Chapter 2 Practice Question Answers
- 1.Answer: D. A contributor may distribute funds to a beneficiary’s estate, but the funds will be subject to estate taxes. A contributor has control of the funds in a 529 account at all times, so he may keep the funds, but the earnings will be subject to taxation. The normal 10% penalty for an unqualified withdrawal does not apply in this case, because death of the beneficiary is an exception. Finally, a contributor may roll over the plan to a new beneficiary who is a qualified family member. Qualified family members include siblings, parents, in-laws, children, aunts and uncles, nieces and nephews, first cousins, step-siblings, step-parents, step-children, and spouses of any of these family members. Contributors may not use 529 plans as collateral for a loan.
- 2. Answer: D. Room and board is a qualified education expense only if the student is attending school at least part-time. Thus, not all students will be able to claim room and board as a qualified education expense. All the other answers are qualified education expenses.
- 3. Answer: D. A 529 college savings plan can be opened through any of the three entities listed. Plans sold through an investment firm are often referred to as advisor-sold plans. Those sold by the state or its primary distributor are often referred to as direct-sold plans. Finally, selling dealers are municipal securities dealers other than the state’s primary distributor who have an agreement with the primary distributor to market and sell the plans.
- 4. Answer: B. A municipal fund security is a fund of securities that is issued by a state or municipality. Because it is issued by a state or local government, it is exempt from the rules of the Investment Company Act of 1940.
- 5. Answer: B. Participants in an LGIP are often limited to a specific type of municipal entity within a certain jurisdiction. LGIPs are not open to individual investors. MSRB disclosures are not required