College Savings Plans

College Savings Plans

Are you ready to test your knowledge about college savings plans? This ten-question multiple-choice quiz will explore different finance options for college and how they work. After completing all ten questions, click "What's my grade?" at the end of the quiz to see how you did.

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An investment plan created by Congress in 1996, designed to help families prepare for the expense of college education, is known as what?
As part of the Small Business Job Protection Act of 1996, Section 529 was added to the Internal Revenue code. Section 529 conferred tax exemption to qualifying state college savings programs which encouraged saving for future higher education expenses for designated beneficiaries.

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Which of the following can you not use 529 Plan funds for?
529 plan savings are available for tuition, books, fees, and other required educational expenses at accredited U.S. universities, colleges, vocational schools, and select foreign universities. If the named beneficiary is at least a half-time student, room and board expenses can be paid for with 529 savings as well, up to the cost-of-attendance amounts used for federal financial aid calculations. 529 plan savings cannot be used to repay student loans or to pay student loan interest expenses.

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What is the penalty for making a non-qualified withdrawal from a 529 Plan?
If any of the earnings portion from a 529 plan are used for ineligible expenses, the amounts withdrawn are subject to income tax and an additional 10% federal tax penalty. There are no penalties for savings used for eligible expenses.

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Which of the following are true regarding federal tax benefits for 529 Plan contributions and earnings?
Although contributions to a 529 plan are not tax-deductible on your federal return, any earnings generated from funds deposited into the 529 plan are federally tax-exempt the year the earnings are generated and can be withdrawn to pay for eligible education expenses without incurring any federal tax liability. Many states provide different tax treatments, including state income tax deductions for contributions. Plan subscribers should look at the details of their state plans to learn about their state taxes.

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Which of the following cannot be done with 529 Plan funds if your child does not go on to post-secondary education?
If funds are withdrawn for ineligible purposes, they are subject to federal withdrawal penalties. 529 savings can only be sent to family members and cannot be sent to those outside your family without incurring penalties.

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For the purpose of determining financial aid, how are 529 Plan assets owned by a parent assessed?
Assets in accounts owned by a dependent student or one of their parents are counted as parental assets on the Free Application for Federal Student Aid, or FAFSA. In calculating a student´s Expected Family Contribution (EFC), only a maximum of 5.64% of parental assets are counted. Other student assets are counted at 20%. The higher the student´s EFC, the lower the financial aid amount awarded.

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How frequently can you change 529 Plan investment decisions?
IRS regulations only allow you to move money from your current 529 investment options to a different option twice per calendar year. (The automatic changes within Target Enrollment Portfolios don't count.) However, you can change the investment options for your future contributions anytime you want.

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The most common trusts for minors are known as?
Savings bonds, certificates of deposit (or certificate accounts), or other basic types of savings accounts are not trusted funds. Trust funds are intended to provide financial benefits to designated beneficiaries. The most common forms of trusts used to accumulate savings to cover future educational expenses for children or grandchildren are Custodial, UGMA (Unified Gifts to Minors Act), or UTMA (Unified Transfers to Minors Act) accounts.

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Which of the following are not true regarding Coverdell Education Savings Accounts?
According to the Internal Revenue Service, a Coverdell Educational Savings Account is a trust or custodial account used only to pay the qualified education expenses for the designated beneficiary. Contributions to a Coverdell ESA are not tax-deductible, but contributions grow tax-free until distributed. So long as Coverdell funds are used to pay for qualified education expenses, they can be withdrawn tax-free.

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Which of the following can be transferred or rolled over into a 529 Plan without tax penalties?
Most 529 plans accept rollovers from existing Coverdell accounts, I/EE bonds, and UGMA accounts. Such rollovers are considered qualified education expenses for those types of accounts. In most cases, the redemption of funds from those accounts must be rolled over into the 529 plan within the same calendar year.

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