Series 66

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Special Issues for Retirement Plans - Coverdell Education Savings Accounts

While other education savings accounts (such as state-sponsored 529 plans) are not covered on the Series 66 exam, the Coverdell ESA is tested. Formerly known as the Education IRA, it had been included with other IRAs in the testing process. Therefore, basic questions about the Coverdell are likely to be found on the exam. Make sure you know the following information:

  • Annual contribution limit is $2,000, up from the $500 limit for the old Education IRA.
  • This limit is per student, so it is not possible for two sets of grandparents to each contribute $2,000 to two different Coverdell ESAs for the same student.
  • No tax deduction is available for the contribution, but earnings grow tax-deferred.
  • Withdrawals of earnings are tax-free, if used for qualified education expenses.
  • Withdrawals of earnings not used for qualified education expenses are taxed at the student's ordinary income tax rate and will also be subject to a 10% penalty

Exam Tips and Tricks
Consider these sample exam questions about IRAs:

  1. Which of the following statements about Traditional IRAs are TRUE?
    1. Contributions are allowed based on earned income only.
    2. Contributions always reduce taxable income.
    3. Contributions may be made even if the individual is covered by an employer's retirement plan.
    4. Contributions may not be made after age 70 ½.
    1. I & II
    2. II, III & IV
    3. I, III & IV
    4. I, II, III & IV

The correct answer is "c", since contributions may not reduce taxable income if the person is not eligible to deduct the contribution.

  1. Which of the following clients is best suited for a Roth IRA instead of a Traditional IRA?
    1. Someone who is in a high tax bracket now and expects to be in a much lower tax bracket in retirement.
    2. Someone who is in a low tax bracket now and expects to be in a much highertax bracket in retirement
    3. Someone who is covered by a retirement plan at work and can only make a non-deductible contribution to a Traditional IRA because of a high income
    4. Someone who is in a moderate tax bracket now and expects to be in a lower tax bracket in retirement
    1. I & II
    2. II & III
    3. II, III & IV
    4. I, II, III & IV

The correct answer is "b": the Roth IRA is the better choice for client II, since the IRA deduction is worth less to someone in a low bracket and the tax-free withdrawals will be more valuable to someone in a higher bracket. Also, it's always better to make a non-deductible Roth IRA contribution than a non-deductible Traditional IRA contribution. The clients described in I and IV expect to be in a lower tax bracket at retirement, so they may be better off taking the tax deduction now.

Qualified Retirement Plans

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