529 College Saving Plan FAQ
A 529 Plan is an investment plan operated by a state designed to help families save for future college costs. As long as the plan meets the requirements of a qualified state tuition program under Section 529 of the Internal Revenue Code, federal tax law provides special tax benefits to the plan participant.* It is up to each state to decide whether it will offer a 529 plan (or possibly more than one), and what it will look like.
*Distribution for qualified expenses are subject to certain state taxes, and federal tax-exempt status may change with tax legislation.
Who can contribute to a 529 plan?
Once an account has been established, anyone can contribute to it. Any investor can participate, regardless of their income or net worth. Furthermore, there are no age or time limit restrictions for the contributor or the beneficiary.
What is the difference between "Account Owner" and "Beneficiary"?
The account owner (also referred to as the participant) is the person who establishes the 529 plan on behalf of the beneficiary. The beneficiary is the person whose education expenses will be covered under the 529 plan.
How will a 529 plan affect my child's chances to qualify for financial aid?
Guidance for the U.S. Department of Education states that your 529 savings account is treated as an asset of the parent or other account owner in determining eligibility for federal financial aid. However, the rules in this area remain somewhat uncertain. In short, saving for college with a 529 plan will impact a student's financial aide eligibility, although the precise effect will depend on the type of 529 plan and the policies of the institution. Of course, saving for college through other means can have a substantial impact as well, in many cases more substantial than a 529 plan.
What if the beneficiary decides not to go to college?
The account owner has a few choices if the beneficiary decides not to go to college. First, he or she can leave the funds in the account in the event that the beneficiary eventually decides to go to school. Another alternative is to change the beneficiary to another qualified family member of the original beneficiary. Lastly, the account owner can take a non-qualified withdrawal from the account subject to state and federal income taxes, as well as a 10% penalty on earnings.
What if the beneficiary receives a scholarship?
If the beneficiary receives a scholarship, the account owner can leave the funds in the account to be used at a future date (for example, graduate school costs). Another option is to change the beneficiary to someone who is a qualified family member of the original beneficiary. The account owner may also withdraw up to the amount of the scholarship without penalty. However, the account owner will be taxed at his or her tax rate.
What if I change my mind about investing in a 529 plan?
The account owner can withdraw the funds at anytime. However, if funds are withdrawn and not used for qualified higher education expenses, earnings will be subject to state and federal income taxes at the account owner's tax rate. In addition a 10% penalty on earnings will be assessed.
Can I transfer assets from an existing UGMA/UTMA into a 529 plan?
Generally, yes. Many 529 plans accept cash proceeds from the sale of assets held in UGMA/UTMA accounts. This may be a great option for those who have set up UGMA/UTMA accounts for the purpose of educational funding provided the account is not over funded.
The placement of UGMA/UTMA funds in a 529 account can provide all the tax and investment benefits associated with 529 plans. However, once the transfer is made, you will be unable to change the beneficiary and any withdrawals from the 529 account must be used for the benefit of that beneficiary only.
The restriction on beneficiary changes would apply to the amount transferred plus any separate contributions. Remember, however, that a 529 plan can only accept cash and so any appreciated securities in the UTMA/UGMA would first have to be sold and capital gains would be reportable on the minor's tax return. In addition, commission or sales charges may be incurred during the liquidation process.
What happens in the event of the participant's death or disability?
The participant may designate a successor participant of the account, effective upon the participant's death or disability. The successor must also agree to act as the successor participant.
Can I invest for one beneficiary in more than one state's 529 plan?
Absolutely. There are several dozen states that have 529 plans without any state residency requirements. You can open accounts in as many of these states as you want, although in most cases there is little reason to have accounts in more than two or three states.
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