Education Financial
Services, Your 529 Advisors
What is a 529 plan?
Features of a 529
What are the tax incentives for investing in a 529 plan?
What is the structure of a 529 account?
How much can I invest?
Who can be a beneficiary?
Who can setup a 529 account?
Can someone other than the account owner contribute to
a 529 account?
What if my beneficiary does not go to college?
What are holding periods?
Investments of a 529
What are my investment options?
Can I change the investment options for the assets in
my account?
How can I contribute to my account?
Can I rollover funds from another 529 plan?
Can I fund an account with assets in an existing UTMA/UGMA?
What are the principal risks of the program?
Education purposes of a 529
What are the permitted uses of money in my account?
What is considered a qualified higher education expense?
Will any college or university accept 529 withdrawals?
What happens if the beneficiary receives a scholarship
becomes disabled or dies?
How will a 529 plan affect my child's chances to qualify
for financial aid?
Taxation of 529’s
Is
there a federal tax deduction for contributions?
Is there a state tax deduction for contributions to a
529 account?
What are the federal estate-tax consequences?
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
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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.
Grogan Advisory Services
1709 Cherokee Road #305
Johnson City, TN 37604
518.899.6090
This website is intended for use by residents of AZ, CA, CO, IL, MA, MI, NJ, NY, OR, SC, TX, VA and WA only. The information provided is
intended for educational use only and is not meant as a solicitation in any
state where we are not licensed
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