Practicing Financial Planning For Professionals and CFP Aspirants12th Edition by Sid Mittra – Test Bank

Practicing Financial Planning For Professionals and CFP Aspirants12th Edition by Sid Mittra – Test Bank

Chapter 7
EDUCATIONAL PLANNING
Multiple Choice Questions
Question 1. The best way to accumulate funds for college education is to
A. Buy stocks
B. Buy a CD
C. Start investing early
D. Open an account in the child’s name
Answer: C
Question 2. Compounding works best if you invest
A. Over the short term
B. For the long term
C. In money market accounts
D. In CollegeSure CD
Answer: B (pages 7–3 to 7–4)
Question 3. For UGMA/UTMA accounts, all of the following statements are true except:
A. They are custodial accounts set up in a child’s name
B. They are taxed at child’s rate
C. They are an irrevocable gift for the child
D. They can be used for any purpose by the child
Answer: B
Question 4. Which of the following statements about a Coverdell ESA is not correct?
A. Taxpayers may be phased out from contributing to a Coverdell ESA because of their level of modified adjusted gross income
B. Assets in a Coverdell ESA accumulate on a tax-deferred basis and earnings are tax-free is used for qualified educational purposes
C. Coverdell assets can be used for elementary, secondary and higher education
D. Every contributor can make an annual $2,000 contribution to a Coverdell for the same beneficiary
Answer: D
Question 5. Coverdell ESAs cover each of the listed items except:
A. Books
B. Computer hardware and software
C. Student’s car loan payments
D. Tuition
Answer: C
Question 6. Coverdell ESAs combine the following features:
I. Contribution is allowed up to $2,000 per year
II. Investments are tax-deferred, but withdrawals are taxable
III. They adversely affect financial aid application
IV. Contributions are controlled by parents
The correct answer is:
A. I, II, and III
B. II, III, and IV
C. I, III, and IV
D. I, II, and IV
Answer: C
Question 7. Section 529 plans are:
A. State-sponsored college savings plans
B. Custodial accounts that let parents invest on behalf of the child
C. IRA type plans set up through a financial service firm
D. A governmental student loan program
Answer: A
Question 8. A contributor to a Section 529 plan cannot:
A. Replace a plan beneficiary with a new one
B. Contribute to a 529 plan if their adjusted gross income exceeds the threshold cap for the particular year
C. Rollover funds from one state’s program to another
D. Claim the Hope Scholarship credit
Answer: B
Question 9. All of the following can be designated as a beneficiary for a Section 529 plan except:
A. A father or mother
B. A son- or daughter-in-law
C. an aunt or an uncle
D. Child of a close friend
Answer: D
Question 10. Section 529 plans have the following benefits:
I. Education expenses qualifying for the Lifetime Learning Credit can be paid with plan withdrawals
II. The contributor retains ownership rights and the money remains in his/her estate
III. Tuition credits can be transferred to another qualified tuition program for the same beneficiary
The correct answer is:
A. None of the above
B. II only
C. I and III
D. I only
Answer: C
Question 11. Major drawbacks of Section 529 plans are:
I. You must start early to derive significant benefits
II. They could result in a decrease in the amount of the financial aid
III. Once you join a plan, you cannot open an Educational IRA
The correct answer is:
A. I and II
B. II and III
C. I and III
D. I, II, and III
Answer: A
Question 12. Donor may change beneficiary for the following plans:
I. Section 529
II. UGMA/UTMA
III. Coverdell ESAs
The correct answer is:
A. I & II
B. I only
C. III only
D. II and III
Answer: B
Question 13. Section 529 plans, UGMA/UTMA and Coverdell ESAs share the following features:
I. There is no age limitation for contributions
II. Funds can be used for child’s or parent’s educational expenses
III. Investments are tax-deferred
IV. These plans set no income limitations
The correct answer is:
A. I and II
B. III and IV
C. I, II, and III
D. None of the above
Answer: D
Question 14. Which of the following would be most suitable for funding a college education that commences in three years?
A. Stock mutual fund
B. Bond mutual fund
C. Zero-coupon bond with a maturity that matches the start date
D. Checking account at the local bank
Answer: C
Question 15. To qualify for Education Bond Program one should:
A. Buy Series EE bonds only
B. Buy Series I bonds only
C. Indicate that the bonds will be used for educational purposes
D. Be at least 24 years old
Answer: D
Question 16. Treasury Inflation Indexed Securities:
A. Cannot be used for college savings
B. Can be used for college savings
C. Have maturities of 3 to 5 years
D. Are sold in denomination of 1,000 only
Answer: B
Question 17. The following steps may be taken to reduce the amount of the family’s expected contribution:
I. Increase parents’ assets and reduce their after-tax income
II. Save money in child’s name
III. Decrease investment in 401(k) plans
The correct answer is:
A. I only
B. II only
C. II and III
D. I and III
Answer: A
Question 18. All of the following grants and loans are awarded based on financial need, except for:
A. Federal Pell Grant
B. Federal Supplemental Education Opportunity Grant
C. Federal Perkins Loans
D. Subsidized Stafford Loan
E. PLUS Loans
Answer: E
Question 19. Persons unable to repay student loans can use:
I. Deferment
II. Forbearance
III. Graduated Payment
IV. Consolidation
The correct answer is:
A. I, II, and IV
B. I, III, and IV
C. I and IV
D. I, II, III, and IV
Answer: D
Question 20. All of these are true for education tax incentives except the following statement:
A. Employer education is typically a tax write-off for the employer and non-taxable income for the employee
B. Student loan interest (subject to some stipulations) can be used to reduce adjusted gross income
C. The Life Long Learning Credit and the American Opportunity Credit (Hope Credit) can both be used by the same taxpayer to reduce taxes in the same calendar year.
D. Educational expenses may qualify as an itemized deduction
Answer: C
Question 21. The following debt cutting tools are available to the student’s family:
I. Financial Aid
II. Student Loans
III. Tuition at Freshman Rate
IV. Discounts for Teaching Position
The correct answer is:
A. I, II, and III
B. I and III
C. I, III, and IV
D. I, II, III, and IV
Answer: D