Qualified state tuition programs are governed by the rules and regulations found in Internal Revenue Code section 529.
These 529 college savings plans are individually state sponsored with each state setting their own particular terms and conditions. What’s available from one state’s plan might or might not be permitted within another.
There are basically two types of 529 college saving plans: pre-paid state tuition plans and state sponsored tax deferred investment/savings plans for college expense.
These 529 plans offer tax deferred growth on funds while inside the plans.
Contributions to 529 Plans are not tax deductable, and withdrawals are tax free when used for qualified higher education expense.
Virtually all the states have launched or are in the process of adopting some sort of 529 college savings plan.
Typically, these plans are probably most appropriate for high income tax bracket families who probably will not be eligible for financial aid when children reach college age.
Some states plans, allow non state residents participating in plan, and further permit the withdrawn funds to be used to pay the costs of any college, anywhere, including many non-USA institutions. Other state specific plans have various plan restrictions.
529 Plans DO NOT have any income limitations for participants and the maximum amount that can be contributed annually can range from a few thousand dollars to many thousands which depends on the specific state plan.
Different 529 Plans have different maximum total contribution levels and some have maximum account value levels. Some have plan limits which limit further contributions, when, as and if contributions and earnings exceed $245,000.
Certain 529 Plans allow gift tax exclusions under certain circumstances and also offer particular potential advantages for estate planning and tax considerations.
Contributions can be made systematically, periodically, automatically and or in lumpsum to 529 College Saving Plans.
Parents, grandparents, relatives or anyone can contribute to a 529 College Saving Plan for a named beneficiary. Contributions qualify for the $11,000 annual gift exclusion. Effectively, any one individual can "gift" for 529 Plan purposes or any other purpose up to $11,000 per year to as many other individuals as the want without incurring a gift tax.
For 529 Plan purposes, the aggregate amount contributed for the year cannot exceed the total allowable for the particular state plan; with some plans allowing a special election for large gifts to be averaged over a few years.
529 Plans are controlled by the parents, not by the beneficiary.
529 Plans are excluded from your taxable estate for federal estate tax purposes.
The original beneficiary of the account can be changed to other family members of the original beneficiary’s family at any time. The definition of family member is broad and far reaching.
All states with 529 Plans offer tax deferred federal tax features, some states offer tax state exempt on earnings to residents of their home state within their own state plan, and some offer tax state income tax deductions on contributions within their own state plans.
Plan participants in 529 College Savings Plan do not actively manage the investments. Each state determines the appropriate investment for their plans. Some invest the funds under state supervision, some through financial services companies and others through outside mutual fund companies.
For some plans, monies are typically placed in a pre-approved mix of aggressive to conservative mutual funds with that mixed based on the age of the child.
Sometimes it’s very difficult and penalties might be imposed should you move from one state 529 Plans to another; other times they can be rolled without too much difficulty.
Typically 529 Plans are considered parental assets for educational aid considerations.
Some 529 Plans can be started with low initial contributions and small additional contributions can be made in the future.
UGMA accounts can be rolled into some 529 Plans.
Account owner’s can name anyone the wish as a beneficiary, the beneficiary does not have to be a family member.
529 Plans are available to all U.S. citizens and permanent residents.
From some 529 Plans, funds can be withdrawn anytime; however, if the funds are not used for a qualified higher education expense a tax is imposed on earnings at account owner’s tax rate plus a 10% tax penalty is imposed on earnings.
The investment products offered in most 529 Plans are not FDIC insured and may lose value and are not bank guaranteed.
Purchasing a 529 Plan does not guarantee you will have the necessary monies for college tuition, expenses, etc. for a college education.
All Mutual Funds, Variable Annuities and Variable Life Insurance policies are offered by prospectus ONLY. For complete information including charges and expenses obtain a prospectus, and read it carefully before you invest. Mutual Fund, Variable Annuity and Variable Life prospectuses are available directly from the issuing companies when product information is requested, and in some cases, they can be downloaded directly on the issuing company's internet website.
The tax deferral characteristic associated with variable annuities is not needed when used in an account that is by definition tax deferred (retirement accounts) and according to some sources variable annuities generally have higher fees and internal expenses than mutual funds.
Systematic and dollar cost averaging within Mutual Funds, Variable Annuities and Variable Life insurance policies does not assure a profit and does not protect against loss in declining markets. It involves continuous investment in securities regardless of fluctuating prices and the investor should consider his or her financial ability to continue purchases through periods of low price levels. Investing in stocks, bonds, mutual funds and variable annuities does not guarantee a profit.
All of these investments can lose money. Stocks, bonds, mutual funds and variable annuities are not FDIC insured.
