SIE Exam Question 320: Answer and Explanation

Question: 320

Noreen and her husband Jeff, residents of New York City, have just had their first child Ali. They are interested in opening a 529 Plan for Ali in order to save for her future college education. As a registered representative, it would be most appropriate to tell them

• A. to invest in a New York state 529 as there may be certain tax advantages at the state level.
• B. to invest in a New York state 529 as there may be certain tax advantages at the federal level.
• C. it does not matter which state they open up a 529 Plan in as the distributions will be treated the same regardless.
• D. to invest in a 529 Plan outside of New York state as there may be certain tax advantages at the federal level.

Correct Answer: A

Explanation:

A - Investors make after-tax contributions to 529 Plans. The earnings in the plan grow tax-free and any distributions for qualified educational expenses are tax-free at the federal level. Additionally, registered representatives must disclose that there may be certain tax benefits for opening a plan inside your state of residency, for example, tax deductions off of your state income taxes. Conversely, if an individual invests in a 529 Plan outside of their state, their state of residency might make they pay taxes on the growth of the plan.