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529 SAVINGS PLANS
Posted on: 2005-09-09 13:44:30 529 SAVINGS PLANS By Ryan Latimer August 15, 2005 The 529 college savings plans are one of the most important financial and tax developments in recent years. The plans follow similar guidelines as an IRA and 401k do. 529 college plans are a tax deferred method of making contributions for college. They are used only for educational expense and should not be treated as a retirement account. These plans offer numerous benefits to those who invest and are not just for parents and grandparents. Every investor should be familiar with the basics about these educational plans. The 529 savings plans get their name from a portion of the IRS code. Congress enacted Section 529 of the Internal Revenue Code, which sets the rules and groundwork for a Qualified Tuition Programs. Section 529 plans allow investors & beneficiaries to accumulate a large amount of worth (wealth) in approved education savings plans sponsored by individual states. The states set the rules, based on certain federal guidelines, as to how the money donated may be invested. They also determine how long the plan can stay in existence and for whom the money may be spent. The account must be owned by an adult, for the benefit of a named beneficiary (usually a minor at the time the account is established). Once the money goes into the account, it can only be removed from the estate of the owner and will be considered a completed gift, without the requirement of a gift tax providing the beneficiary is no more than one generation removed from the owner. However the donor/owner of the account maintains complete control over the account, and will determine when, how much and to whom the distributions will be made. Remember, if the money is used for the beneficiary's higher education needs (including tuition, books, room and board) the earnings from the investment can be distributed tax-free. Some states even allow a deduction against state income taxes for the contributions. Check with your local plan administrator to see if your state offers any tax breaks for investing in a 529 plan. They money can be used for other reasons, but remember, if the money is paid out to the beneficiary for any other reason, the earnings are taxable to the beneficiary and not the owner. The beneficiary can be subject to an additional 10% excise tax. Multiple accounts can be set up for multiple beneficiaries. But the accounts are subject to the per-beneficiary account limits set by the each state that sponsors the plans, generally ranging from $100,000 up to $250,000. Owners may open accounts in multiple states. Each state manages the range and style of investment various educational investment plans. In most cases, the investments go into bundled variable or mutual fund products that are selected by the state. However, a number of states offer the more conservative prepaid tuition plan option. The latter are geared to the rising cost of education determined by the states. According to the College Board, the education savings have had an averaged compounded return of 6.3% since 1991-92. Since a large amount of wealth can be accumulated outside of the estate of the investor and/or beneficiary, the planning opportunities can be intriguing. To date there are around 11 states that help investors protecting the assets of the 529 plans from creditors. Legally, a donor/beneficiary could create multiple plans in multiple states, shielding a large amount of wealth from creditors¦while still maintaining all control of that wealth. These plans in essence can act as a safe haven of wealth and can be planned to stretch out to benefit generations to come. Another benefit could be to provide retirement income for the owner. Consider this example: assume that James established a plan naming Braden as the beneficiary. Braden gets a scholarship and doesn't touch the money in the account. James could delay distributions. (States have different rules regarding distributions, some state require distributions must be made within 10 years after projected college enrollment while others allow an unlimited duration.) James can name Braden's future children as beneficiary(s). Since this would be considered a generation skip, it requires the filing of a gift tax return. Another option, James could keep the account intact, taking advantage of the continuing tax deferral, and name himself as the beneficiary. He could use the money to pay for that graduate degree he always wanted or he could elect to withdraw the money for his own retirement, paying income and excise taxes on the earnings. In 2001, 529 Plan Distributions became a TAX-FREE investment. Look at some of the benefits the plans can offer: High contribution limit You can contribute up to $250,000 (contributions and earnings) depending on the individual state's plan. Contributions eligible for gift tax exclusion You may accelerate use of the annual gift tax exclusion and make a single contribution up to $50,000 ($100,000 for married couples) per beneficiary, per single year, without federal gift tax consequences. Contributions excluded from taxable estate are Funds contributed are excluded from your taxable estate and you still retain the right to determine the use of the account. Low minimum investments: Because you can open an account with any investment amount, it's easy to start saving, and continue saving with small contributions. Simplified and flexible rollover between 529 plans: Direct transfers from one 529 plan to another will be allowed for the same beneficiary. Take notice¦..you are allowed one rollover per 12-month period to new amounts distributed from a 529 plan and later re-contributed within 60 days. Expansion of room and board expenses This benefits part-time students. For students enrolled at least half time, the amount of qualified room and board expenses have increased from $2,500, for those living off campus, and $1,500, for those living at home, to the full room and board cost by each institution. Specifically, tax-free distributions will before the full amount calculated as part of the cost of attendance for federal financial aid purposes. Tax-Deferred earnings and tax-free withdrawal No Income Limits: There are no income limits restricting who is eligible to contribute. Control and liquidity: You may withdraw funds at any time for non-higher education expenses or change the beneficiary for the account. (Federal and State income tax on the earnings and a 10% penalty will apply.) Investment choices: You may choose from a variety of investment options depending on the state's 529 plan offers. Figures are showing that participation in 529 plans is growing at a steady rate. This growth can be accredited to the investment benefits that one can receive with the plans and the need to save to counter the rising cost of post-high school education. In 2000, contribution figures showed a total of $2.6 billion was invested in the 529 plans. This amount exploded to an amount of $14 billion in 2001. Some experts predict that the amount of money invested in these plans could reach $350 billion to $400 billion invested in 15 million accounts by the year 2010. |