RFC Education Funding Planning 3 — Questions and Answers
Question 1: What is the annual contribution limit for a Coverdell Education Savings Account (ESA) per beneficiary?
- $500
- $1,000
- $2,000 (Correct answer)
- $5,000
Correct answer: $2,000
The annual Coverdell ESA contribution limit is $2,000 per beneficiary per year, regardless of how many accounts are opened for that child.
Question 2: A Coverdell ESA must be fully distributed by what age to avoid a penalty on earnings?
- 18
- 21
- 25
- 30 (Correct answer)
Correct answer: 30
Coverdell ESA funds must be used by the time the beneficiary reaches age 30, or the remaining balance must be transferred to an eligible family member's ESA.
Question 3: An UGMA/UTMA account differs from a 529 plan primarily because:
- UGMA/UTMA funds can only be used for education expenses
- UGMA/UTMA funds are irrevocably transferred to the child and can be used for any purpose (Correct answer)
- UGMA/UTMA contributions receive a state income tax deduction
- UGMA/UTMA accounts have higher contribution limits
Correct answer: UGMA/UTMA funds are irrevocably transferred to the child and can be used for any purpose
UGMA/UTMA accounts are custodial accounts where assets become the child's irrevocable property and can be used for any purpose once the child reaches the age of majority.
Question 4: For federal financial aid purposes, UGMA/UTMA assets held by a dependent student are assessed at what rate in the Expected Family Contribution (EFC) calculation?
- 5.64%
- 12%
- 20% (Correct answer)
- 50%
Correct answer: 20%
Student-owned assets such as UGMA/UTMA accounts are assessed at 20% in the EFC calculation, significantly reducing financial aid eligibility.
Question 5: Series EE bonds purchased after 1989 can be redeemed tax-free for education expenses under the Education Savings Bond Program, subject to which of the following conditions?
- The bond owner must be under age 24 at time of redemption
- The bond must be in the student's name
- The bond owner must meet income phase-out limits in the year of redemption (Correct answer)
- The bond must have been held for at least 10 years
Correct answer: The bond owner must meet income phase-out limits in the year of redemption
The interest exclusion for Series EE bonds used for education is subject to income phase-out limits applied in the year of redemption, and the bonds must be in the parent's or taxpayer's name.
Question 6: Which of the following is a key advantage of a Coverdell ESA over a 529 plan?
- Higher annual contribution limits
- Contributions are deductible on federal tax returns
- Can be used for K-12 private school expenses with no additional legislation required (Correct answer)
- No income limits for contributors
Correct answer: Can be used for K-12 private school expenses with no additional legislation required
Coverdell ESAs have always permitted tax-free distributions for qualified K-12 elementary and secondary school expenses, predating the 529 expansion under the Tax Cuts and Jobs Act.
Question 7: A high-income couple (MAGI $250,000) wishes to contribute to a Coverdell ESA. Which strategy would allow them to fund it?
- File separately to reduce MAGI below the phase-out
- Have the child contribute using gift money (Correct answer)
- Contribute through a corporation they own
- Request a waiver from the IRS
Correct answer: Have the child contribute using gift money
Since the income limits apply to the contributor, having the child make the contribution using gifted funds is a common workaround for high-income parents.
RFC Education Funding Planning 3
What is the annual contribution limit for a Coverdell Education Savings Account (ESA) per beneficiary?