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Education Financial Services, Your 529 Advisors

Frequently Asked Questions
Table of Contents

Features of a 529

Investments of a 529

Education purposes of a 529

Taxation of 529’s

What is a 529 plan?

What is a 529 plan?
A 529 plan is an investment plan designed to help families save for future college costs. 529’s are considered to be “state sponsored” because each state has their own unique plan. In some cases, states offer more than one 529 plan. 529 refer to Section 529 of the Internal Revenue Code.

Features of a 529

What are the tax incentives for investing in a 529 plan?
First, any gains on your investment would be federally tax free. When distributions are made for qualified education expenses, the distributions are federally tax free, as well.

Secondly, some states offer state tax incentives to participate in their own state plan. Furthermore, each state treats the amount of the tax incentive differently. Be sure to read your prospectus to determine what the tax savings would be or consult with your financial advisor.

What is the structure of a 529 account?
There are 5 components to any 529 plan:

Account Owner
Successor Owner
Beneficiary
Investment Options
Contribution Methods

The Account Owner is the designated individual who controls all decision making of the account, such as, money distributions, investment decisions, and beneficiaries. The account owner also designates the successor owner in the case of the death of the account owner.

Control of the 529 account is very important when comparing 529 plans to other investment options. For instance, custodial accounts, UTMA’s or UGMA’s, will experience a legal transfer of ownership from custodian to child at certain age limits (the age limits are state determined). Once that transfer occurs, the guardian no longer determines how those dollars will be spent. The 529 eliminates this concern.

The Successor Owner is the designated individual who assumes responsibility for the account in the event of the death of the account owner.

The Beneficiary is the individual who will ultimately receive the money for education purposes. The beneficiary does not have to a child. In fact the account owner and the beneficiary can be the same person. Also, the beneficiary can change once a year throughout the lifetime of the account.

Investment Options vary by plan. Some plans offer many choices but others are very limited. Some plans offer very aggressive investments and some offer very conservative investments. It is important to consult with an advisor if you are not comfortable with these decisions. Most importantly, it is important to understand that all 529 plans are investment vehicles and you must understand the associated risk of any investment program.

Contribution Methods

Contributions can be made by:

Payroll deduction (if your employer approves this method and the 529 plan allows it)
Electronic funds transfers from checking and/or savings accounts
Lump sum contributions by check.

There are distinct minimum requirements for each of these contribution methods and they vary by plan. Please consult with the prospectus or your financial advisor to determine what these limits are and what you can afford (all contributions are after tax dollars).

How much can I invest in an account?
Each 529 plan has different maximum contribution limits. The low end of the scale allows $100,000 per account and the high end of the scale allows $305,000 per account.

Typically these amounts are adjusted on an annual basis to adjust for estimated education inflation. Each plan has a different minimum contribution for each contribution method. Please consult with Education Financial Services to know your options.

Who can be a beneficiary?
Anyone can be a beneficiary. You can set up an account for your child, your grandchild, your spouse, another relative, yourself, or even someone not related to you. Some plans have age restrictions so review your prospectus or review with an advisor.

Who can set up a 529 account?
Anyone who is a U.S. citizen or legal U.S. resident can establish a 529 account. Furthermore, you can invest in any 529 you desire. You are not required to only participate in your state plan. Due to the complexity of 529 plans, it is important to determine which 529 plan is the most appropriate plan for your needs and interest.

Can someone other than the account owner contribute to a 529 account?
Yes. Anyone can contribute to the account. In fact, grandparents, aunts, and uncles may also contribute on behalf of the beneficiary. However, only the account owner can make decisions regarding the account. Keep in mind, that each plan has minimum contribution limits which must be satisfied.

What if my beneficiary does not go to college?
If the beneficiary you named does not go to college as anticipated, you have three options:

Leave the money in the account. The beneficiary may ultimately change their mind decide to attend college;
Withdraw the money from the account. However, you will be subject to the assessment of income tax and the additional 10% federal tax on earnings;
Change the beneficiary. You can name another member of the beneficiary's family as the new beneficiary of the account without any negative income tax consequences.

What are holding periods?
Holding periods are restrictions established by some states which require that your money stay in a state’s 529 plan for a determined amount of time before withdrawals can be made. The holding periods range from 1 – 3 years and are state specific. The purpose of the holding period is to discourage individuals from receiving a state tax deduction from their state and the rolling the money into another plan. Individuals should know that if tax savings are received and then the money is rolled into another plan prior to the holding period ending, you will receive a bill from your state for that tax savings.

Investments of a 529

What are my investment options?
Each plan has different investment options. Most plans refer to the investment options as portfolios because the investment allocations are predetermined. All 529 plans are comprised of mutual funds. No individual stocks or bonds are allowed and all mutual funds are specific to the 529 plan offering.

The investment options are typically categorized as Age-Based, Static, or Custom.

Age-Based portfolios change the investment allocation based on the beneficiary’s age. Typically, the younger the beneficiary the more aggressive the investments and then change over time becoming more conservative as the beneficiary approaches college.

For illustration purposes only

Static portfolios maintain the investment objective for the life of the account.

Conservative - 60% equities, 30% bonds, 10% cash (lowest risk, lowest return)
Moderate - 80% equities, 20 % bonds (average risk)
Aggressive - 100% equities (greatest risk)
	Graphs are for illustration purposes only

Custom portfolios allow the individual investor to choose which mutual funds they wish to invest in, thereby, creating your own custom portfolio.

Some 529 plans use a multiple manager approach. In other words, the 529 plan administrator hired several money managers and designed portfolios using the expertise of those various money managers to satisfy the investment objective.

Due to the complexity of the investment options, you should consult with an advisor to determine which plan is most appropriate for your needs.

Can I change the investment options for the assets in my account?
Yes. You can reallocate your investment portfolios once every calendar year or when you change beneficiaries. New contributions to your 529 can be invested any way you choose.

How can I contribute to my account?
You may contribute funds by check, wire transfer or an automatic purchase plan. Payroll deduction is allowed only if your employer will approve this method and if the 529 plan allows for payroll deduction.

Can I roll over funds from another 529 plan?
Yes. All 529’s will accept funds from other 529 plans. However, the existing 529 must be liquidated prior to the transfer. This transfer can be done without tax implications.

Can I fund an account with assets in an existing UTMA/UGMA?
Yes. However, assets in a UTMA/UGMA must be liquidated and the cash proceeds contributed. Consequently, a tax issue may arise. Account owners are advised to consult a tax advisor before transferring funds from an existing UTMA/UGMA account.

What are the principal risks of the program?
529 plans are investment accounts and therefore are subject to the investment risks of investing in the mutual funds under the investment option(s) chosen. There is no assurance that any option will have any particular level of return or will not suffer losses and there is no guarantee of the amount that will be available in the account.

Education purposes of a 529

What are the permitted uses of money in my account?
Money in your account may be used to pay for qualified higher education expenses of the person who is the beneficiary. Withdrawals of earnings for purposes other than paying a beneficiary's qualified higher education expenses generally will be subject to federal income tax and an additional federal 10% tax payable to the IRS.

What is considered a qualified higher education expense?
Qualified higher education expenses include:

Tuition, textbooks, supplies and equipment (computers) required for the enrollment of the beneficiary at the educational institution. Room and board and meals are allowed as well.
For students living off campus, including those who live with their parents or guardians, withdrawals may be used to pay up to the amount determined by the educational institution for room and board.

Existing school loans are not considered qualified higher education expenses.

Will any college or university accept 529 withdrawals?
Most community colleges, public and private colleges, universities and vocational schools in the United States are eligible educational institutions. Some foreign institutions are also eligible. To find out if a school is eligible, go to the Department of Education’s website at www.fafsa.ed.gov.

What happens if the beneficiary receives a scholarship becomes disabled or dies?
The account owner can withdraw the assets if the beneficiary receives a scholarship, becomes disabled or dies. A withdrawal on account of the beneficiary’s death, disability or receipt of a scholarship (to the extent of the scholarship award) is subject to federal income tax but the 10% federal tax penalty is waived.

How will a 529 plan affect my child's chances to qualify for financial aid?
Assets in a 529 account are treated as an asset of the parent or other account owner in determining eligibility for federal financial aid. Expected contribution towards your child's college costs, for parents, will include 5.6%, or less, of the value of your account for each academic year. Comparatively, 35% is the assessment against assets owned in your child's name or in a custodial account.

Taxation of 529’s

Is there a federal tax deduction for contributions?
No. Contributions are made with after-tax dollars. However, the growth of the money is federal tax free.

Is there a state tax deduction for contributions to a 529 account?
Maybe. Some states allow tax deductions and some do not. State tax savings are Federally taxable, consult with your tax advisor to determine if a state tax incentive is suitable for your needs.

What are the federal estate-tax consequences?
The value of the account is not included in the account owner’s estate for estate-tax calculation purposes. However, if the account owner dies within five calendar years of making an election to take advantage of the special annual gift-tax exclusion rule, the portion of the contribution allocable to years after the year of the account owner’s death will be included in the account owner’s estate for estate-tax calculation

Securities offered through Medallion Investment Services, Inc.*
Member NASD & SIPC (410) 544-8400
Insurance products offered through Medallion Insurance Services, LLC*
*Wholly-owned subsidiary of TMG Holding Company, Inc. T/A The Medallion Group

Non qualified withdrawals are subject to federal and state income tax and a 10% penalty.

The federal tax treatment of 529 Plans under the Economic and Tax Reconciliation Act of 2001 will expire after December 31, 2010 unless Congress extends the law.