INDIVIDUAL 529 College Tuition Plans Come of Age

The "529 Plan" has now graduated to become a permanent fixture in college-saving plans. Last year, Congress and the Administration dropped a Sunset provision that had scheduled the popular college tuition programs for expiration in 2010. Instead, they made the 529 Plan (a reference to its section in the Internal Revenue Code legally known as a Qualified Tuition Plan) permanent. There are two types of qualified tuition programs. With the prepaid program, contributions and earnings are used to purchase tuition credits for a designated beneficiary. On the other hand, the savings account plans are accounts set up specifically to pay for qualified higher education expenses of a beneficiary.

529 Plans Offer Numerous Benefits
A 529 College Savings Plan is a state-sponsored, tax-advantaged savings plan that can help families and individuals save for higher education expenses. Contributions on behalf of a beneficiary can grow until they reach $200,000 or $300,000, depending on the state. These plans offer a number of benefits:

• Parents and guardians retain complete control over disbursement of 529 funds, unlike Uniform Gift to Minors Act accounts which become the property of the student upon reaching the age of majority, either 18 or 21 years of age depending on the state in which the account was opened.
• Contributions sometimes up to $300,000 per account are allowed. The contributions allowed are regulated at the state level and therefore vary from state to state.
• The contributor is not subject to any adjusted gross income limitations.
• Savings grow tax deferred.
• Qualified tuition programs can be used at most accredited colleges and universities in the U.S. and at many colleges abroad.
• Withdrawals are federal income tax-free when used for qualified education expenses. Qualified expenses include tuition, fees, eligible room and board, books, supplies and required equipment for attendance at a higher education institution.
• In addition to the federal tax benefit, many states offer a state income tax deduction for contributions to their plans as well as state income tax-free withdrawals for qualified expenses.
• Unlike money for some other college savings vehicles, the account owner maintains control over all of the funds in the 529 College Savings Account.
• Savings can be invested in a variety of investment vehicles, most often through mutual funds offered by leading money managers such as Vanguard and Fidelity.
• Money in 529 accounts can be tapped for other purposes in cases of emergency. However, a 10% tax penalty is due on top of income taxes.
• If the child doesn't want to go to college, the account can be rolled over to another family member without adverse tax consequences.
• If the child gets a scholarship, any unused money can be withdrawn without paying any penalty (just the tax).

The Tax-Free Gift of Education
Parents, grandparents or other relatives can contribute as much as $60,000 in a single year (five times the normal exclusion of $12,000 per year) for each beneficiary without incurring the federal gift tax as long as they don’t make any other contributions or gifts to the beneficiary for four more years. Married persons filing jointly can give up to $120,000 in a single year without being subject to the gift tax. The contribution is considered a completed gift and is excluded from the contributor’s estate. However, if the donor makes the five year election and dies before the close of the five-year period, the donor must include the portion of such contribution allocable to the period after the date of death of the donor.

While 529 plans offer a great tax-advantaged way to save for college, if the donor chooses a plan that invests in the stock market, the account will be subject to the same risks as any other market investment (i.e. it has the potential to lose money). Therefore, donors need to pick investment options carefully, with a particular eye on fees and loads. Lastly, donors should be aware that contributions to a qualified tuition program are not deductible for federal income tax purposes.

For more information, please contact Sherry Reisch at sreisch@gellerco.com.