 Personal
Finance Best Practices
529 Plans:
An Education Funding Option
Provided by:
John Hamerlinck
UBS Financial Services Inc.
Published: September 2007
College costs have risen
faster than the rate of inflation. The cost of a
four-year college education in 2024 is expected to climb
to $160,000 for a public institution and $345,000 for a
private university. Given these figures, it may be
prudent to start saving as early as possible for higher
education costs.
There are several options for education funding, but for
the purposes of this article, we will discuss only one
of those options -- 529 Plans.
529 Plans
Named for section 529 of the U.S. Internal Revenue Code,
529 Plans are state sponsored, tax-advantaged investment
programs that allow donors (parents, grandparents, other
relatives and friends) to save for higher education
costs for a named beneficiary. The Pension Protection
Plan of 2006 makes permanent the federal tax exclusion
for withdrawals from 529 Plans, if those withdrawals are
used for qualified higher education expenses. Remember,
however, that tax laws are subject to change at any
time. These and other tax implications of a 529 Plan
should be discussed with your
legal and/or tax advisors.
It is also important to note that the tax implications,
as well as the investment choices of
529 Plans may vary significantly from state to state.
You should carefully consider these factors before
establishing and contributing to a 529 Plan. 529 Plans
are sold via Plan Description Documents, which contain
detailed information regarding the Plan, risks, charges
and tax treatment. You should read the Plan Description
carefully before investing.
There are two types of 529 Plans: 529 College Savings
Plans and 529 Prepaid Tuition Plans.
529 College Savings Plans Features
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Federal tax advantages—529 College Savings Plans are
funded with after-tax contributions that have the
opportunity to grow tax-deferred. Distributions are
received free from federal taxes if used for qualified
higher education expenses. Otherwise, the distribution
of earnings will be subject to a federal tax penalty and
treated as ordinary income for tax purposes.
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State tax considerations—Since 529 College Savings
Plans are state-sponsored, some may provide state income
tax advantages for the residents or taxpayers of that
state. These benefits may include tax deductions for
contributions to the plan and/or exemptions from state
tax for qualified higher education distributions. Please
consult with a tax advisor regarding the state tax
implications of the specific plan.
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Almost anyone can establish a 529 College Savings
Plan—Parents, grandparents, siblings, uncles, aunts,
friends or colleagues can establish 529 College Savings
Plans for the benefit of others or themselves. There are
no income limitations or age restrictions regarding who
can open an account. In addition to accepting all
instate investors, most 529 College Savings plans accept
out-of-state investors as well. Please note that funds
must be used for qualified higher education expenses or
they may be subject to a penalty and treated as ordinary
income for tax purposes.
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Substantial contributions allowed—Annual contribution
amounts vary by state, though a donor may contribute up
to $60,000 per beneficiary in the first year of a
five-year period ($120,000 for married couples filing
jointly).
-
Designate—and change—account beneficiaries—A donor can
set up a 529 College Savings Plan for just about anyone
and maintain control of the funds, allowing for a change
of the beneficiary. The new beneficiary, however, must
be a close family relative of the original beneficiary;
otherwise there may be adverse tax consequences.
Beneficiary changes may be limited to one per year.
-
Choice of investment options—Select from among several
investment options offered by the state’s plan, which
may include portfolios consisting of a variety of mutual
funds. Changes in investments, while permitted, are
generally limited to one per year.
-
Flexible rollovers—One tax-free transfer or rollover
of benefits from one 529 College
Savings Plan to another for the same beneficiary may be
allowed during a 12-month period. The rollover must be
completed within 60 days of the withdrawal.
529 Prepaid Tuition Plans
A state’s 529 Prepaid Tuition Plan generally allows
donors to fund future education expenses—tuition and, in
some instances, room and board—at specific in-state
(typically public) colleges at current rates, which
provides protection against rising higher education
costs. Some plans provide additional benefits for state
residents, and funding options range from one-time
lump-sum contributions to monthly installment payments.
Talk to Your Financial Advisor
Your Financial Advisor should be able to provide you
with more information about 529 Plans, as well as other
education funding options, and help you evaluate the
choices from the perspective of your overall investment
goals, risk tolerance and time horizon.
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This article was provided by
John Hamerlinck, financial advisor for UBS Financial
Services Inc. Drawing on 20 years of management and
financial experience John works with business owners and
individuals that need sophisticated financial planning
and investment strategies. He recently joined UBS
Financial, one of the leading global financial firms. A
former Marine Corps veteran he holds a MBA from Lewis
University. You can contact John at 727-892-2516 or www.ubs.com/fa/johnhamerlinck
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Article Published September 2007,
Bay
Area Business Magazine
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