529 plans are tax-advantaged investment vehicles designed to encourage saving for future education expenses. These plans are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
Which of the following is NOT a qualified education expense for a 529 plan?
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A) Tuition is a qualified education expense. B) Room and board is a qualified education expense. C) A car purchase is not a qualified education expense. D) Required textbooks are qualified education expenses.
What is the main difference between a prepaid tuition plan and an education savings plan?
A) Both types of 529 plans allow for tax-free withdrawals for qualified education expenses. B) Prepaid tuition plans lock in tuition rates, while education savings plans invest in portfolios. C) Education savings plans are not limited to private colleges. D) Contribution limits are generally similar for both types of plans.
Which of the following accounts is most similar to a 529 plan but has lower contribution limits and more restrictions on eligible expenses?
A) A Coverdell ESA is similar to a 529 plan but has lower contribution limits and more restrictions on eligible expenses. B) UGMA accounts do not have the same tax advantages as 529 plans and have fewer restrictions on eligible expenses. C) UTMA accounts do not have the same tax advantages as 529 plans and have fewer restrictions on eligible expenses. D) A Roth IRA is a retirement account, not an education savings account.
In the late 1990s, states began establishing 529 plans to help families save for the rising costs of higher education. These plans gained popularity and were further enhanced by the Economic Growth and Tax Relief Reconciliation Act of 2001, which made qualified withdrawals from 529 plans tax-free at the federal level.
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Example Series 65 Example Practice Question
A family opens a 529 plan for their newborn child and contributes $200 monthly. Then, over 18 years, the account grows tax-deferred, and when the child is ready for college, the family can withdraw the funds tax-free to pay for tuition, room and board, and other qualified education expenses.
Save for school with a 529, tax advantages make it shine. Prepaid tuition or savings plan, invest for education while you can.
- Annual contribution limit: There is no specific annual contribution limit for 529 plans, but contributions are subject to the federal gift tax exclusion limit. - Gift tax exclusion: The annual gift tax exclusion is $17,000 per donor per beneficiary in 2023. A special 5-year election allows for a lump-sum contribution of up to $85,000 without incurring gift tax.
- Annual contribution limit example: A parent can contribute up to the gift tax exclusion limit of $17,000 per year to their child's 529 plan without incurring gift tax. - Gift tax exclusion example: A grandparent can contribute $85,000 to their grandchild's 529 plan in one year, using the 5-year election, without incurring gift tax.