529 College Savings Plan

Frequently asked Questions

What is a 529 Plan?

IRS Section 529 Plans are qualified tuition programs that receive special tax treatment. These plans are specifically designed to help families of any income level save for higher education expenses. All 529 plans, are state-sponsored plans, they require state legislation to enable them.

Who can open an account?

Anyone of legal age with a valid social security number or federal taxpayer identification number who is a U.S. citizen or resident alien can open an account. Certain states have residency requirements applicable to either the owner or the beneficiary. (Example: Illinois)

Do I need to open separate accounts for each of my children?

Yes. Each account may have only one beneficiary, but you can open accounts for as many beneficiaries as you would like.

Who can be a beneficiary?

Any individual with a valid social security number or federal taxpayer identification who is a U.S. citizen or resident alien qualifies as a beneficiary.

Can I change the beneficiary? Who can I select as my new beneficiary?

The account holder can change the beneficiary at any time. If you do make a change, the new beneficiary must be a member of the family of the previous beneficiary, as defined by federal tax law in order to prevent a non-qualified distribution. For purposes of changing the designated beneficiary, a "Member of the Family" includes an individual who is related to the designated beneficiary as described below:

• Father or mother, or an ancestor of either
• Stepfather or stepmother
• Brother or sister of the father or mother
• Brother, sister, stepbrother, or stepsister
• Son or daughter, or descendant of either father-in-law, or mother-in-law
• Stepson or stepdaughter
• Son or daughter of a brother or sister
• Spouse of the designated beneficiary or any of the above individuals
• Brother-in-law, sister-in-law, son-in-law, daughter-in-law,
• First cousins

What happens if I change the beneficiary?

A beneficiary change to a "member of the family" (as defined by the IRS) of the previous beneficiary who is within the same generation (e.g., a sibling of the prior beneficiary) has no tax impact. But a change in beneficiary to a person who is in a lower generation (e.g., the prior beneficiary's child) is treated differently. The tax rules provide that such a change in beneficiary will result in a new gift from the previous beneficiary to the new beneficiary. Thus, a participant apparently could reduce the original beneficiary's unified credit amount, or create a gift-taxable event, by changing the beneficiary to a person in a younger generation.

However, by adhering to the five-year lump sum gifting provision, it would be possible to make such a beneficiary change without incurring any gift tax consequences, as is explained below. If the intended new beneficiary is in a lower generation than the old beneficiary and the account balance is more than $12,000, the participant may wish to consider transferring no more than $60,000 ($120,000 if the previous beneficiary is married) to a 529 Plan account for the new beneficiary every five calendar years. The old beneficiary therefore could elect to treat the transferred amount as having been gifted ratably over a five-year period to avoid triggering any gift-tax consequences. If the donor makes the five-year election and dies during the five-year calendar period, part of the contribution could be returned to the donor's estate. Because such a move requires careful planning, the participant and beneficiary should consult a knowledgeable estate and gift tax professional.

What happens if I change the beneficiary to someone that is not a member of the family?

This would be considered a non-qualified distribution taxable to the account owner.

Does the 529 plan account owner have to be related to the beneficiary?

No. In addition to opening an account for your child, a stepchild, niece or nephew, you may open an account for a friend or anyone who meets the eligible requirements as above.

How will a 529 plan account affect my Beneficiary's chance of obtaining financial aid?

A 529 account is considered an asset belonging to the account owner, not the beneficiary.* This is significant, because when determining financial aid, the government will assume that 35% of the student's assets will be treated as expected family contributions, or EFC, to be used to pay college expenses the following year. In this same calculation, they will assume that at most only 5.6% of the parent's assets will be treated as EFC. Assuming that one of the student's parents is the account owner of the account, assets in a 529 plan account will be treated more beneficially than the same amount of assets held in a custodial UGMA/UTMA account, which is considered an asset of the student for the calculation of EFC. In addition, if the account owner is the student's grandparent or anyone else, the assets within the account will not be considered as part of the family's EFC for the following year. One must note though, that the earnings portion of any qualified withdrawal will be treated as income to the student in that year, and will be assessed at a 50% rate as part of the family's EFC.

* Note: UTMA/UGMA 529 Accounts are considered assets of the minor.

Who controls the money in an 529 plan account?

The account owner or purchaser maintains control over all of the money invested in a 529 plan. The beneficiary does not have any control over the account.

Can I rollover assets from another state's 529 plan into my state's 529 plan without paying taxes?

Yes. You can rollover balances from another state's 529 program tax-free. You will need to complete a new Account Application along with a Rollover Request form. The designated beneficiary on the new account must be the same or a member of the same generation of the family of the former designated beneficiary. The designated beneficiary may be the same person on both accounts or a member of the family of the former designated beneficiary.

Can I open and contribute to a 529 plan account for myself?

Yes. A 529 plan allows you to name yourself as both the account owner and the beneficiary on a savings plan option account.

Can my spouse and I set up a joint account?

No. Each account must be owned by one individual or entity. But you and your spouse may each establish separate accounts for the same beneficiary or for different beneficiaries. You will also be able to name a successor owner if the original account owner dies.

How do I get started?

Simply complete the program application provided to you by your Investment Professional. Click here for form to request further information on programs by state within California, Arizona, Nevada, Oregon Washington has a state Government plan) - many states have more than 1 plan) When you establish an 529 plan, you must name a beneficiary. The minimum contribution required to open an account is $250 per portfolio. Subsequent purchases may be made with a minimum $50 per portfolio. Automatic purchase plans and Payroll Direct Deposit are also available.

Can I withdraw the money in my account at any time?

Yes. You can withdraw all or any portion of the money in your account at any time for any purpose. Withdrawals for purposes other than paying for qualified education expenses will, as a rule, be subject to federal income tax and a penalty or an additional tax of 10% on earnings.

Can I use my account to pay for any college?

The money in your 529 plan can be used to pay for qualified higher education expenses at any eligible college, university, vocational school or other post-secondary institution in the country (as well as some outside of the U.S.).

What are qualified higher education expenses?

Qualified higher education expenses include: tuition, fees, supplies, books, required equipment, and room and board. Click here for more

What are the limitations on which room and board expenses are covered?

Beneficiaries must be enrolled at least half time at a post-secondary institution for room and board expenses to be considered an eligible education expense. Room and board expenses for beneficiaries who live at home cannot exceed $1,500 per academic year. For those students living on campus, room and board costs are limited to the school's posted room and board charge. If the beneficiary lives off campus (not at home), the reasonable limit is determined by the educational institution.

Can money in a 529 plan be used for graduate studies?

Yes. The savings in your savings plan account can be used for graduate school, law school, medical school, or just about any higher educational program.

How is the money taxed when I withdraw it for educational purposes?

Qualified withdrawals are completely federal tax-free. When you withdraw funds to pay for qualified higher education expenses, there is no federal tax on the contribution or earnings portion of your withdrawal. Depending on the state, the earnings portion of these withdrawals may or may not be subject to state tax.

Can I withdraw money from the account for non-educational purposes?

Yes. The money may be withdrawn for non-education purposes, but the earnings portion of this money will be subject to a penalty and will be taxed at the account owner's income tax rate. The gain on non-qualified withdrawals (i.e. not used to pay qualified higher education expenses) will be subject to federal income tax and a 10% federal penalty. The gains on withdrawals due to death, disability or scholarship of the beneficiary are subject to federal income tax, but not the penalty. Gains on non-qualified withdrawals not on account of death, disability or scholarship will be subject to federal income tax and a 10% federal penalty.

What happens if the beneficiary receives a scholarship?

If the designated beneficiary receives a qualified scholarship, funds up to the amount of the scholarship may be returned to the account owner without penalty. The account owner must provide written notice and proof of receipt of the scholarship in order to receive any refund. A 10% penalty won't apply but the gain is subject to federal income tax.

What if my child decides not to go to college or drops out at some point?

If the beneficiary does not use the money,

• The account can be re-designated to another beneficiary who is a member of the family without tax consequences;
• The funds can remain in the account until the beneficiary returns to school;
• You can close the account and receive the balance at any time. There is a federally mandated 10% penalty for withdrawing funds this way, and earnings will be taxed at the account owner's tax rate. The penalty is waived if the distribution is due to the death or disability of the beneficiary or if a scholarship or nontaxable grant is awarded to the beneficiary.

Can I move funds between investment options?

The account owner can change investment options once a year and if/when there is a change in beneficiary.

When are earnings from the account taxed?

Distributions used to pay for qualified educational expenses are exempt from federal income taxes, and, depending on the state, from state taxation. The earnings on distributions used to pay for non-qualified expenses will be taxed at the account owners income tax rate and will be subject to federal income tax and a 10% federal penalty.

Who pays the taxes when the money is distributed from a 529 plan account to cover non-qualified education expenses?

Depending on who receives the distribution, either the beneficiary or the account owner is responsible for taxes.

Can the original 529 plan account owner establish an account and later transfer ownership of the account to someone else?

A 529 plan allows the ownership to be transferred from the original account owner to a new account owner. The original account owner must send in a signature guaranteed letter stating the change in account status, including the original owner and new owner's names, addresses and social security numbers. This letter must be accompanied by a new account application. There are no penalties or tax consequences involved in this account change.

What happens if my beneficiary already has the Hope Scholarship Lifetime Learning credits? Can they still benefit from a 529 Plan?

You can use either the Hope Scholarship or Lifetime Learning credit in the same year you take a qualified distribution from a 529 Plan as long as the qualified distribution is not used for the same expenses for which the credit was claimed.

What is the minimum investment?

For the 529 plan, the minimum initial investment needed to establish an account in the plan is $250. This minimum is reduced if you set up an Automatic Investment Plan (including Payroll Direct deposit) for as little as $50/month coming directly from your bank account or paycheck. Note: A program of regular investment cannot assure a profit or protect against a loss in a declining market.

What is the maximum amount that can be contributed?

Currently, under some 529 Plans, contributions can be made until the total value (contributions and earnings) of all accounts for that beneficiary equals $246,000. Once this limit is reached, no additional contributions will be permitted. However, with earnings, your accounts can continue to grow in excess of this limit. This amount is established by the program's rules and may change to reflect the increasing cost of higher education.

What happens if there is leftover money in the 529 Plan after the original beneficiary's educational needs have been met?

The best approach, of course, is to not allow the account to become significantly over-funded. Remember, this is a college savings plan that has some great estate planning benefits, not vice versa. If there is money remaining after the educational needs of the initial beneficiary has been met, there are a couple of steps that can be taken.

(1) If you replace the designated beneficiary with a new beneficiary who is a member of the family, then no further gift is involved, unless the new beneficiary is assigned to a lower generation than the old beneficiary. If the new designation is in a generation lower, then the old beneficiary is treated as making a gift to the new beneficiary subject to all the normal gift tax rules. In this situation, the five-year averaging election can be made by the old beneficiary for the deemed gift to minimize or avoid gift tax consequences, or,

(2) You can simply terminate the account and receive a refund of the account value, subject to income tax and the applicable non-qualified withdrawal 10% penalty. While this rescission may defeat the purpose of removing value from an estate, it certainly provides the level of control and flexibility that many individuals seek when talking to advisors about gifting and other estate reduction programs.

Can I convert a Coverdell Education Savings Account (formerly the Education IRA) into a College Savings Program?

Yes. A qualified withdrawal may be taken from a Coverdell Education Savings Account (tax-free) if the money is then placed into a 529 Plan for the same beneficiary. There is no penalty for this liquidation as long as the assets are placed into a College Savings Program.

I have savings bonds for my children. Can I transfer those assets to a 529 plan?

Since only cash can be contributed to a 529 Plan, the bonds would have to be liquidated. Series EE or I-Bonds purchased after 1989 may be converted tax-free to the plan if the eligibility requirements are met to do so.

How is my money invested?

A 529 Plan usually offers several specially designed investment options. You select an option at the time you establish the account. Once money is in the account, your investment selection may be changed once per calendar year, or if/when changing the designated beneficiary on the account.

Can more than one person make contributions to an account?

Yes. Anyone can contribute to a child's account. However, only the account owner has control over the account. A person wishing to make a sizable contribution may want to consider opening a separate account for the same beneficiary.

Can I contribute to a Coverdell Education Savings Account if I invest in a College Savings Program?

Yes. The restriction that formerly precluded contributing to both was removed for years after 2001.

Can I transfer UGMA (Uniform Gifts to Minors Act)/UTMA (Uniform Transfers to Minors Act) accounts into a College Savings Program?

Yes, the custodian on a UGMA/UTMA account must use the assets for the benefit of the child. An UGMA/UTMA account can be liquidated, which would be a taxable event, and the money placed into a 529 plan. The UGMA/UTMA custodial responsibilities for those assets would still apply. This means that the assets used to purchase the 529 plan would need to be for the benefit of the child.

What are the federal income tax advantages?

Any earnings on the money you invest in your 529 plan account will grow tax-free and qualified withdrawals will be federal income tax-free.

What are the gift and estate tax advantages?

Normally, a gift of more than $12,000 to a single person in one year is subject to federal gift tax. A contribution to a 529 Plan is considered a completed gift to the beneficiary that qualifies for the annual $12,000 gift tax exclusion. With a 529 Plan, you can take advantage of a special rule that allows you to invest five times the annual exclusion amount ($12,000 x 5 = $60,000) today without gift tax consequences. This lump sum investment along with tax deferral gives you the opportunity to earn more than an incremental investment of $12,000 per year over the course of 5 years. Under the rules, the donor must elect to treat the lump sum contribution as having been made over a five-year period for gift tax purposes. If you die before the end of the five-year period, the portion of the contribution allocable to the remaining years would be included for federal estate tax purposes in the value of your gross taxable estate. Any additional gifts above the limit for the benefit of the same beneficiary would be currently subject to gift tax or, if available, your lifetime credit.

What happens if I take advantage of the special election allowing me to pro-rate my contribution over five years and I die before the five-year period is complete? Will the funds be removed from my estate?

Because the funds have been pro-rated over the entire five-year period, your estate will be responsible for those funds that are allocable to the remaining years during which you were not alive. For example, suppose Doris contributed $55,000 to a 529 Plan account for her grandson in December of 2002 and elected to treat the contribution as having been made over five years. Assume that Doris dies in January of 2005 - three calendar years after she opens the account. In this example, a total of $24,000 ($12,000 for each of the years 2006, 2007) would be considered part of Doris' taxable estate.

How would a contribution of $30,000 be treated?

For any contribution greater than $12,000 the donor has two options: either treat the entire contribution as gifted ratably over a five-year period, or elect to treat it as gifted entirely in year one. If the donor chooses the latter of these two options, the amount in excess of $12,000 will reduce the donor's unified credit amount, currently $1,060,000. In the above example, the donor could elect to treat the gift as a $6,000 gift for year one and each of the next four years, or elect to treat is as a $30,000 gift in year one, with a subsequent $20,000 reduction from the donor's unified credit if available, otherwise it would be subject to current gift tax.

Where do contributions go when they leave my estate?

The contributor has made a completed gift under the federal gift tax rules. If the beneficiary were to die, the assets are considered part of the beneficiary's estate.

Why is using a 529 College Savings Program better than opening a taxable account?

Since 529 plan accounts are tax-deferred and in some cases, state tax-free, earnings may compound at a much greater rate than those in a taxable account. And qualified withdrawals from a 529 Plan are free from federal income taxes.

What were the Federal Tax Law Changes in 2002?

529 plan changes - New for 2002

• qualified withdrawals are free from federal income tax
• Contribution limit raised from 500 per year to $2,000 per year
• Income range in which contributions are phased out increases to 220,000 up from 190,000 per couple
• Investors can contribute to a 529 plan in the same year
• Contributions are allowed to both a IRS Section 529 Plan and a Coverdell Education Savings Account in the same year
• The Education IRA is now the Coverdell Education Savings Account
• The earnings portion of non-qualified withdrawals is subject to an additional 10% federal tax, which will replace the current 10% state tax mandated penalty
• rollovers for the same beneficiary are allowed between 529 plans
• A rollover from one state's Section 529 plan to another state's plan may be completed once per 12-month period without effecting a change in Designated Beneficiary
• Qualified higher education expenses have been expanded to include expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance
• Qualified withdrawals can now be used for primary and secondary school as well as college
• The limit for annual room & board expenses has been adjusted to reflect current costs

• Off-campus (not at home)- reasonable room & board as determined by education institution
• On-campus - actual invoice amount charged for room & board if greater than allowance
  

• first cousins are considered family members when rolling over or changing beneficiaries
• HOPE and Lifetime Learning credits may be used in the same year for the same beneficiary as a 529 plan distribution, but not for the same expenses

Tax Free Growth makes a Difference

529 plan example contribution of $500 a month at 8.3% and a 27% tax bracket Years Taxable account 529 account 5 years $33,592 $36,983 10 years $70,701 $92,083 18 years $131,994 $241,643

Series 1 is a Taxable account, Series 2 shows the advantages of a 529 college savings plan account. This hypothetical illustration assumes contributions of $500 a month, an 8% nominal rate of return compounded monthly with an effective return of 8.30% and a 27% tax bracket for the taxable account. The return is shown for illustrative purposes only and is not intended to predict the rate of return of any one investment which will fluctuate. It assumes qualified 529 plan distributions are free from federal taxes. State taxes may apply but are not shown. Non-qualified withdrawals are subject to ordinary income tax and potential penalty.