529 Plans

Kaitlyn Barrick

What is a 529 plan?

• A 529 plan is an education savings plan run by a state or educational institution created to help families set aside funds for future college costs.

• Anyone who plans, or has a child planning to further their education past High School may open a 529 plan.

• The plan was named after section 529 of the internal revenue code in 1996.

• There are two main types of 529 plans: Savings plan: A savings plan allows you to invest

in mutual funds or other investments. Your account will increase or decrease in value depending on the performance of the investment you chose.

Prepaid plan: A prepaid plan allows you to pre-pay all or a portion of the cost of an in-state public college.

• There are two ways to invest in a 529 plan:

With a 529 plan manager Through a financial advisor

Benefits

• Federal tax benefits

• State tax benefits

• Donor retains control of funds

• Low maintenance

• Simplified tax reporting

• Flexible

• Substantial Deposits allowed

• Gift and estate tax benefits: Your payment is treated as a gift to the beneficiary for

gift tax and generation-skipping transfer tax purposes, however, your payment qualifies for the $13,000 annual gift tax exclusion.

State Restrictions

• There are minimal state restrictions when it comes to 529 plans.

• Every state offers a 529 plan.• 529 plans are not only for public colleges,

they are also for private colleges.• You are able to have 529 plans from

multiple states.• 529 plans bought in one state may be used

in another state.

Penalties

• If a 529 plan is unused, it is federal law to impose a 10% penalty on earnings for non-qualified distributions beginning in 2002.

• The penalty may be lifted if the account is terminated because the beneficiary has died or has become disabled.

Effects of 529 Plans• Financial aid is affected by 529 plans. If they are owned by a parent for

a student, it is reported on the FAFSA application as a parental asset.• Investing in a 529 plan can also affect federal and state income taxes. It

may offer college savers special tax benefits. However, if you withdraw money from a 529 plan and do not use it on a college expense, you will be subject to an income tax and a 10% tax penalty on earnings.

• Fees and expenses vary based on the type of 529 plan.• You may avoid extra fees with a:

– direct-sold college savings plan- “You buy an interest in the college saving plan directly from a broker-dealer on behalf of the state, the state that sponsors the plan, or from the plan's program  manager, with no sales person involved.”

– brother-sold college savings plan- “You buy an interest in a college saving plan through an invest-  ment adviser, brokerage firm, or bank, generally paying a sales load or fee. Purchasing through  a broker, you may be able to reduce the front-end load for purchasing Class A shares if you invest  above certain threshold amounts (breakpoint discounts). 

• You must have a money manager in order to manage your funds in a 529 plan, you cannot do it yourself.

• There are restrictions for contributing to a 529 plan. You may choose how much you want to contribute monthly, but once your amount is chosen you may not change the plan for 12 months.

• The yearly limit is $13,000 per individual- $26,000 for a couple.

• You can purchase a 529 plan directly, or through a broker. A plan purchased through a broker is more expensive but they can be essential in helping you choose the right plan and they also help you save money down the road.

• The best 529 plan available truly depends on your own circumstances and what will work best for your family.

What states offer 529 plans?

Answer:

All of them!

What are the two main types of 529 plans?

Answer:

A savings plan and a prepaid plan

What penalty is faced on an unused 529 plan?

Answer:

A 10% penalty on earnings

How are penalties lifted?

Answer:

If the account is terminated due to a death or injury of the beneficiary

Where does the name “529 plan” come from?

Answer:

Section 529 of the internal revenue code

Bibliography

• Brokamp, Robert. "The 529 Plan: College Savings." The Motley Fool, Web. 6 Jan 2011. <http://www.fool.com/college/college04.htm>.

• "Research and compare 529 plans." Savingforcollege.com, Web. 6 Jan 2011. <http://www.savingforcollege.com/college_savings_201/>.

• United States. Introduction to 529 Plans. , 2007. Web. 6 Jan 2011. http://www.sec.gov/investor/pubs/intro529.htm

• http://www.collegeinvest.org/glossary/