under the FAFSA formula, student-owned assets are assessed at what rate versus parent-owned assets?
- The same rate as parent assets (up to 5.64%)
- A higher rate—20% for student assets vs. up to 5.64% for parent assets (Correct answer)
- A lower rate—5% for students vs. 20% for parents
- Student assets are fully excluded from the Expected Family Contribution
Correct answer: A higher rate—20% for student assets vs. up to 5.64% for parent assets
FAFSA assesses student-owned assets at 20% of value but parent-owned assets at a maximum of only 5.64%, so parent-owned 529 accounts are more favorable for financial aid eligibility.
Question 6: If a 529 plan beneficiary receives a scholarship, the account owner may withdraw an amount equal to the scholarship:
- With both income tax and the 10% penalty on earnings
- With ordinary income tax on earnings but without the 10% penalty (Correct answer)
- Completely tax-free and penalty-free in all circumstances
- Only if done within 60 days of the scholarship award
Correct answer: With ordinary income tax on earnings but without the 10% penalty
A scholarship exception allows non-qualified 529 withdrawals up to the scholarship amount to escape the 10% penalty, though earnings remain subject to ordinary income tax.
PFS Education Planning & Financial Analysis 1
What is the maximum annual contribution per beneficiary to a Coverdell Education Savings Account (ESA)?