Test Your College Funding Knowledge

If you want to help make sure that your grandchildren or children accumulate enough money to afford college, a good first step is to become familiar with 529 plans and the Coverdell Education Savings Account (ESA). What are the differences between these two tax-advantaged college funding vehicles? Take this short quiz to find out how much you know.

Match these options with their descriptions below:

A) 529 plan; B) ESA; C) Neither; D) Both

__ 1. Withdrawals of contributions and earnings are free of federal income tax provided they are spent on qualified education expenses.

__ 2. Withdrawals may be used to fund qualified elementary, secondary, undergraduate, and post-graduate expenses. (The provision regarding elementary and secondary education expenses is slated to expire after 2010 unless Congress passes an extension.)

__ 3. Although this vehicle is permitted under federal law, most states offer their own plans, which may vary significantly from state to state and provide advantages and benefits exclusively for their own residents and taxpayers.

__ 4. There are generally fees and expenses associated with participation, but there are no guarantees regarding the performance of the underlying investments or that they will be sufficient to cover college costs as expected.

__ 5. In many states, participants can choose between a savings option and a prepaid tuition option.

The tax implications of a Section 529 savings plan should be discussed with your legal and/or tax advisors.

Before investing in a 529 savings plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. You should read this material carefully before investing

 

Answers:

1. D) Both
2. B) ESA
3. A) 529 plan
4. D) Both
5. A) 529 plan

 

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.