Transcript 529 Plans - Mercer University

529 Plans
Presented by:
John Agee
Jimmy Chowdhury
Bryan Kight
Agenda/Topics to Be Covered
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Existing Plans
529 Plan Overview
529 Plan Benefits
Disadvantages
Plan Management and Fees
FAQs
Additional Resources
References
Appendix: IRC Code
Existing College Plans
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One of the best ways to increase the affordability of your child’s education is to take
advantage of federal tax breaks aimed at families saving and paying for college.
These include the following:
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Qualified Tuition Programs (529 plans) — Earnings grow tax-deferred and
distributions are tax-free when used for qualified post-secondary education costs
before 2011.
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Coverdell Education Savings Accounts — Earnings grow tax-deferred and
distributions are tax-free when used for qualified post-secondary education costs.
May also be withdrawn tax-free for primary and secondary school expenses before
2011.
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U.S. Savings Bonds — EE and I bonds purchased after 1989 by someone at least 24
years old may be redeemed tax-free when the bond owner or the bond owner's
spouse or dependent pays for college tuition and fees. In 2005, the tax exclusion is
phased out for incomes between $61,200 and $76,200 (between $91,850 and
$121,850 for married taxpayers filing jointly). These income limits increase each year.
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Individual Retirement Accounts — Early withdrawal penalties are waived when
Roth IRAs and traditional IRAs are used to pay the qualified post-secondary education
costs of yourself, your spouse, your children, or your grandchildren. (Taxes may still
be due on the withdrawals, however.)
Source: http://www.savingforcollege.com/tutorial101/federal_tax_incentives_to_education.php
Existing College Plans (cont.)
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Hope Scholarship Credit—A parent may claim a tax credit for 100% of the first $1,000
and 50% of the next $1,000, of a dependent child’s college tuition and mandatory fees,
for a maximum $1,500 annual tax credit per child. Students may claim the credit only if
they are not claimed as a dependent on another person’s tax return. In 2005, the credit is
phased out for incomes between $43,000 and $53,000 (between $87,000 and $107,000
for married taxpayers filing jointly). The credit is allowed only for students who are
attending a degree program at least half-time and who have not completed their first two
years of academic study before the beginning of the taxable year. It cannot be claimed in
more than two tax years for any one student.
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Lifetime Learning Credit—A taxpayer may claim a tax credit for 20% of up to $10,000
in combined tuition and mandatory fees for himself, his spouse, and his dependent
children. This equates to a $2,000 tax credit. In 2005, the credit is phased out for
incomes between $43,000 and $53,000 (between $87,000 and $107,000 for married
taxpayers filing jointly). Claiming the Hope Scholarship credit described above means that
you may not claim a Lifetime Learning credit for any of that student’s expenses in the
same tax year. There is no requirement that the student be studying towards a degree or
be enrolled at least half-time, and there is no limit on the number of years the credit may
be taken.
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Tuition and Fees—An above-the-line deduction (this means you do not have to itemize
your deductions) for up to $4,000 of the college tuition and related expenses of yourself,
your spouse, or your dependent is available in 2004 and 2005 if your income is $65,000
or less ($130,000 or less if you are married filing jointly). For taxpayers with incomes
between $65,000 and $80,000 (between $130,001 and $160,000 for married taxpayers
filing jointly), the deduction limit is $2,000. The deduction is not available if anyone claims
a Hope or Lifetime Learning credit for that student's expenses in the same tax year. This
deduction disappears after 2005.
Source: http://www.savingforcollege.com/tutorial101/federal_tax_incentives_to_education.php
Existing College Plans (cont.)
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Deduction for Student-loan Interest—Up to $2,500 in student loan
interest may be deducted above-the-line as long as the debt was incurred to
pay the college costs for yourself, your spouse, or your dependent, while
enrolled as a student at least half-time in a degree program. For 2005, the
full deduction is allowed for singles with income below $50,000 and a partial
deduction is allowed for singles with income up to $65,000. Married couples
filing jointly get the full deduction with income up to $105,000 and a partial
deduction with income up to $135,000. A student claimed as a dependent
may not take the deduction on his or her own return.
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Tax-free Scholarships—Most scholarships and grants are tax-free if the
recipient does not have to provide services in exchange for the award.
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Tax-free Educational Assistance—Employers may pay and deduct up to
$5,250 in college and graduate school costs for each employee under a
Section 127 educational assistance plan. The education does not have to be
job-related. The benefit is tax-free to the employee, but cannot be used to
pay for an employee’s children or other family members.
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For more information on tax incentives for education, see IRS Publication
970, Tax Benefits for Higher Education, available at www.irs.gov.
Source: http://www.savingforcollege.com/tutorial101/federal_tax_incentives_to_education.php
What is a 529 plan?
• It is an education savings plan
operated by a state or educational
institution designed to help
families set aside funds for future
college costs. As long as the plan
satisfies a few basic requirements,
the federal tax law provides
special tax benefits to you, the
plan participant (Section 529 of
the Internal Revenue Code).
Source: http://www.savingforcollege.com/intro_to_529s/
What is a 529 plan? (Cont.)
• 529 plans are usually categorized as
either prepaid or savings, although
some have elements of both. Every
state now has at least one 529 plan
available. It's up to each state to
decide whether it will offer a 529 plan
(or possibly more than one), and what
it will look like. Educational
institutions can offer a 529 prepaid
plan but not a 529 savings plan (the
private-college Independent 529 Plan
is the only institution-sponsored 529
plan thus far).
Source: http://www.savingforcollege.com/intro_to_529s/
What's so great about 529 plans?
• First, you get unsurpassed income tax breaks. Your
investment grows tax-deferred, and distributions to pay
for the beneficiary's college costs come out federally
tax-free. This treatment applies for distributions in the
years 2002 through 2010. Unless Congress decides to
extend this tax break, qualifying distributions made
after 2010 will be taxable to the beneficiary (earnings
portion only). Assuming that the student isn't earning
hundreds of thousands of dollars running a dot-com
company out of her dorm room, you should still save
taxes with her lower income tax bracket. Your own
state may offer some tax breaks as well (like an upfront
deduction for your contributions or income exemption
on withdrawals) in addition to the federal treatment.
Source: http://www.savingforcollege.com/intro_to_529s/
What's so great about 529 plans?
• Second, you the donor stay in control of the account.
With few exceptions, the named beneficiary has no
rights to the funds. You are the one who calls the
shots; you decide when withdrawals are taken and for
what purpose. Most plans even allow you to reclaim
the funds for yourself any time you desire, no
questions asked. (However, the earnings portion of
the "non-qualified" withdrawal will be subject to
income tax and an additional 10% penalty tax).
Source: http://www.savingforcollege.com/intro_to_529s/
What's so great about 529 plans?
• Third, a 529 plan can provide a very easy hands-off way to
save for college. Once you decide which 529 plan to use,
you complete a simple enrollment form and make your
contribution (or sign up for automatic deposits). Then you
can relax and forget about it if you like. The ongoing
investment of your account is handled by the plan, not by
you. Plan assets are professionally managed either by the
state treasurer's office or by an outside investment
company hired as the program manager. You won't even
receive a Form 1099 to report taxable or nontaxable
earnings until the year you make withdrawals. If you want
to move your investment around you may change to a
different option in a 529 savings program every year
(program permitting) or you may rollover your account to a
different state's program provided no such rollover for your
beneficiary has occurred in the prior 12 months. (There is
no federal limit on the frequency of these changes if you
replace the account beneficiary with another qualifying
family member at the same time.)
Source: http://www.savingforcollege.com/intro_to_529s/
What's so great about 529 plans?
• Finally, everyone is eligible to take advantage of a
529 plan, and the amounts you can put in are
substantial (over $230,000 per beneficiary in many
state plans). Generally, there are no income
limitations or age restrictions. Thinking about going
back to college or graduate school in the future? Then
set up a plan for yourself!
Source: http://www.savingforcollege.com/intro_to_529s/
529 Benefits
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The Benefits: Tax Treatment
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All of the account's earnings are exempt from federal tax when they
are withdrawn if they are used for qualified education expenses. This
means that, unlike the taxes you have to pay on earnings from regular
stock investments, you won't pay any tax on the 529 account earnings
unless you end up using the money for something other than higher
education. Earnings are currently tax-deferred in most states, as well.
A break on the earnings tax isn't the only tax advantage, either.
Although your contributions aren't pre-tax (you pay state and federal
tax on the money you put into the account), there are some states that
let you deduct a portion of your contributions from your state taxes.
More states will probably follow suit in the coming years.
Exemption
The tax exemption on 529 account earnings is in effect at least until
2011, which is when it can revert to the original plan where the
earnings are taxed at the child's rate. It is very likely that Congress will
revisit the 529 issue and vote to make the tax-free status permanent
prior to that date.
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Source: http://money.howstuffworks.com/529.htm
529 Benefits
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The Benefits: Account Control
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Unlike custodial accounts or Education Savings Accounts
(ESAs, formerly Education IRAs), the beneficiary does not
gain control of the money at a specific age (usually 18 or
21 for those types of accounts). The account owner
always has control of the money. This helps lessen that
parental anxiety that Junior will take the money and tour
Europe or buy a Porsche instead of going to college.
There are no restrictions on who can open an account for
whom. You can open an account for your child, a friend's
child, a relative, the paper boy, or even yourself.
Anyone can contribute to the account. Now all (or at least
some) of that birthday money from Grandma and Grandpa
that's usually blown on candy and soon-forgotten toys can
be funneled into the college savings account!
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Source: http://money.howstuffworks.com/529.htm
529 Benefits
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The Benefits: Income Eligibility
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Did you know that with an ESA, you aren't eligible to
contribute if you make more than $110,000 per year
($220,000 for married couples)? Unlike ESAs, your income
does not affect your eligibility to open a 529 account.
Contributions to 529 plans also qualify for the $11,000
($22,000 for married couples in 2002) annual gift tax
exclusion. You can also contribute up to five years of gifts
during the first year, meaning you can put in up to $55,000
($110,000 for married couples). This is a great benefit in
situations where inheritance money enters the picture.
Your account can grow up to $268,000 in some states.
You can contribute as little as $25 to $50 per month.
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Source: http://money.howstuffworks.com/529.htm
529 Benefits
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The Benefits: How the Money Can Be Used
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In most states, there is no age limit or time limit for when the
money has to be used. Your child can put off college indefinitely, in
which case you have the option of rolling the account over to
another child as long as that child is in the same family of the first
beneficiary. In case you're wondering just who is considered
"family," the plan defines family members as "the original
beneficiary's spouse, children, sisters, brothers, nephews, nieces,
first cousins, and any spouses of those persons."
Your child can go to any accredited degree-granting educational
institution, whether it is public, private, two-year, or four-year.
There are even some international schools that qualify.
In most states, qualified education costs include tuition, books,
room, board, transportation, and even computers.
In the event that your child gets a scholarship, then the
remainder of the 529 account can be rolled over to another sibling
(or relative), or it can be cashed out with no penalty other than the
tax paid (at your rate) on the earnings. The same rule applies in
the event of the child's death or disability.
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Source: http://money.howstuffworks.com/529.htm
529 Benefits
Source: http://money.howstuffworks.com/529.htm
529 Benefits
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The Benefits: Investment Control
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If the thought of turning over your hard earned money to the state makes
you a little uneasy, rest assured that the state doesn't control your money. In
fact, most states are signing on with well-known, successful investment
companies such as TIAA-CREF, Vanguard and Fidelity. The number and types
of investment options vary by state, and once you select your option you
can't change it. You can, however, roll your money over into another
state's plan if you're not happy with your chosen investment option. There is
no penalty to roll the money over into another state's plan, and you can do it
once every 12 months. Most states have no residence requirement for
their 529 plans.
Many plans are also offering investment choices that are age-based. This
means that if you're starting early, perhaps when your child is age one to
three, the investments can begin aggressively in stocks then gradually shift to
bonds and money market accounts as your child gets closer to college age.
Some state plans offer several levels of options for aggressive, moderate and
conservative investments.
If you can't reach the risk level you want in one plan, you can always open a
second 529 account in the same or another state. You can have as many
accounts as you want and can also contribute to both a 529 plan and an ESA.
That way, you can diversify your investments in the event that the plan
doesn't offer the investment mix you would like.
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Source: http://money.howstuffworks.com/529.htm
Example of Age Based Portfolios
This graphic will cycle/change when in slide show mode.
Source: http://money.howstuffworks.com/529.htm
529 Plan Benefit Recap
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A 529 college savings plan is a very simple way to
save money for your kids' (or anyone else's)
college education. The benefits are tremendous.
Here are some of the heavy hitters:
You pay no taxes on the account's earnings.
The child doesn't have control of or access to the
account -- you do.
If the child doesn't want to go to college, you can
roll the account over to another family member.
Anyone can contribute to the account.
There are no income limitations that might make
you ineligible for an account.
Most states have no age limit for when the money
has to be used.
If the child gets a scholarship, any unused money
can be withdrawn without paying any penalty (just
the tax).
Source: http://money.howstuffworks.com/529.htm
529 Disadvantages
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If your child applies for financial aid, the 529 account may affect eligibility.
According to FinancialAidOfficer.com:
...the 529 account is treated as an asset of the parent or other account owner in
determining eligibility for federal financial aid. This means that your expected
contribution towards your child's college costs will include 5.6 percent, or less,
of the value of your 529 account for each academic year. This is actually much
better than the 35 percent assessment against money that is in your child's
name or in a custodial account.
The only real drawback comes in when calculating eligibility the second year. At
this point, 50 percent of the money that was withdrawn from the 529 account
the first year shows up on your child's tax return. This decreases your child's
eligibility for the next year by 50 percent of that amount. For example, if you
withdraw $10,000 from the account to pay for college expenses the first year,
then $5,000 (50 percent of the total) will show up as the child's taxable income.
That will decrease your child's eligibility the following year by $2,500, because
there is a 50 percent eligibility assessment on the child's tax return from the
prior year. (Remember -- we're talking about tax laws -- all of this can change.)
If the student owns the 529 account, which is what happens when a custodial
account has been transferred to a 529 account, then the amount of the account
will greatly affect his or her eligibility for financial aid. Because the student owns
the account and it is one of the student's assets, a 35 percent assessment
against those assets kicks in.
Source: http://money.howstuffworks.com/529.htm
529 Disadvantages (cont.)
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One thing to watch out for is that the new tax laws regarding 529 plans
will "sunset" in 2011. This means that lawmakers will have to make the
tax change permanent before then or else the plans will revert to their
original tax-deferred status (see sidebar in previous section). This
possible reversal could affect you if your children will be going to
college after 2011.
The money in your 529 plan can't be used as collateral for a loan.
You don't control the investments (more about how the money is
invested in the next section). Your only option for changing the
investments made with your money is to roll the account over to
another state's plan. You can do this once a year with no penalty.
If you have to withdraw the money for some reason other than to pay
for qualified higher education, then you pay tax (at your rate) and a 10
percent penalty.
You can only make cash contributions to the account; stocks can't be
rolled over into it.
Although you are the account owner, 529 accounts are considered gifts
and are, therefore, not calculated as part of your own estate assets.
Each beneficiary must have his/her own account. Siblings or cousins
can't share an account. You can, however, roll any remaining portion of
an account over to another child once the account's beneficiary has
completed college.
Source: http://money.howstuffworks.com/529.htm
Choosing the Right 529 Plan
• Choosing the right 529 plan is not much
easier than choosing anything else in
financial world. It takes some research,
some luck, and the ability to accept some
level of risk. The variations in state plans
don't make the process any easier. Here
are few guidelines that can get you
started:
Source: http://money.howstuffworks.com/529.htm
Choosing the Right 529 Plan
Research Tips
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The Kiplinger Web site offers information about the best deals for 529 plans.
SavingForCollege.com is also a great resource for all kinds of information
about 529 plans. It provides state-specific information and links to state
programs.
The first thing to do is to look at your own state's plan. There are
currently 16 states that offer a tax deduction on 529 contributions, and many
that also exempt state tax on the earnings upon withdrawal. Some states
may offer matching grants or loan programs. This can make a fairly
significant difference and is worth weighing against other state plans that
may have lower fees.
The next thing to look at is the manager of the plan. Because the plans
haven't been around for very long, you can't really rely on the success record
of the plan manager. Look at the investment company's record of dealing
with mutual funds and pension plans.
Source: http://money.howstuffworks.com/529.htm
529 Plan Fees
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Finding a low-cost plan means looking at several possible
charges. For instance, some states charge an enrollment fee
to open the account, and some also charge annual
maintenance fees. Then there is the expense ratio, which is
the percentage of fund assets that pays for operating
expenses and management fees. This includes 12b-1 fees
(basically, fund marketing fees), administrative fees, and all of
the other asset-based costs that the fund incurs, with the
exception of brokerage costs. Expense ratios often decrease as
a fund gathers more dollars from investors, because the fund’s
managers can spread the fixed costs of running the fund over
a larger asset base. Expense ratios for 529 plans vary from a
low of 0.31 percent to a high of 2.24 percent. Additional costs
can also be incurred with plans that are sold by brokers. The
commissions currently range from about 3.25 percent to 5
percent, payable upfront! Usually, buying direct eliminates the
brokers' fees.
Source: http://money.howstuffworks.com/529.htm
529 Flexibility
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Look at how flexible the plan is. You don't want to be penalized
when you want to change beneficiaries or roll the account over
to another state's plan. You also don't want to be limited in how
the funds can be used. For example, most states allow the
funds to be used for all qualified education expenses
including the expense of books, housing, etc., as well as
graduate school. Look at the amount you will most likely have
when your child enters college and make the decision about
whether the eligibility of those other expenses will be an issue.
For example, if you know you will only have $20,000 in the
account and tuition alone is $40,000, then whether the money
can be used for housing isn't relevant. Another issue is the age
limitation. There are a few states that may require your child
to use the money prior to a certain age, or that may require
that the child be under a certain age in order for you to be able
to open an account. There may even be limits to how long the
accounts can remain open without any withdrawals.
Source: http://money.howstuffworks.com/529.htm
529 Plan Management
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Investigate the availability and fees related to withdrawing your cash. Although the
IRS set a 10-percent fine for withdrawal of funds that are not used for qualified
education expenses, plans can charge more than that. Also find out about how easy it
is to get your money in the event of an emergency. Sometimes, there are time
requirements about how long the money has to stay in the account before it can be
withdrawn. If you do have to withdraw a portion of the money for a non-education
expense, find out what happens to the rest of the account. Is it closed? Is a fine
charged for the entire amount?
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Look at the maximums and minimums for contributions. Determine how much you
want to have in the account when your child enters college. Make sure the plan
allows at least that amount. You also may need a low minimum if you want to start
the plan out without a large sum of money.
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Find out what happens with the ownership of the account if the account owner dies.
Does it go directly to the beneficiary? Or, do you have the right to determine a
successor? Also, check to see if you can change beneficiaries with little hassle from
either the plan or the current beneficiary.
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Finally, check to make sure the plan is well managed and has the resources devoted
to it that it needs. Check for program materials that answer all of your questions,
good program support staff, and an easily navigated Web site offering quick program
information and access to information about your account.
Source: http://money.howstuffworks.com/529.htm
How 529 college savings plans work
Direct-sold
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1 Select a beneficiary. Most contributors set up 529 plans for their children or grandchildren, but you can
designate anyone as a beneficiary, even someone who isn't related to you.
2 Select a direct-sold state plan, and decide how you want your money invested. Most plans offer several
investment portfolios. You can find a list of plans at www.savingforcollege.com.
3 Send money to the state offering the plan. You won't pay a sales commission, although you may have to pay an
enrollment fee, depending on the plan.
4 Once the beneficiary reaches college-age, withdraw the money to pay for tuition and fees. As long as the money
is only used for college-related expenses, you won't pay taxes on interest or gains.
Broker-sold
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1 Select a beneficiary.
2 Contact a financial adviser who offers 529 plans. Some financial services firms, such as A.G. Edwards, offer
more than a dozen different plans. The adviser should be able to explain the investment options and help you
decide how to invest.
3 Give the adviser money to invest in the plan. In most cases, you'll pay a sales commission, usually 3.5% of your
investment. Some broker-sold plans also offer B shares, which have no upfront loads but charge higher annual
fees the first eight years or more.
4 Withdraw the money to pay for the beneficiary's college tuition and fees. Interest and gains will be tax-free.
Prepaid
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1 Contact the prepaid tuition plan for your state. You can locate your state plan through the College Savings Plan
Network, www.collegesavings.org. Most prepaid plans are limited to state residents.
2 Invest in the plan, either through an upfront cash payment or a series of payments. Some states also allow you
to purchase units that represent a fraction of costs of attending a state college or university. In both cases, the
state allows you to buy tomorrow's tuition at today's prices.
3 When your child reaches college age, the state will pay tuition and fees at any state college or university. You
can also use your savings at an out-of-state or private college, but you lose your guarantee. If the cost of an outof-state or private school exceeds the value of your account, you'll have to make up the difference.
Source: http://www.savingforcollege.com/intro_to_529s/
529 FAQs
• Why invest in a 529 plan when I can't be
sure that my child will attend a public
university in my state?
• There's a misconception that state-sponsored 529 plans
are only geared to families that send their children to a
state school. That's just not true. There are two general
types of 529 plans: prepaid programs and savings
programs. The states offering prepaid tuition contracts
covering in-state tuition will allow you to transfer the
value of your contract to private and out-of-state schools
(although you may not get full value depending on the
particular state). If you decide to use a 529 savings
program, the full value of your account can be used at
any accredited college or university in the country (along
with some foreign institutions).
Source: http://www.savingforcollege.com/intro_to_529s/
529 FAQs
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What's this I hear about a penalty on refunds?
What happens if my child doesn't go to college or if
I simply end up with more in the account than he
needs for college?
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Federal law imposes a 10% penalty on earnings for nonqualified distributions beginning in 2002. The penalty is
not assessed on principal. An exception to the penalty
can be claimed if you terminate the account because the
beneficiary has died or is disabled, or if you withdraw
funds not needed for college because the beneficiary has
received a scholarship.
You can change the beneficiary to another qualifying
family member at any time in order to keep the account
going and avoid (or at least delay) taking non-qualified
withdrawals when the original beneficiary doesn't need
those funds.
Source: http://www.savingforcollege.com/intro_to_529s/
529 FAQs
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Can I transfer my existing Coverdell education
savings accounts and U.S. savings bonds into a 529
plan?
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Yes, you can accomplish these transfers without
triggering tax, but you should be careful about
ownership issues. For instance, the Coverdell ESA
(formerly the Education IRA) is effectively owned by
your child and so it may not be proper to transfer the
funds into a 529 account that is owned by you. Also, for
529 distributions after the 2010 "sunset" the untaxed
earnings transferred into the 529 plan from a ESA will be
subject to tax when withdrawn from the 529 plan. Also
note that the tax-free transfer of U.S. savings bond
redemption proceeds into a 529 plan requires that you
meet all the qualification requirements for the education
exclusion, including the income limits in the year of the
redemption.
Source: http://www.savingforcollege.com/intro_to_529s/
529 FAQs
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Can I transfer my child's existing Uniform Transfers to Minors
Act (UTMA) account into a 529 plan?
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Many, if not all, 529 plans accept funds coming from an existing
UTMA or UGMA. However, because these funds belong to the minor
under a custodial arrangement, any withdrawals from the UTMA/529
account must be for the benefit of that minor only. Program rules and
state laws will generally prevent you from making any beneficiary
changes to the UTMA/529 account, and the minor will assume direct
ownership of the account when the custodianship terminates at the
age of majority. Parents who are nervous about a child getting their
hands on money in an UTMA account, and who may be looking to
"regain control" of the money by transferring the funds to a 529
account, may be disappointed to learn that they are not able to
accomplish that objective without violating state laws (see your
attorney). Still, the placement of UTMA funds in a 529 account can
provide all the tax and investment benefits associated with 529
plans. Remember, however, that a 529 plan can only accept cash and
so any appreciated securities in the UTMA would first have to be sold
and capital gains would be reportable on the minor's tax return.
Source: http://www.savingforcollege.com/intro_to_529s/
529 FAQs
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I thought there were some gift and estate tax advantages with 529 plans, but you
didn't mention that as a benefit. Am I wrong?
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The gift and estate tax treatment of an investment in a 529 plan is a good news, bad news
situation.
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The bad news is that your contribution is treated as a gift to the named beneficiary for gift
tax and generation-skipping transfer tax purposes and so you need to be aware of this
exposure particularly if you are making other gifts to the beneficiary during the same year.
The good news is that your contribution qualifies for the $11,000 annual gift tax exclusion
and so most people can make fairly large contributions without incurring the gift tax.
Even better news is that if you make a contribution of between $11,000 and $55,000 for a
beneficiary, you can elect to treat the contribution as made over a five calendar-year period
for gift tax purposes. This allows you to utilize as much as $55,000 in annual exclusions to
shelter a larger contribution. The money (and the growth of your account) gets out of your
estate faster than if you made contributions each year.
And the best news is that the asset leaves your estate but doesn't leave your control. This is
a truly remarkable benefit when you compare it to the "normal" gift and estate tax laws.
Anyone who is being advised to reduce their estate tax exposure through gifting, but cannot
stand the thought of irrevocably giving away their assets, can now have their cake and eat it
too. Of course, if you later revoke the account its value comes back into your estate. Your
estate will also have to include a portion of any contribution made with the five-year
averaging election if you don't live past the fourth year.
Source: http://www.savingforcollege.com/intro_to_529s/
529 FAQs
• Can I invest for one beneficiary in more
than one state's 529 plan?
• Most 529 savings plans have no state
residency requirements. You can open
accounts in as many of these states as you
want, although in most cases there is little
reason to have accounts in more than one or
two states.
Source: http://www.savingforcollege.com/intro_to_529s/
529 FAQs
•
Can I contribute the maximum amount in more than one
state if I want to?
•
The IRS currently does not require that states count your
investment in other state 529 plans when applying their own
contribution limits. And there are no "contribution police" out there
looking for people who are intent on using multiple states to stuff
hundreds of thousands of dollars into 529 plans as a kind of tax
shelter. But you are looking for trouble if you contribute more on an
aggregate basis than you can reasonably argue might be needed for
your beneficiary's future higher education costs. Of course, between
a pricey private college, medical school, and then business school
you might be able to support a pretty hefty sum. A state will not
want to see its program misused as a tax shelter (its tax status as a
529 plan could be threatened) and if a state determines that you
have made contributions without the intent to use the account for
college it will terminate your account and perhaps assess an extra
penalty.
Source: http://www.savingforcollege.com/intro_to_529s/
529 FAQs
•
What's this I hear about a penalty on refunds?
What happens if my child doesn't go to college or if
I simply end up with more in the account than he
needs for college?
•
Federal law imposes a 10% penalty on earnings for nonqualified distributions beginning in 2002. The penalty is
not assessed on principal. An exception to the penalty
can be claimed if you terminate the account because the
beneficiary has died or is disabled, or if you withdraw
funds not needed for college because the beneficiary has
received a scholarship.
You can change the beneficiary to another qualifying
family member at any time in order to keep the account
going and avoid (or at least delay) taking non-qualified
withdrawals when the original beneficiary doesn't need
those funds.
Source: http://www.savingforcollege.com/intro_to_529s/
States with 529 Program
All 50 states have 529 programs.
Source: http://www.savingforcollege.com/529_plan_details/
Additional Resources
• http://www.savingforcollege.com/
• http://www.collegesavings.org/
• http://www.usatoday.com/money/covers/2002
-07-08-529-college-plans.htm
• http://money.howstuffworks.com/529.htm
• http://www.sec.gov/investor/pubs/intro529.ht
m
References
•
•
•
Obringer, Lee Ann. Retrieved November 06, 2005, from How Stuff Works Web site:
http://money.howstuffworks.com/529.htm
Retrieved November 06, 2005 from Saving For College Web site:
http://www.savingforcollege.com/intro_to_529s/
Section 529 of the Internal Revenue Code of 1986. Retrieved November 4, 2005, from
RIA Checkpoint Website:
http://checkpoint.riag.com/Checkpoint?usid=116c11136c6c&feature=tcheckpoint&jsp
=%2FJSP%2FmainFs.jsp&lkn=frameSrch&tabPg=30&tmpl=%2FJSP%2FmainFs.jsp&uf
rm1=mainTb&ufrm2=srchFrame.
APPENDIX:
529 IRC
§ 529 Qualified tuition program.
(a) General rule.
A qualified tuition program shall be
exempt from taxation under this subtitle.
Notwithstanding the preceding sentence,
such program shall be subject to the taxes
imposed by section 511
(relating to imposition of tax on unrelated
business income of charitable
organizations).
(§ 529 )
IRC (cont.)
(b) Qualified tuition program.
For purposes of this section—
(1) In general.
The term “qualified tuition program” means a program
established and maintained by a State or agency or
instrumentality thereof or by 1 or more eligible educational
institutions—
(A) under which a person—
(i) may purchase tuition credits or certificates on behalf of a
designated beneficiary which entitle the beneficiary to the
waiver or payment of qualified higher education expenses
of the beneficiary, or
(ii) in the case of a program established and maintained by a
State or agency or instrumentality thereof, may make
contributions to an account which is established for the
purpose of meeting the qualified higher education
expenses of the designated beneficiary of the account, and
(§ 529 )
IRC (cont.)
(B) which meets the other requirements of this subsection.
Except to the extent provided in regulations, a program
established and maintained by 1 or more eligible
educational institutions shall not be treated as a qualified
tuition program unless such program provides that
amounts are held in a qualified trust and such program has
received a ruling or determination that such program
meets the applicable requirements for a qualified tuition
program. For purposes of the preceding sentence, the term
“qualified trust” means a trust which is created or
organized in the United States for the exclusive benefit of
designated beneficiaries and with respect to which the
requirements of paragraphs (2) and (5) of section 408(a)
are met.
(2) Cash contributions.
A program shall not be treated as a qualified tuition
program unless it provides that purchases or contributions
may only be made in cash.
(§ 529 )
IRC (cont.)
(3) Separate accounting.
A program shall not be treated as a qualified tuition
program unless it provides separate accounting for each
designated beneficiary.
(4) No investment direction.
A program shall not be treated as a qualified tuition
program unless it provides that any contributor to, or
designated beneficiary under, such proram may not
directly or indirectly direct the investment of any
contributions to the program (or any earnings thereon).
(5) No pledging of interest as security.
A program shall not be treated as a qualified tuition
program if it allows any interest in the program or any
portion thereof to be used as security for a loan.
(6) Prohibition on excess contributions.
A program shall not be treated as a qualified tuition
program unless it provides adequate safeguards to prevent
contributions on behalf of a designated beneficiary in
excess of those necessary to provide for the qualified
higher education expenses of the beneficiary.
(§ 529 )
IRC (cont.)
(c) Tax treatment of designated beneficiaries and
contributors.
(1) In general.
Except as otherwise provided in this subsection, no amount shall be
includible in gross income of—
(A) a designated beneficiary under a qualified tuition program, or
(B) a contributor to such program on behalf of a designated
beneficiary,
with respect to any distribution or earnings under such program.
(2) Gift tax treatment of contributions.
For purposes of chapters 12 and 13—
(A) In general. Any contribution to a qualified tuition program on
behalf of any designated beneficiary—
(i) shall be treated as a completed gift to such beneficiary which is
not a future interest in property, and
(ii) shall not be treated as a qualified transfer under section 2503(e).
(§ 529 )
IRC (cont.)
(B) Treatment of excess contributions. If the aggregate amount of
contributions described in subparagraph (A) during the calendar year
by a donor exceeds the limitation for such year under section
2503(b), such aggregate amount shall, at the election of the donor,
be taken into account for purposes of such section ratably over the 5year period beginning with such calendar year.
(3) Distributions.
(A) In general. Any distribution under a qualified tuition program shall
be includible in the gross income of the distributee in the manner as
provided under section 72 to the extent not excluded from gross
income under any other provision of this chapter.
(B) Distributions for qualified higher education expenses. For
purposes of this paragraph—
(i) In-kind distributions. No amount shall be includible in gross
income under subparagraph (A) by reason of a distribution which
consists of providing a benefit to the distributee which, if paid for by
the distributee, would constitute payment of a qualified higher
education expense.
(§ 529 )
IRC (cont.)
(ii) Cash distributions. In the case of distributions not described in
clause (i), if—
(I) such distributions do not exceed the qualified higher education
expenses (reduced by expenses described in clause (i), no amount
shall be includible in gross income, and
(II) in any other case, the amount otherwise includible in gross
income shall be reduced by an amount which bears the same ratio to
such amount as such expenses bear to such distributions.
(iii) Exception for institutional programs. In the case of any taxable
year beginning before January 1, 2004, clause (i) and (ii) shall not
apply with respect to any distribution during such taxable year under
a qualified tuition program established and maintained by 1 or more
eligible educational institutions.
(iv) Treatment as distributions. Any benefit furnished to a designated
beneficiary under a qualified tuition program shall be treated as a
distribution to the beneficiary for purposes of this paragraph.
(§ 529 )
IRC (cont.)
•
•
•
•
•
•
(v) Coordination with hope and lifetime learning
credits. The total amount of qualified higher education
expenses with respect to an individual for the taxable
year shall be reduced—
(I) as provided in section 25A(g)(2), and
(II) by the amount of such expenses which were taken
into account in determining the credit allowed to the
taxpayer or any other person under section 25A.
(vi) Coordination with Coverdell education savings
accounts. If, with respect to an individual for any
taxable year—
(I) the aggregate distributions to which clauses (i) and
(ii) and section 530(d)(2)(A) apply, exceed
(II) the total amount of qualified higher education
expenses otherwise taken into account under clauses
(i) and (ii) (after the application of clause (v)) for such
year,
(§ 529 )
IRC (cont.)
the taxpayer shall allocate such expenses among such distributions
for purposes of determining the amount of the exclusion under
clauses (i) and (ii) and section 530(d)(2)(A).
(C) Change in beneficiaries or programs.
(i) Rollovers. Subparagraph (A) shall not apply to that portion of any
distribution which, within 60 days of such distribution, is
transferred—
(I) to another qualified tuition program for the benefit of the
designated beneficiary, or
(II) to the credit of another designated beneficiary under a qualified
tuition program who is a member of the family of the designated
beneficiary with respect to which the distribution was made.
(ii) Change in designated beneficiaries. Any change in the designated
beneficiary of an interest in a qualified tuition program shall not be
treated as a distribution for purposes of subparagraph (A) if the new
beneficiary is a member of the family of the old beneficiary.
(§ 529 )
IRC (cont.)
(iii) Limitation on certain rollovers. Clause (i)(I) shall not
apply to any transfer if such transfer occurs within 12
months from the date of a previous transfer to any
qualified tuition program for the benefit of the designated
beneficiary.
(D) Operating rules. For purposes of applying section 72—
(i) to the extent provided by the Secretary, all qualified
tuition programs of which an individual is a designated
beneficiary shall be treated as one program,
(ii) except to the extent provided by the Secretary, all
distributions during a taxable year shall be treated as one
distribution, and
(iii) except to the extent provided by the Secretary, the
value of the contract, income on the contract, and
investment in the contract shall be computed as of the
close of the calendar year in which the taxable year
begins.
(§ 529 )
IRC (cont.)
(4) Estate tax treatment.
(A) In general. No amount shall be includible in the gross estate of
any individual for purposes of chapter 11 by reason of an interest in a
qualified tuition program.
(B) Amounts includible in estate of designated beneficiary in certain
cases. Subparagraph (A) shall not apply to amounts distributed on
account of the death of a beneficiary.
(C) Amounts includible in estate of donor making excess
contributions. In the case of a donor who makes the election
described in paragraph (2)(B) and who dies before the close of the 5year period referred to in such paragraph, notwithstanding
subparagraph (A), the gross estate of the donor shall include the
portion of such contributions properly allocable to periods after the
date of death of the donor.
(5) Other gift tax rules.
For purposes of chapters 12 and 13—
(A) Treatment of distributions. Except as provided in subparagraph
(B), in no event shall a distribution from a qualified tuition program
be treated as a taxable gift.
(B) Treatment of designation of new beneficiary. The taxes imposed
by chapters 12 and 13 shall apply to a transfer by reason
(§ 529 )
IRC (cont.)
of a change in the designated beneficiary under the program (or a
rollover to the account of a new beneficiary) unless the new
beneficiary is—
(i) assigned to the same generation as (or a higher generation than)
the old beneficiary (determined in accordance with section 2651), and
(ii) a member of the family of the old beneficiary.
(6) Additional tax.
The tax imposed by section 530(d)(4) shall apply to any payment or
distribution from a qualified tuition program in the same manner as
such tax applies to a payment or distribution from an education
individual retirement account. This paragraph shall not apply to any
payment or distribution in any taxable year beginning before January
1, 2004, which is includible in gross income but used for qualified
higher education expenses of the designated beneficiary.
(d) Reports.
Each officer or employee having control of the qualified tuition
program or their designee shall make such reports regarding such
program to the Secretary and to designated beneficiaries with respect
to contributions, distributions, and such other matters as the
Secretary may require. The reports required by this subsection shall
be filed at such time and in such manner and furnished to such
individuals at such time and in such manner as may be required by
the Secretary.
(§ 529 )
IRC (cont.)
(e) Other definitions and special rules.
For purposes of this section—
(1) Designated beneficiary.
The term “designated beneficiary” means—
(A) the individual designated at the commencement of
participation in the qualified tuition program as the
beneficiary of amounts paid (or to be paid) to the
program,
(B) in the case of a change in beneficiaries described in
subsection (c)(3)(C), the individual who is the new
beneficiary, and
(C) in the case of an interest in a qualified tuition program
purchased by a State or local government (or agency or
instrumentality thereof) or an organization described in
section 501(c)(3) and exempt from taxation under section
501(a) as part of a scholarship program operated by such
government or organization, the individual receiving such
interest as a scholarship.
(§ 529 )
IRC (cont.)
(2) Member of family.
The term “member of the family” means, with respect to any
designated beneficiary—
(A) the spouse of such beneficiary;
(B) an individual who bears a relationship to such beneficiary which is
described in subparagraph (A) through (G) of section 152(d)(2(;
(C) the spouse of any individual described in subparagraph (B); and
(D) any first cousin of such beneficiary.
(3) Qualified higher education expenses.
(A) In general. The term “qualified higher education expenses”
means—
(i) tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of a designated beneficiary at an eligible
educational institution; and
(ii) expenses for special needs services in the case of a special needs
beneficiary which are incurred in connection with such enrollment or
attendance.
(§ 529 )
IRC (cont.)
(B) Room and board included for students who are at least half-time.
(i) In general. In the case of an individual who is an eligible student
(as defined in section 25A(b)(3)) for any academic period, such term
shall also include reasonable costs for such period (as determined
under the qualified tuition program) incurred by the designated
beneficiary for room and board while attending such institution. For
purposes of subsection (b)(6), a designated beneficiary shall be
treated as meeting the requirements of this clause.
(ii) Limitation. The amount treated as qualified higher education
expenses by reason of clause (i) shall not exceed—
(I) the allowance (applicable to the student) for room and board
included in the cost of attendance (as defined in section 472 of the
Higher Education Act of 1965 (20 U.S.C. 1087ll) , as in effect on the
date of the enactment [6/7/2001] of the Economic Growth and Tax
Relief Reconciliation Act of 2001) as determined by the eligible
educational institution for such period, or
(§ 529 )
IRC (cont.)
(II) if greater, the actual invoice amount the student
residing in housing owned or operated by the eligible
educational institution is charged by such institution for
room and board costs for such period.
(4) Application of section 514.
An interest in a qualified tuition program shall not be
treated as debt for purposes of section 514.
(5) Eligible educational institution.
The term “eligible educational institution” means an
institution—
(A) which is described in section 481 of the Higher
Education Act of 1965 ( 20 U.S.C. 1088 ), as in effect on
the date of the enactment [6/7/2001] of this paragraph,
and
(B) which is eligible to participate in a program under title
IV of such Act.
(§ 529 )