|
Frequently Asked Questions (FAQs)
About 529 College Savings Plans
What is a 529 College Savings
529 Plan?
A 529 College Savings Plan is an investment plan established and maintained
by a state to assist families saving for college expense. These plans
are created under federal law and allow for income tax-deferred growth
on the investments and income tax free withdrawal from the account if
the assets are used for "qualified higher education expenses".
< Return to FAQ Index
How do I open a 529 College Savings Plan account?
Each State has a 529 Plan either in place or under development. The plan
can be accessed via the Internet or by contacting the financial services
company hired by the State to administer the Plan.
< Return to FAQ Index
What are the benefits of a 529 College Savings
Plan?
The 529 College Savings Plan allows assets to appreciate on an income
tax deferred basis and provide income tax free withdrawals if the assets
are used for qualified higher education expenses.
< Return to FAQ Index
Are there income limits or thresholds which phase
out or eliminate the ability to contribute to a 529 College Savings Plan
account?
No there are no income or other limits on the ability to contribute to
an account other than the maximum funding level each state designates
for its particular plan.
< Return to FAQ Index
Who can establish a 529 College Savings Plan?
Any person can create a 529 College Savings Plan for any other person
or for the benefit of himself or herself. As long as the assets are withdrawn
for use for qualified higher education expenses the growth on the investments
will be tax-free. This creates an opportunity allowing people to begin
saving for possible graduate school or professional school later on in
life and not only for children's higher education expenses.
< Return to FAQ Index
Once the 529 College Savings account is opened
and the beneficiary is named can we change the beneficiary?
The 529 College Savings account allows for the change of beneficiary
at any time by the account owner. Certain beneficiary changes are tax-free
and other changes result in taxation. Care must be had in making beneficiary
changes.
< Return to FAQ Index
Can the owner of a 529 College Savings Plan account
close the account and take back all of the money?
Yes the owner of a 529 College Savings Plan account can withdraw all
the funds in an account at any time. This will lead to income taxation
on the earnings on the account as well as a 10% penalty for withdrawing
the funds and not using them for qualified higher education expenses.
< Return to FAQ Index
Who is allowed to be a beneficiary?
Any person can be a beneficiary whether it is a related person such as
a child, grandchild, spouse, etc. or someone who is not related. The beneficiary
must be a US citizen or a resident alien. You can also establish the account
for yourself as the beneficiary.
< Return to FAQ Index
Once an account is established, who retains control
over the investment decisions?
The Plan Managers each establish certain investment portfolios that
you can invest in. Federal law requires that the consumer have no direct
control over investment choices, and as such, Plan Managers have provided
a large number of varying options for the consumer to select for investing
these funds.
< Return to FAQ Index
Can anyone contribute to a 529 account maintained
for a beneficiary?
Each state's plan is slightly different, however, as a general rule most
Advisor type plans allow for any person to make contributions into an
existing 529 Plan account.
< Return to FAQ Index
What are the most common investment options given
by Plan Managers?
The most common investment offerings include age based allocation investments
that are geared towards your child's age and the year in which he or she
will attend college. There are also asset allocation investments, growth
investments, aggressive and conservative investments as well as a variety
of equity and fixed income options within most plans.
< Return to FAQ Index
Can you change investment options once they have
been selected for the 529 College Savings account?
The investment option chosen for a 529 College Savings Plan account can
only be changed once every twelve months. However, each time a new contribution
is made to a 529 College Savings Account a different election can be made
with respect to how these newly contributed assets are to be invested.
< Return to FAQ Index
Is there a federal deduction for contributing
to a 529 College Savings Plan?
No at the present time there is no federal deduction for contributions
to a 529 College Savings Plan.
< Return to FAQ Index
Are there state deductions for contributions to
a 529 College Savings Plan?
Yes, many States have laws allowing for a deduction on personal income
tax returns for contributions made by its State residents to the Home
State 529 College Savings Plan.
< Return to FAQ Index
Are the withdrawals from a 529 College Savings
Plan free from federal income tax?
A withdrawal from a 529 College Savings Plan is free of federal income
tax if the proceeds are used for "qualified higher education expenses".
< Return to FAQ Index
Are withdrawals for 529 College Savings Plans
free from state income tax?
Withdrawals from a 529 College Savings Plan may be taxed to you depending
on your state of residency. Many states have adopted the federal exclusion
of these plan proceeds from income tax and as such these states will not
tax distribution. Other states do not have their own income tax and again
they would not be taxing distributions. Still other states have state
income taxes and have not adopted federal law, in which case these states
will tax distributions from a 529 College Savings Plan account.
< Return to FAQ Index
Can the 529 College Savings Plan assets be used
for all colleges and universities?
The 529 College Savings Plan assets can be used for most accredited institutions
of higher education in the United States. Generally, those schools, whether
college or graduate school, vocational or trade school, that participate
in the federal student aid program are eligible for participation in the
529 College Savings Plan.
< Return to FAQ Index
How do you change the beneficiary on a 529 College
Savings Plan account?
Each Plan Manager will maintain their own forms for purpose of updating
beneficiaries on accounts so that a change of beneficiary form can be
signed to reflect a new beneficiary.
< Return to FAQ Index
Does the changing of a beneficiary generate an
income tax?
Depending on the relationship of the new beneficiary to the old beneficiary
may determine whether there is an income tax, penalty tax or gift tax
on the change of beneficiary.
< Return to FAQ Index
Can I borrow money from the plan or use the plan
as security for a loan?
No, federal law specifically provides that you cannot use the account
as collateral for a loan or borrow money from the plan.
< Return to FAQ Index
What happens if money is withdrawn from the plan
and not used for "qualified higher education expenses"?
When assets are withdrawn from the plan and not used for "qualified
higher education expenses" an income tax must be paid by the owner
on the assets withdrawn, as well as a 10% penalty on the income.
< Return to FAQ Index
Who will own my account if I pass away before
the account is fully utilized?
Under the existing ownership rules, an account owner has the ability
to name a successor owner on the account if he or she should die. If no
successor owner is named, then the owner's Last Will and Testament will
determine who the new owner will be.
< Return to FAQ Index
How does the 529 College Savings Plan affect qualification
for financial aid?
Under existing rules, a 529 College Savings Account will be treated as
an asset of the owner and not an asset of the beneficiary. For this reason,
care should be given to structuring ownership of the 529 College Savings
Account to be certain it minimizes its impact on obtaining financial aid.
< Return to FAQ Index
Are 529 College Savings Accounts taxed to the
owner if the owner should die?
The 529 College Savings Plan Account is not taxed to the owner should
the owner pass away while retaining control of the 529 College Savings
account unless the owner had made a large gift and was prorating the annual
gift tax exclusion over a number of years and died during the term of
years.
< Return to FAQ Index
Can the 529 College Savings Plan Account be obtained
through an employer and be payroll deducted?
Yes, 529 College Savings Plan accounts are becoming a popular voluntary
corporate benefit and afford the employee the same 529 College Savings
Plan opportunities at a lower cost and allows for the use of payroll deduction.
< Return to FAQ Index
Can Coverdell Savings Account assets be transferred
into a 529 Plan account?
Yes, if the beneficiary of the Coverdell Account is the same beneficiary
for whom the 529 Plan is established, then the assets in a Coverdell Account
can be transferred, tax free, to a 529 Plan account.
< Return to FAQ Index
More Information
If you have a question about 529 Plans or financial planning for education
that is not addressed here, we invite you to contact
us for more information.
|
