College Savings Plans

Ready to test your knowledge? You'll have ten multiple choice questions to answer. Click on each question to reveal the question and multiple choice answers. After you've completed answering all ten questions, click "Grade Me!" at the end of the quiz to see how you did.

Question 1

An investment plan created by Congress in 1996, designed to help families prepare for the expense of a college education, is known as what?

(A) Unified Gift to Minors Account	Correct Incorrect
(B) Savings Bonds	Correct Incorrect
(C) 529 Plan	Correct Incorrect
(D) Stafford Plan	Correct Incorrect

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.

Question 2

Which of the following can you not use 529 Plan funds for?

(A) Repayment of student loans	Correct Incorrect
(B) Tuition	Correct Incorrect
(C) Room and board	Correct Incorrect
(D) Books and related materials	Correct Incorrect

529 plan savings can be used for tuition, books, fees and other required educational expenses at accredited U.S. universities, colleges or vocational schools and at 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.

Question 3

What is the penalty for making a non-qualified withdrawal from a 529 Plan?

(A) There is no penalty.	Correct Incorrect
(B) $25.00 per withdrawal.	Correct Incorrect
(C) 10% on top of the income tax paid on the withdrawn amount.	Correct Incorrect
(D) 50% on top of the income tax paid on the withdrawn amount.	Correct Incorrect

If any of the earnings portion from a 529 plan are used for ineligible expenses, the amounts withdrawn are subject to income tax and an additional 10% federal tax penalty.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.

Question 4

Which of the following are true regarding federal tax benefits for 529 Plan contributions and earnings?

(A) Earnings from 529 Plans are not taxable.	Correct Incorrect
(B) Earnings withdrawn from 529 savings plans to pay for qualified education expenses are free from federal tax.	Correct Incorrect
(C) Contributions to 529 Plans are not tax deductible on your federal return.	Correct Incorrect
(D) All of the above.	Correct Incorrect

Although contributions to a 529 plan are not tax deductible on your federal return, any earnings generated from funds deposited into 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 for their state plans to learn how their state taxes may be impacted.

Question 5

Which of the following cannot be done with 529 Plan funds if your child does not go on to a post-secondary education?

(A) You can keep the 529 plan investment until a later date when the student may decide to attend college.	Correct Incorrect
(B) Transfer the benefits for use by another member of the student's family	Correct Incorrect
(C) Gift the funds to a disadvantage youth without penalty.	Correct Incorrect
(D) You can withdraw the funds, paying income tax and withdrawal penalties on the earnings.	Correct Incorrect

If funds are withdrawn for ineligible purposes, they are subject to federal withdrawal penalties. While 529 savings can be transferred to another family member, they cannot be transferred to other individuals outside of the family without incurring penalties.

Question 6

For the purpose of determining financial aid, how are 529 Plan assets owned by a parent assessed?

(A) As a parental asset.	Correct Incorrect
(B) As a student asset.	Correct Incorrect
(C) They are not considered in determining financial aid.	Correct Incorrect
(D) None of the above.	Correct Incorrect

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.

Question 7

How frequently can you change 529 Plan investment decisions?

(A) At any time.	Correct Incorrect
(B) Once a month.	Correct Incorrect
(C) Once a year.	Correct Incorrect
(D) You cannot change the investment direction decision once it is made.	Correct Incorrect

Until 2015, only one change to investment decisions was permitted each year. But under the Achieving a Better Life Experience Act of 2014, a twice-yearly provision was enacted that allowed 529 plans to be adjusted more frequently.

Question 8

The most common trusts for minors are known as?

(A) Savings bonds	Correct Incorrect
(B) Certificates of Deposit	Correct Incorrect
(C) Custodial, UGMA or UTMA accounts.	Correct Incorrect
(D) Children's Savings Accounts	Correct Incorrect

Savings bonds, certificates of deposit (or certificate accounts) or other basic types of savings accounts are not trust 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.

Question 9

Which of the following are not true regarding Coverdell Education Savings Accounts?

(A) There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution.	Correct Incorrect
(B) There is a $2,000 per year limit on contributions to a specific beneficiary.	Correct Incorrect
(C) Contributions are tax deductible.	Correct Incorrect
(D) Distributions are tax-free as long as they are used for qualified education expenses.	Correct Incorrect

According to the Internal Revenue Service, a Coverdell Educational Savings Account is a trust or custodial account that can be used only for the purpose of paying 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.

Question 10

Which of the following can be transferred or rolled over into a 529 Plan without tax penalties?

(A) Unified Gift to Minor Accounts	Correct Incorrect
(B) Coverdell Education Savings Accounts	Correct Incorrect
(C) Series I/EE savings bonds	Correct Incorrect
(D) All of the above	Correct Incorrect

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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Information presented in the Northwest Financial Wellness Center is provided for educational purposes only and is not related to actual Northwest products or services. Northwest makes no representations as to the accuracy, completeness or specific suitability of any information presented. Information provided should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. Northwest recommends you consult a professional for any specific guidance you are seeking.

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