RFC Education Funding Planning 2 — Questions and Answers
Question 1: A married couple wants to superfund a 529 plan for their newborn grandchild. What is the maximum lump-sum contribution they can make using the 5-year gift tax averaging election?
- $36,000
- $90,000
- $180,000 (Correct answer)
- $360,000
Correct answer: $180,000
A married couple can each contribute $18,000 × 5 years = $90,000, for a combined total of $180,000 under the 5-year election (2024 annual exclusion amounts).
Question 2: Which of the following expenses is NOT a qualified expense for the American Opportunity Tax Credit (AOTC)?
- Tuition
- Course-required books
- Room and board (Correct answer)
- Required enrollment fees
Correct answer: Room and board
The AOTC covers tuition, required fees, and course-related books and supplies, but room and board is not a qualified expense.
Question 3: A parent has a 529 plan with a $50,000 balance for a child who decides not to attend college. Which option avoids the 10% penalty on the earnings?
- Withdraw funds and pay ordinary income tax only
- Roll over the balance to a Roth IRA for the beneficiary (subject to lifetime limit) (Correct answer)
- Transfer the account to a sibling
- Leave the funds in the account indefinitely
Correct answer: Roll over the balance to a Roth IRA for the beneficiary (subject to lifetime limit)
Under the SECURE 2.0 Act, unused 529 funds can be rolled into a Roth IRA for the beneficiary (up to a $35,000 lifetime limit), avoiding the 10% penalty.
Question 4: For federal financial aid purposes, a 529 plan owned by a dependent student's parent is reported on the FAFSA at what assessment rate?
- 5.64% of the account value (Correct answer)
- 20% of the account value
- 25% of the account value
- 0% — parent-owned 529s are excluded
Correct answer: 5.64% of the account value
Parent-owned 529 plans are treated as parental assets on the FAFSA and assessed at a maximum rate of 5.64%, which is much more favorable than student-owned assets.
Question 5: The Lifetime Learning Credit (LLC) differs from the American Opportunity Tax Credit (AOTC) in that the LLC:
- Is refundable up to 40% of the credit
- Has no limit on the number of years it can be claimed (Correct answer)
- Covers only the first two years of college
- Provides a maximum credit of $2,500
Correct answer: Has no limit on the number of years it can be claimed
Unlike the AOTC which is limited to four years, the Lifetime Learning Credit can be claimed for an unlimited number of years of post-secondary education.
Question 6: A grandparent-owned 529 plan distribution used for a grandchild's college expenses was historically treated how on the FAFSA prior to the 2024-25 FAFSA simplification?
- As a parental asset assessed at 5.64%
- As student income assessed at up to 50% (Correct answer)
- As a non-reportable asset
- As a tax-free gift excluded from all calculations
Correct answer: As student income assessed at up to 50%
Prior to simplification, grandparent-owned 529 distributions counted as student income on the FAFSA and could reduce aid eligibility by up to 50 cents per dollar.
Question 7: Which statement about 529 plan investment options is most accurate?
- Investments can be changed at any time without restriction
- Account holders may change investment options twice per calendar year or upon beneficiary change (Correct answer)
- Only age-based allocation portfolios are permitted
- Investment gains must be reinvested in the same fund
Correct answer: Account holders may change investment options twice per calendar year or upon beneficiary change
IRS rules allow 529 account holders to change investment options up to twice per calendar year or whenever the beneficiary is changed.
RFC Education Funding Planning 2
A married couple wants to superfund a 529 plan for their newborn grandchild.
What is the maximum lump-sum contribution they can make using the 5-year gift tax averaging election?