Transcript Filling the Gap - Welcome | NYSFAAA

Filling the Gap
529 Plans
2005 NYSFAAA Guidance Counselor Workshop
What is a 529 plan?
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A 529 plan is a tax-advantaged savings plan
designed to encourage saving for future college
costs. 529 plans, legally known as “qualified tuition
plans,” are sponsored by states, state agencies, or
educational institutions and are authorized by
Section 529 of the Internal Revenue Code – hence
the name.
There are two types of 529 plans: pre-paid tuition
plans and college savings plans. All fifty states and
the District of Columbia sponsor at least one type of
529 plan. In addition, a group of private colleges
and universities sponsor a pre-paid tuition plan
called the Independent 529 Plan.
Pre-paid tuition plans
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Pre-paid tuition plans are currently offered
in 13 states. New York is not one of them.
These plans generally allow college savers
to try and to lock in future costs of colleges
by purchasing units of future expenses at
participating colleges and universities.
Many state governments guarantee
investments in pre-paid tuition plans that
they sponsor.
Residency in the state is often required
The Pre-paid downside
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Prepaid contract programs are the less popular option.
The purchaser has limited options on where their money can
be spent.
The purchaser also limits the potential gains their investment
might have.
Some states, like Texas, have stopped accepting new
enrollments all together. Rising tuition rates have put a
burden on the guaranteed nature of the funds.
Expect pre-paid tuition 529 plans to close in the future as they
don’t make as much financial sense for family’s in most cases.
For the ones that do, they are costing states too much money
to continue.
College savings plans
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College savings plans generally permit a college saver to
establish an account for a beneficiary for the purpose of
paying the beneficiary’s eligible college expenses.
An account holder may typically choose among several
investment options for his or her contributions, which the
college savings plan invests on behalf of the account holder.
Investment options often include stock mutual funds, bond
mutual funds, and money market funds, as well as, age-based
portfolios that automatically shift toward more conservative
investments as the beneficiary gets closer to college age.
Withdrawals from college savings plans can generally be used
at any college or university.
Investments in college savings plans that invest in mutual
funds are not guaranteed by state governments and are not
federally insured.
More details
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Savings programs are offered by every state.
There are usually tax benefits for residents.
Some plans have residency requirements, some
don’t. Ones that are limited to residents might do
something special like match a certain level of
contribution based upon income and dependency
age.
Plans can be sold directly to the investor or through
a broker. Be aware that brokers sometimes steer
clients towards more expensive options since they
make a commission on the sale.
What does NY State do?
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New York Saves Website: www.nysaves.com
In New York State, individuals can deduct up to $5,000 from
their state return; $10,000 for joint return.
New York offers fifteen investment options managed by
Vanguard. Three are age based and 12 are varied based on
investment strategy and risk tolerance of the account holder.
There is a maximum contribution limit of $235,000 for a single
beneficiary.
Minimum contributions are $25 or $15 with payroll deduction.
No fees to enroll or maintain an account. Only .58% fee for
management.
Easy link to Upromise (www.upromise.com). Upromise is a
cash back program that invests a percentage of certain
purchases you make directly into your 529 Plan.
On the horizon
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Sunset clause – all these great tax benefits may
expire in 2011. It will be very unpopular politically
though, so don’t be surprised to see these changes
made permanent.
Potential tax changes were just recommended by
President’s Advisory Panel on Federal Tax Reform
may impact 529 plans
529’s would be combined with other tax favored
plans and replaced by “Save for Family Accounts”.
These all in one accounts would have a $10,000
annual limit and could cover education, medical,
home and retirement needs.
How does investing in a 529
plan impact financial aid?
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Each educational institution may treat
assets held in a 529 plan differently.
Generally, investing in a 529 plan will
reduce to some degree a student’s
eligibility for need based financial aid.
More pre-paid downside
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Assets held in pre-paid tuition plans are
generally treated differently for financial aid
purposes than assets held in college savings
plans.
Assets held in pre-paid tuition plans typically
reduce need-based financial aid on a dollar
for dollar basis.
If you expect your beneficiary to receive a
significant amount of need-based financial
aid, it is probably best not to invest in a prepaid tuition plan if you have an option.
College savings plan
advantage
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Assets held in college savings plans
generally receive more favorable financial
aid treatment than pre-paid tuition plans.
Financial aid treatment for college savings
plans depends on whether the assets held in
the plan are considered to be assets of the
parent or the student.
Where you save matters
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According to Federal Methodology, about
6% of parental assets, in contrast to 35% of
student assets, are expected to be
contributed toward the student’s college
expenses for each academic year.
According to Institutional Methodology, 25%
of student assets are expected to be
contributed towards a student’s college
expenses each year
An example
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Mary’s parents saved $40,000 for her in an UGMA account
through a one time gift from her grandparent’s estate. When
she applies for need-based aid, her student contribution from
assets is between $10,000 and $14,000 depending on what
formula is used.
Bill’s parents also received $40,000 but opened up a 529
savings plan in their name with Bill as the beneficiary. When
he applies to college, his student contribution from assets is
$0. His parent’s contribution from assets increases by
approximately $1,600 to $2,400, depending on which formula
is used.
The net difference is at least $8,400 in financial aid for the
family.
Control of the money
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In the previous example, the money from Mary’s
UGMA account is considered a student asset
because that’s exactly what it is – Mary’s asset.
Instead of going to college, Mary could also choose
to spend that money on a new BMW and a shot at
Hollywood!
Bill however, does not own any assets. He is the
beneficiary. If Bill leaves school to join the circus,
his parents can designate another sibling to receive
the money, or they can choose to take the money
for themselves and pay taxes on it. No BMW for
junior!
Another wrinkle
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Since 529 plans are considered to be the
property of the account owner, and not the
beneficiary, anyone can own one.
This means that grandparents and friends of
the family could start accounts for a student
who is not their child.
Under current financial aid rules, this
information is not collected, and is therefore
invisible to a financial aid office when
determining the family contribution.