What You Need to Know About…
Funding College Education with 529 Plans

Paying for college has never been easy. And in the future, four years at a private college could cost more than you paid for your house. Next to retirement, this may be the biggest expense you and your family are likely to face.

First authorized by Congress in 1996, qualified state tuition programs, or 529 college savings plans, offer substantial benefits for investors. Named for their section in the Internal Revenue Code, 529 plans allow states to offer investors professionally-managed, tax-advantaged portfolios to help meet rising college expenses.

The benefits for investors include market-based returns from a portfolio of mutual funds and complete control over withdrawals for the life of the account. Proceeds may be used at any accredited post-secondary school in the United States.

Key Features

• Investment earnings accumulate tax-deferred until withdrawn.
  
  
• Residents of any state may set up a 529 plan and use the proceeds for tuition, room and board, and textbooks at any two- or four-year post-secondary school in the United States that offers undergraduate or graduate degrees.
  
  
• The owner retains control over the withdrawals.
  
  
• Contributions are invested in professionally-managed portfolios.
  
  
• The account’s value is not part of the owner’s estate—and this may save a substantial amount of money for your heirs.

Contributions

• Anyone may contribute on behalf of a single beneficiary, including parents, grandparents, other relatives, and family friends, regardless of income or state residency.
  
  
• Maximum contributions vary from state to state, but typically exceed $100,000.
  
  
• Contributions may total $10,000 a year per beneficiary ($20,000 for married couples filing jointly) without triggering federal gift taxes.
  
  
• A contribution of $55,000 ($110,000 for couples filing jointly) may be made to a single account and prorated for a five-year period without triggering federal gift taxes, as long as no other gifts are made to that beneficiary.

Withdrawals

• Any withdrawals used for qualified education expenses are free of federal tax under current law.¹
  
  
• If the beneficiary wins a scholarship, the owner will be refunded the scholarship amount without penalty.

What if your child doesn’t go to college?
Since you, the owner, retain control over withdrawals, you have the following choices if the beneficiary decides not to attend college:

• Change beneficiaries (any new beneficiary must be related to the original beneficiary)²
  
  
• Leave the assets in the plan for later use
  
  
• Withdraw the assets³

College savings plans offered by each state differ significantly in features and benefits. The optimal plan for each investor depends on his or her individual objectives and circumstances. In comparing plans, each investor should consider each plan’s investment choices, fees and state tax implications. For more information on how a 529 plan can help you fund your children’s or grandchildren’s education, contact your financial advisor.

1 Under a “sunset provision,” the federal tax exemption for earnings on qualified withdrawals is scheduled to expire at the end of the year 2010, unless extended by Congress. As with all tax-related expenses, consult with your tax advisor.
2 The election of certain beneficiaries may be a taxable event.
3 The earnings portion of any nonqualified withdrawal is generally taxed at the owner’s tax rate and is subject to a 10% penalty.

The accuracy and completeness of this article are not guaranteed. The opinions expressed are those of the author(s) and are not necessarily those of David A. Noyes & Company or its affiliates. The material is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

[Back to list of articles]

Learn more.
To find out more about how David A. Noyes & Company can help you build your wealth, contact us today.