A grandmother writes a $95,000 check to a 529 plan for her newborn grandchild. No gift tax due. An investor's portfolio returns 18% with a beta of 1.5 when the market returned 12%. Impressive or just riding risk? Both answers hinge on rules the Series 65 tests directly.
A 529 plan is a state-sponsored, tax-advantaged education savings account. You contribute after-tax dollars. Earnings grow tax-deferred, and qualified withdrawals are entirely tax-free. Qualified expenses include tuition, room and board, books, and up to $10,000 per year for K-12 tuition.
The account owner (typically the parent or grandparent) controls the account. The beneficiary can be changed to another family member at any time. This is a major advantage over UTMA/UGMA accounts, where the gift is final.
HIGH-FREQUENCY: 529 superfunding is a favorite test topic. A contributor can elect to front-load up to five years of annual gift exclusions into a single 529 contribution. At $19,000 per year, that means $95,000 in one year with no gift tax.
Common mistakes
- Confusing 529 and Coverdell contribution limits. The 529 has no federal annual cap (only a state lifetime cap, often $300K+). Coverdell is capped at $2,000 per beneficiary per year. The exam may offer $5,000 or $5,500 as Coverdell trap choices.
- Assuming a will overrides JTWROS. It does not. JTWROS operates by operation of law. If a brokerage account is titled JTWROS with a sibling, the sibling inherits regardless of what the will says. The trap answer is "the will controls all asset distribution."
- Mixing up Reg T and maintenance margin. Reg T sets the initial deposit at 50%. Maintenance margin (FINRA minimum) is 25%. The exam presents a margin scenario and asks which percentage applies. Using 50% for a maintenance calculation or 25% for an initial deposit produces wrong numbers.
Bottom line
- 529 plans allow superfunding: up to 5x the annual gift exclusion front-loaded in one year with no gift tax
- UTMA/UGMA gifts are irrevocable; the minor owns the assets at the age of majority
- JTWROS passes by operation of law, bypassing the will and probate
- Tenancy by the entirety is for married couples only and adds creditor protection, while still carrying right of survivorship
Exam shortcut
When a question asks which performance measure to use: if it says "total risk" or "entire portfolio," pick Sharpe. If it says "systematic risk" or "well-diversified," pick Treynor. If it asks what return the manager "added," it wants Jensen's alpha. For ownership disputes: title beats the will. JTWROS, TOD, POD, and beneficiary designations all pass outside probate.
The full lesson (about 3,610 words, 24 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C19
- C20
- C21
- C22
- C23
- C24
- C25
- C26
- C27
- C28
- C29
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