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- Savings programs (plans) established and administered
by States for the purpose of setting aside savings for "qualified
higher education expenses".
- These programs are often referred to as "529 Plans",
named after the IRS code that outlines the details of the
plan.
- Outline of the 529 Plan
is as follows:
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a family
member setups a fund with one of the States that sponsors
529 College Prepaid Tuition and/or Savings Plans |
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most State
529 Plans have open enrollment to State residents
and non-residents. However, there are about 3-4 State
529 Plans that are closed to State non-residents (although
this number is decreasing). |
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State 529
Plans may offer different investment strategies that
the account donor may select from based on their investment
objectives |
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some State
529 Plans offer incentives such as a guaranteed return
or matching contributions |
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the
donor can roll-over the fund to another state plan
at least once every 12 months |
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all plans
are available to qualified participants regardless
of age and income |
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the account
donor will name a beneficiary to the fund, which can
be changed at any time |
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you may setup up your
own savings plan naming you as the beneficiary if
you plan to go back to school |
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contributions
can be in the form of scheduled donations that can
range from $15 per month or more, or contributed at
once up to the aggregate maximum of $250,000 |
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you can contribute
into more than one state's plan up to the maximum
aggregate amount: $250,000 |
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key
benefits of the program is its exemption from taxes
if the plans meets basic IRS requirements — see
tax discussion below |
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many states
offer their own state tax exemption rules |
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the "named"
beneficiary can withdraw funds from the 529 Plan "tax-free"
to pay for qualified education expenses; i.e., tuition,
room & board, books, and fees |
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the donor
maintains complete control over the account, naming
the beneficiary and controlling how the funds may
be used |
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the donor
can transfer the account to another beneficiary if
the original beneficiary decides not to attend school |
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there
are two-types of plans (link below):
- Prepaid College Tuition Plans
- College Savings Plan
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you can find more
detailed information at:
National Association of State Treasurers:
http://www.collegesavings.org/ |
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Several key tax advantages are available:
- Tax exempt earnings:
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earnings from your investment
are tax free as long as the money stays into the plan
and is used for "educational purposes" |
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"educational purposes"
include tuition, room & board, books, supplies,
and fees |
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there is a federal penalty fee of 10%
if the earned funds are withdrawn for "non-educational"
purposes — state penalties
may also apply |
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the earned portion of
non-qualified withdrawals will be counted as taxable
income to the donor |
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- Withdrawals from the fund
are exempt from taxes:
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starting in January 2002,
all qualified distributions from the fund are exempt
from federal taxes |
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the exemption applies to
the increase in value of pre-paid tuition units at
a state-sponsored plans |
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- Plans can be rolled over:
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participants
can transfer their money from one state's 529 plan
to another state's 529 plan at least once every 12
months |
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rollovers allow participants
to change their investment strategy if another plan
better matches their objectives |
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rollovers to another plan
can occur at any time when a change of beneficiary
to the plan has been made |
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- Expansion of the term "family
member":
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participants can open a
fund for any "family member", which has
been expanded to include first cousins |
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donors maintain
complete control over the fund, naming a "family
member" as the beneficiary |
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the account
donor may change the beneficiary at any time |
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- Contributions to 529 Plans:
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participants can make contributions
to the account ranging from $15 per month to an aggregate
total of $250,000, over a scheduled contribution period
or all at once |
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contributions
made to a plan qualify for the $10,000 annual gift
exclusion |
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up to $50,000
($100,000-joint) may be "gifted" into the
plan without a gift tax. The $50,000 contribution
can be treated as a contribution made over a five
year calendar period (assuming that no other gift
is given to the beneficiary within 5 years) |
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- You can switch from one state plan
to another state plan at least once per year — most
savings plan are open to all resident and non-resident participants.
- Proceeds may be used at any school your beneficiary decides
to attend — public or private, in-state or out-of-state.
- Qualified distributions from the fund are exempt from
Federal and most state taxes.
- View State College Savings Plans:
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Notes:
Student Financial Aid Process
- Review our notes in our College
Planning Center on the student financial aid process:
Note 2: qualifying
for student financial aid
Note 3: reviewing
the financial aid process
- 529 Savings Plans are counted as assets of the parent
or guardian when calculating the "Expected Family Contribution"
(EFC).
- The portion of the 529 Plan that will be included is 5.6%,
or less, of the funds value for each academic year.
- Funds used from the plan to pay for the beneficiary's
education costs will be included next year as income to
the student when considering eligibility for financial aid.
- The portion of funds included as income may vary by institution.
In addition the formula used to calculate EFC frequently
changes. How 529 plans will be treated in the future is
too premature to review at this time.
- Note that most financial aid comes in the form of loans.
So the inclusion of 529 plans may not affect eligibility
for student loans.
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Guides to Lower Bills —
Increase Income |
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