529 Plan Summary

College Savings Plans - the 529 Plan

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Question or Topic

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The Question:

Explain the 529 Plan

Objectives

Learn about the 529 plan and how it compares to other tax incentives for post-secondary education.

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The Answer

Discover the Benefits

The Higher Education 529 Fund program offers many unique advantages.

Tax Advantages

Tax-deferred growth. You don’t pay taxes on the account as it grows, which creates the potential for faster investment growth.
Tax-free withdrawals. Withdrawals used for tuition, room and board, books, fees and certain equipment required at eligible educational institutions are exempt from federal income tax.
Gift-tax advantages. Contribute up to $11,000 annually on behalf of a student ($22,000 for married couples) without having to file a gift-tax return or pay gift taxes.

Flexibility and Control

Affordable. Contribute through a low minimum initial investment or low monthly contributions.
No income restrictions. Establish an account for a student in the Higher Education 529 Fund regardless of your income level.
High contribution limits. Generally, you can make contributions until the account balance reaches $269,000 per child (beneficiary)—one of the highest limits around.
Versatility. Money invested can be used at accredited public or private colleges, trade or graduate schools in the United States.
Control. All decisions regarding the account remain under your control.

Is College in Your Child's Future?

Consider a 529 Savings Plan
With the rising costs of college tuition and expenses, it’s never too soon to begin planning your child’s college investment program. So, as you embark on this planning process, be sure to consider all your investment options.

Increasingly popular with parents of all income levels is a 529 investment plan, often referred to as a 529 savings plan.

What is it?
A state-sponsored investment plan designed to promote tax-deferred growth until you’re ready to use your investment for college.¹ Named after the section of the federal tax code, 529 plans’ features differ from Coverdell Education Savings Accounts² and custodial accounts.

Some Highlights

Federal Tax Benefits.³ Earnings have the potential to grow at a tax advantage, while withdrawals are tax-free when used for qualified education expenses.
You Decide. Although your child can be named as the beneficiary, you retain control of the assets. This ensures the money you invest will be spent how, and when, you want-not when your child decides he wants a new sports car. Best of all, if your child decides against college, you don’t lose your investment—you can simply change the account beneficiary to another family member or withdraw the funds for your personal use.³
High Contribution Limits. 529 investment plans have no annual contribution limits, unlike traditional Coverdell Education Savings Accounts which cap annual contributions at $2,000. Maximum lifetime contribution limits for 529 plans, and the way these limits are calculated, vary from state to state. However, many plans allow lifetime contributions of more than $200,000 per beneficiary—and earnings growth is not restricted.
Estate Tax Benefits. Even grandparents, and other generous relatives interested in decreasing their estate’s value for tax purposes, can reap the tax benefits of 529 investment plans. Limited only by federal gift tax laws, they can each contribute up to $11,000 a year without being subjected to the gift tax. Or, if they’re in a hurry to decrease their estate’s value, they can make five years’ worth of contributions in one lump-sum—that’s $55,000 a person, or $110,000 per married couple. Of course, there are other benefits to lump-sum gifts: having a larger amount of money invested over a longer period means more time to accumulate earnings.
No Income-based Limits. Unlike Roth IRAs and Coverdell Education Savings Accounts, there are no income limits or restrictions on participation in a 529 investment plan.
Residency Perks. Some states offer tax breaks to residents who choose their home-state’s plan—and many plans are open to non-residents. There are even some plans that offer tax breaks to non-residents. Your financial advisor can help you determine which plan best suits your needs.

Residency requirements—if any—as well as fees and penalties, vary by state. Additionally, as with any investment, investing in a 529 investment plan involves risk and you could lose money. Be sure to read the terms and conditions of any plan carefully before making your investment decision.

To learn more about 529 investment plans, please contact Bob Parrish.

	529 College Investment Program	Coverdell Education Savings Account
Contribution Limits	Contribution limits of up to $200,000 or more during life of account, regardless of the beneficiary’s age.	Annual contribution limit of $2,000 for each child under 18.⁴

Uses	Used for qualified higher education expenses. Funds may be used for accredited colleges and universities Can be used to pay for any type of qualified education expenses such as tuition, fees, room and board, books and supplies.	Used for qualified higher education expenses. Funds may be used for public or private elementary and high school expenses, as well as college expenses. Can be used to pay for any qualified education expense such as tuition, fees, room and board, books and supplies.

Tax Considerations	Account beneficiary can be changed to another family member, if original beneficiary does not attend college, without any tax implications. Earnings accumulate tax-deferred. Withdrawals are free from federal taxes and penalties, if used for qualified higher education expenses.	Account balance can be transferred to another family member without tax penalty. Earnings accumulate tax-deferred. Withdrawals are free from federal taxes and penalties, if used for qualified higher education expenses.

Eligibility	Anyone is eligible to participate. There are no adjusted gross income (AGI) limits to meet.	Any person can establish an account for a child, however they must meet certain AGI limits.

1 Please consult Bob Parrish CPA PC before making any decisions, taking actions or determining this is suitable for you

² Formerly known as Education IRAs.

³ You may withdraw funds from your account—for your own use—at any time, but earnings will be subject to federal income tax. The tax is based upon the account owner’s, not the beneficiary’s, ordinary income tax rate plus an additional 10 percent penalty for all non-qualified withdrawals.

⁴ Contributions made on behalf of a special needs beneficiary who is older than 18 are allowed—but qualified withdrawals generally need to be completed by the time the beneficiary turns 30.

Solutions Solutions are dependent upon facts & circumstances, law and the objectives. These elements vary from one time to another, from one circumstance to another and from person or entity to another.

Kit to Prepare for Your Adviser

	Financial Needs Fact Sheet
	Client Profile Fact Sheet
	Customer Account Information

1. Check out your state plan for tax advantages. A tax break going in, such as the NY, MD and CA plans are attractive. Tax breaks on withdrawals, such as NC, are minimally attractive.

2. Cost Issues - minimum-maximum monthly contributions; annual fee; cost to move to another state 529 (range from $0-$50)

3. Investment options - more is not necessarily merrier. However, at least 5 choices of investments, including a money market, bond fund, large cap, small cap. The age-weighted option is an add on bonus - but not a requirement.

4. Management stability and track record- NOT looking for number 1!! However, a long term fund manager with a competitive track record.

5. Transparency - this will become a big issue in the next year or so. Many of the current 529 offerings have mixed and matched mutual funds. Good for diversity. Bad for tracking and comparing returns. A few of the 529's, offer 100% transparency. The fund you're able to invest in outside of the 529 Plan is virtually identical to the one within, thereby creating an easy "apples to apples" comparison of long term fund performance.

Comparison of Ways to Save and Pay for College and Advanced Degrees

	529 College Savings Plan	State Prepaid and Savings Plan	Mutual Fund in Parent's Name	Coverdell Education IRA	ROTH IRA	UTMA/ UGMA
Income Limits of Investors	None	None	None	Yes- AGI cap	Yes-AGI cap	None
Maximum Yearly Contribution	$10,000 or $50,000 in year 1 of 5 year period.	Varies by State	None	$2000	$3000	None
Tax Benefits	Qualified withdrawals free of federal tax. State: Varies on investment and withdrawal	Federal: None State : Varies on investment and withdrawal	Federal: None State: None	Federal: Yes State: Yes for qualified expenses	Federal: Yes on withdrawals only State: Yes on withdrawals only	Federal: None State: None
Tax Deferred Growth	Yes	Yes	No	Yes	Yes	No
Who is taxed for qualified withdrawals	Beneficiary- at their rate	Beneficiary- at their rate	Owner is taxed annually at the capital gains rate	Tax Free	Tax Free	Beneficiary- at their rate. Limited amount may be Federal tax exempt
Account Owner-the party who controls withdrawals	Parent/Participant Not Beneficiary	Parent/Participant Not Beneficiary	Parent/Participant Not Beneficiary	Parent/Investor Not recipient	Individual. Most likely parent.	Child at age of majority
Can beneficiary be changed	Yes	Yes	N/A	Yes	Yes	No
The funds must be used for higher education or a penalty is incurred	Yes	Varies by State	No	Yes	No	No
Penalty incurred for non-qualified withdrawals	10% and taxed at participant's rate, on growth ONLY	Varies by State	No restrictions on withdrawals	10% penalty and taxed at	10% penalty and taxed if under age 59 1/2; exceptions include higher education for family	None
Is there an age when withdrawals must begin	No	Various by state	No	Yes- completed by age 30	Yes- 70 1/2	No
Investment Options	Pre-set tracks of mutual fund baskets	Tuition units that pay for college	Wide array of choices	Wide array of choices	Wide array of choices	Wide array of choices
For Financial Aid, who owns the assets	Parent/Participant	Student	Parent	Student	Parent- but not counted as usable asset	Student

Fact Sheet

A 529 Plan is a flexible college savings program that helps make saving for a child's higher education easier. It is available to everyone: parents, grandparents, friends and family, and allows U.S. citizens and permanent residents to save today to meet the rising costs of higher education tomorrow.

A Tax-Advantaged College Savings Opportunity You Can't Pass Up

A 529 Plan offers you many benefits:

Tax-Free Earnings Growth
There is no federal income tax due on any earnings while they are in your College Saving 529 account. That is, earnings are not taxed until they are withdrawn. Some states may also allow the earnings to grow state tax free. When withdrawn from the account for qualified higher education expenses, the earnings are taxed at the beneficiary's federal tax rate, which is typically lower than the participant's rate.* Distributions for qualified education expenses are federal income tax free.**

No Income Limits
Everyone can invest in a College Saving 529 Plan because there are no income limits restricting who is eligible to contribute. Other college savings vehicles, such as an Education IRA, restrict individuals from investing if their income is more than a certain amount.

Low Minimum Investments
It's easy to get started in investing in a College Saving 529 Plan today. Under some plans, with a $50 per month minimum contribution, you can enroll in one of the automatic investment plans available. If you choose to open an account by check, you may do so with a minimum initial investment of only $250. There is a $50 minimum for each subsequent investment made by check.

A Choice of Investment Options
Recognizing that each investor has a different approach to investing, a College Saving 529 Plan offers a large choice of investment options. This menu of investment options allows you to choose the portfolio that is most appropriate for your beneficiary's situation and your preferred investment approach.

Withdraw Funds at Any Time
Withdrawals can be made from your College Saving 529 account at any time, but if the withdrawal is used for non-higher education purposes, the earnings will be taxed as ordinary income to the participant (not the beneficiary) and a 10% penalty will be assessed on any distributed investment gains.

Special Gift and Estate Tax Treatment
Contributions to a College Saving 529 Plan are considered completed gifts for federal gift and estate tax purposes and are excludable from your taxable estate. You can generally contribute up to $50,000 for a beneficiary in a single year ($100,00 for married couples) without federal gift tax consequences, provided you do not make any additional gifts to that beneficiary over a five year period. As the participant, you (not your beneficiary) choose how the money is initially invested - from the investment options available in the College Saving 529 Plan.

Summary

Tax Benefits	Flexibility
Tax free earnings growth Earnings used for higher education purposes currently 100% tax free* State tax deferral	High contribution rates No income level restrictions Control of qualified withdrawals Availability of funds Freedom to choose schools Plan pays for any qualified higher education expense, not just tuition.
Estate Planning Benefits	Contributions
Gift tax exclusions Estate tax benefits: Funds contributed to a 529 account are excluded from the Participant's taxable estate for federal estate tax purposes.** After making completed gift, participant maintains control of account.	Low initial investment Yearly and monthly maximum and minimum contributions Contributions can be made monthly or quarterly Payment methods include check, electronic fund transfer, or payroll deduction.