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 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 of government employee