A short course in college savings plans

Workforce, Sept, 2002 by Larry Glazer

How does the 529 College Savings Plan affect financial-aid considerations?

Unlike gifting accounts such as UGMA/UTMAs and Coverdell Education Savings Accounts (formerly Education IRAs), 529 College Savings Plan assets are currently attributed to the account owner, not the student, thereby usually lowering the impact on financial aid. Keep in mind, however, that this could change, given ever-changing financial-aid rules.

What does the 529 College Savings Plan offer that other college savings options don't?

In general, the 529 College Savings Plan offers tax-deferred growth, tax-free qualified distributions, higher contribution limits, no income or age restrictions, and greater control for the account owner.

Is a 529 College Savings Plan the same as a prepaid tuition plan?

No. Although both are state-sponsored programs and fall under Section 529 of the Internal Revenue Code, they are not the same. With a prepaid tuition plan, you prepay tuition at today's rates for a beneficiary to attend college at a future date. This involves pre-selecting a participating school, which is generally a public school. With the 529 College Savings Plan, you have the flexibility to use funds at just about any college in the United States as well as some abroad. Additionally, you can build assets tax-deferred.

Use of funds

What can funds be used for?

You can use 529 College Savings Plan assets to pay for qualified education expenses at almost any college or any post-secondary program in the United States or in select foreign countries.

What education expenses qualify?

Qualified expenses include tuition, room and board, books, fees, supplies, and equipment such as a computer.

Can funds be used for private elementary or high-school tuition?

No, the 529 College Savings Plan is limited to undergraduate and graduate tuition and expenses only.

Making contributions

Who can set up a 529 plan?

Parents, grandparents, other family members, friends--anyone can establish a 529 College Savings Plan. You can even establish a plan for yourself There are no age or income restrictions.

What is the maximum amount

I can contribute?

Maximum contributions vary by plan. The highest maximum available today allows you to invest a lump sum of up to $300,000 per beneficiary. In doing so, however, only $55,000 may be used to satisfy your federal gift-tax exclusion in any five-year period.

Can I continue to contribute to a Coverdell Education Savings Account if I'm enrolled in a 529 College Savings Plan?

Yes, you may. In fact, you may use the money in a Coverdell Education Savings Account to pay for K-12 expenses.

Can I make automatic contributions?

Yes, you can arrange to have funds automatically deducted from a checking or savings account.

Can I roll over or transfer an Educational IRA, UGMA/UTMA, or existing 529 College Savings Plan?

You may roll over or transfer assets from any gifting or qualified savings plan to a 529 College Savings Plan.

Tax advantages

What are the tax benefits of 529 College Savings Plans?

There are a number of tax benefits associated with a 529 College Savings Plan. Your contributions and earnings grow tax-deferred, and you don't have to pay federal taxes when funds are withdrawn to pay for qualified expenses. Exemption on earnings from state taxes is determined by the individual state. Plus, in most cases, both your contributions and earnings are not considered part of your taxable estate.