Education Planning & Financial Analysis Flashcards

What is the maximum annual contribution per beneficiary to a Coverdell Education Savings Account (ESA)?

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.

A 529 college savings plan's primary federal tax advantage is:

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.

The 529 plan 'superfunding' strategy (5-year gift tax averaging) allows a contributor to:

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.

UGMA/UTMA custodial accounts differ from 529 plans most significantly because UGMA/UTMA assets:

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.

Under the FAFSA formula, student-owned assets are assessed at what rate versus parent-owned assets?

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.

If a 529 plan beneficiary receives a scholarship, the account owner may withdraw an amount equal to the scholarship:

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.