Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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Which education savings option imposes income limitations on contributors?

529 Plan
Coverdell Education Savings Plan
Custodial Accounts
Traditional IRA

The correct answer is: Coverdell Education Savings Plan

The Coverdell Education Savings Plan imposes income limitations on contributors, which means that higher-income individuals may not be eligible to contribute directly to this type of account. Specifically, contributions to a Coverdell ESA are phased out for individuals whose modified adjusted gross income (MAGI) exceeds certain thresholds, making it less accessible for those in higher income brackets. This feature distinguishes the Coverdell ESA from options like the 529 Plan, which does not have a cap on income for contributors, and custodial accounts, which are designed for minors and are subject to different tax rules rather than income limitations for contributors. Traditional IRAs also have income limits, but these apply primarily to the deductibility of contributions, not to the ability to contribute itself, which is why the Coverdell Education Savings Plan is the appropriate choice in this context.