What is a 529 Plan?
529 savings plans allow a parent, other relative or
friend to open a tax-deferred college savings plan with
as little as $25 to start in some states. All 50 states
now offer their version of a 529 college saving plan,
and you can usually access the details through your
state treasurer’s office. A 529 college savings plan is
NOT the same thing as a 529 prepaid college tuition
plan. Prepaid tuition plans are just that – tax-deferred
savings plans that allow you to save for tuition for
in-state schools.
Do 529
plans have tax advantages? Asset growth in a 529
plan is tax-deferred. Under the tax law passed by
Congress in 2001, any withdrawals from 529 plans after
2002 through the year 2010 are tax-free if used to pay
for a beneficiary's college tuition, fees, books,
supplies, and — for students enrolled at least half time
— room and board. The 2002 federal tax law change also
allowed account holders to roll over funds from one
state's 529 plan to another state's plan once every 12
months, if they move or if they’re unhappy with the
current plan. One can transfer funds to another 529 plan
at any time as long as the beneficiary is changed.
How can a
whole family benefit? Everyone up and down your
so-called “lineal family tree” can benefit from the tax
breaks and educational rewards of these plans. In fact,
if your child gets a full scholarship to Harvard, that
means any close family member can use the money in that
account to go to school themselves – great for
career-changers. Better still, parents, grandparents,
siblings and friends can make deposits to these plans
and get a tax benefit. One important note – all funds
must be distributed to the initial beneficiary or
transferred to another family member before the initial
beneficiary turns 30.
Does my
kid have to go to school in that state where the plan
is? No.
How do I
pick the right plan? Your financial planner can help
you sort through the details of various state plans.
There are various online services that now rank the
offerings of each state’s plan.
How much
can I put in?
Over $230,000 per beneficiary in
many state plans.
What about fees? They vary from state to state,
and they’re very important to watch. Most states have a
no-load option in addition to advisor-sold plans, so
review and discuss those alternatives.
Who picks
the investments? Each state typically selects
qualified, nationally known investment managers to
create the plan choices in each state. Most state
treasurers’ offices feature direct links off their Web
sites to their particular in-state plan with
instructions on how to open accounts. The funds can be
invested in a variety of investments from
low-to-aggressive risk.
Who
retains control of these funds? The family member
who opens the account.
Do 529 Plan savings hurt financial aid? They
could, depending on the school and how they value these
assets. Don’t be surprised if the school requires full
disclosure of 529 funds—a portion of which could be
deducted from that total aid package.
What happens if there’s an emergency? You’ll pay.
The money in a 529 savings plan can only be used for
higher education costs without negative tax
consequences. If the money is used for any other
purpose, the earnings are taxed at the account owner’s
ordinary tax rate and subject to a 10 percent penalty
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December 2006 — This column is produced by the Financial Planning Association, the
membership organization for the financial planning community (www.fpanet.org/public).
