529 Plan

A parent wanting tax-advantaged college savings should use:

1. A.A commodity accountA commodity or futures account carries no tax preference at all; gains are taxable as realized. It also introduces speculative risk that is unrelated to the education-funding objective the stem states.
2. B.A variable annuityDefensible on one point: a variable annuity does grow tax-deferred, which is why it attracts the eye here. But deferral is not exemption, and it unwinds as ordinary income with a possible early-withdrawal penalty at the ages a tuition bill arrives. The stem asks for education savings, where the 529 gives tax-free qualified withdrawals.
3. C.A 529 planCorrect - education-focused tax benefits.
4. D.A margin accountA margin account is a method of paying for securities, not a tax status. Borrowing changes nothing about how gains are taxed, and adding leverage to money earmarked for tuition works against the stated objective.

Why: A 529 plan offers tax-advantaged growth for qualified education expenses.

A parent wanting education savings that can be transferred to another child can use:

1. A.A 529 plan (beneficiary can be changed)Correct - 529 beneficiary is changeable.
2. B.A variable annuityA variable annuity is a retirement vehicle, and money taken out before age 59 and a half is generally subject to a penalty on top of ordinary income tax on the earnings. It offers no education tax benefit and no mechanism for redirecting the account to a different child.
3. C.A checking accountCash in a bank account is certainly flexible, so a parent could redirect it to any child at will. That flexibility comes without any of the tax advantages the question is built around: no tax-free growth for education costs and no formal beneficiary structure.
4. D.A locked UTMA that cannot changeThis is the sharpest contrast with the correct answer and worth learning as a pair. A custodial gift is irrevocable and the assets legally belong to that minor, so they can never be shifted to a sibling, whereas a 529 account owner may change the beneficiary to another qualifying family member.

Why: A 529 plan lets the beneficiary be changed to another qualifying family member.

A 529 plan can be used for:

1. A.Nothing tax-advantagedThis denies the entire purpose of the account. Contributions are made with after-tax dollars, but earnings accumulate tax-deferred and come out completely free of federal tax when spent on qualified expenses, which is exactly the advantage the plan exists to provide.
2. B.Any personal expense tax-freeThis stretches a real benefit past its boundary. The tax-free treatment is tied to qualified expenses; spend the money on anything else and the earnings portion is taxed as ordinary income to the recipient and hit with a 10 percent penalty. The qualification test is what the account turns on.
3. C.Qualified higher-education costs and limited K-12 tuitionCorrect - college plus limited K-12.
4. D.Retirement income onlyThis swaps one tax-advantaged account for another. Deferring earnings until withdrawal is a feature the 529 shares with an IRA, which is what makes the answer sound plausible, but the 529 is an education-savings vehicle and has no retirement-income function.

Why: A 529 plan funds qualified higher-education expenses and, within limits, K-12 tuition.

A parent wants to save for a newborn's college in about 18 years with tax advantages. The BEST vehicle is:

1. A.A 529 college savings planCorrect - education-focused tax benefits.
2. B.A money market fundA money market fund carries no tax advantage at all and its interest is taxed to the parent every year, so it fails the explicit requirement in the stem. It is also badly matched to an 18-year horizon, where growth matters far more than day-to-day stability of principal.
3. C.A variable annuityThis is the strongest distractor, because a variable annuity genuinely does defer tax on earnings. It is built for retirement, not tuition: withdrawals before age 59 and a half generally add a 10 percent penalty, earnings come out as ordinary income rather than tax-free, and mortality and expense charges pay for a death benefit the parent is not buying the product for.
4. D.A whole life policy on the parentCash value does build tax-deferred, so the tax angle is not imaginary. The bulk of the early premium buys insurance protection and covers commissions rather than accumulating, which makes it an expensive way to fund a known expense on a known date, and the parent is naming an education goal rather than a death-benefit need.

Why: A 529 plan provides tax-advantaged growth for qualified education expenses.