SIE practice questionmedium529 Plans — Tax Treatment
Contributions to a 529 plan are made with:
- APre-tax dollars, and withdrawals for qualified expenses are tax-free
- BAfter-tax dollars, and all withdrawals are taxed as ordinary income
- CAfter-tax dollars, but earnings grow tax-deferred and qualified withdrawals are tax-free at the federal level✓ Correct answer
- DPre-tax dollars, and all withdrawals are taxable
Explanation
Why C — After-tax dollars, but earnings grow tax-deferred and qualified withdrawals are tax-free at the federal level
529 contributions are made with after-tax dollars (no federal tax deduction, though some states offer state tax deductions). Earnings grow tax-deferred, and withdrawals for qualified education expenses are completely free of federal income tax. Many states also exempt qualified withdrawals from state tax. This makes 529 plans one of the most tax-efficient education savings tools.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 1,867+ SIE questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Investment Companies & Packaged Products questions
- A grandparent wants to contribute to a grandchild's 529 plan. Under the special gift tax provision, the grandparent can…
- A Section 529 plan is a tax-advantaged savings plan designed to:
- Who maintains control over a 529 plan account?
- A Section 1035 exchange allows an annuity owner to:
- An ABLE (Achieving a Better Life Experience) account is designed for individuals who:
- Under FINRA rules, the maximum sales charge for a mutual fund is:
- What is the difference between a 529 prepaid tuition plan and a 529 savings plan?
- When a mutual fund investor elects automatic reinvestment of dividends and capital gains distributions: