529 Plans
What Is a 529 Plan?
529 Plans provide tax benefits on money that is saved for and spent on qualified
expenses at a qualified college. 529 Plans come in the following three types:
529 Prepaid Tuition Plan
A 529 Prepaid Tuition Plan is a smart option if you want to go to a public college
in the state where you live. When you (or your parents or guardians) open a 529
Prepaid Tuition Plan, you lock in current tuition rates at qualified in-state colleges.
This means that you pay "today's" tuition rates when you take the money from the
account to pay for college years from now. College costs have been climbing steadily,
and a Prepaid Tuition Plan can save you money. The downside is that you limit the
colleges you can choose from.
Independent 529 Plan
The Independent 529 Plan works like a Prepaid Tuition Plan and comes with the same
benefits, but it doesn't limit you to colleges in your home state. Instead, you
have the option of selecting one of 270+ colleges that participate in the Independent
529 program. A nonprofit group of colleges, not any particular state, manages the
Independent 529 Plan investment portfolio. To see if colleges that you are interested
in participate in this program, visit
www.independent529plan.org.
529 College Savings Plan
A 529 College Savings Plan allows you to use your savings to pay for tuition and
other qualified expenses at any qualified college in the country. Unlike a Prepaid
Tuition Plan, a 529 College Savings Plan lets you use your savings on more than
just tuition; qualified expenses include room and board, books, computers, and mandatory
fees. Contributions to 529 College Savings Plans are invested in stocks, bonds,
and mutual funds. The earnings you get from your invested savings accumulate tax-free,
but they are subject to market risks. The value of a 529 College Savings Plan rises
and falls with the stock and bond markets.
Setting Up a 529 Plan
To start a 529 Plan, ask your local state treasury office or qualified financial
institution. For more information on how to begin saving through an Independent
529 Plan, visit
www.independent529plan.org.
Contribution Guidelines for 529 Plans
Contribution limits and regulations vary from state to state. Here are some common
guidelines that you can expect with your 529 Plans:
- Contributions to a 529 Savings Plan may be made until the plan reaches a set
value, which can be as much as $300,000 (varies by plan)
- Contributions to a 529 Prepaid Plan may be made until the plan reaches its
contribution limit, which can be as much as $150,000 (varies by plan)
- Contributions of $13,000 to $65,000 that are made in one year can be treated as
if they were made during five years and therefore don't incur a gift tax. Remember
that additional contributions made during the remainder of the five years will be
subject to gift tax unless they are counted towards the lifetime gift allowance.
- Contribution minimums also vary by plan and can be as little as $25 a month.
- There are no contribution deadlines.
- Contributions are not deductible on federal taxes. Some states do allow contributions
to be deducted from state taxes. Each plan has different rules, so read the information
carefully.
- You are able to change or roll over your plan to another program once in a 12-month
period. For example, if your 529 Plan is not performing well, you may roll it over
to a new financial firm.
- The fund is managed by either a state treasurer's office or an investment company.
This means very little account maintenance for you.
- Contributions of less than $13,000 a year qualify for the annual gift-tax exclusion
on your income tax form.
Distribution Guidelines for 529 Plans
- Withdrawals are not taxed if they are used for qualified expenses, as specified
by the plan you choose.
- Withdrawals spent on non-qualified expenses are subject to federal taxes and a
10% penalty.
- To prevent potential fines and problems, you should make withdrawals during the
same calendar year that you pay college expenses.
Impact of 529 Plans on Financial Aid Eligibility
- A Uniform Gifts to Minors Act-529(UGMA-529) account, Uniform Transfers to Minors
Act-529 (UTMA-529) account, or parent-owned 529 Plan is reported as a parent's asset
on the
federal student aid application (FAFSA).
This means that when the federal Department of Education calculates your
expected family contribution (EFC),
it is assessed at 5.64%, which is better than being assessed at the 20% rate for
student assets. Keep in mind, a UGMA or UTMA invested in funds other than a 529
Plan will be assessed at the 20% rate for student assets.
- A 529 Plan owned by a grandparent is not included on the FAFSA when calculating
financial aid for the student.
- Qualified withdrawals are not counted as income on the next year's FAFSA application.