College Planning

Section 529 College Savings Plans - Saving for college

With today’s rising costs for college and other education, it is never too soon to begin planning.

Fidelity Advisor 529 college Planning Information Here
Fidelity Advisor 529 college Planning Application Here

What Are College 529 Plans?

529 college savings plans are one of the most important financial and tax developments since the creation of the 401k plan. Section 529 college plans are a tax deferred method of making contributions for college. These plans offer numerous benefits to those who invest and are not just for parents and grandparents. Every investor should know the basics about these exciting plans.

College 529 Plan Benefits

There are many benefits to 529 plans:
High contribution limit: You can contribute up to $250,000 (contributions and earnings) depending on the individual state’s plan.

Contributions eligible for gift tax exclusion: You may accelerate use of the annual gift tax exclusion and make a single contribution up to $50,000 ($100,000 for married couples) per beneficiary, per single year, without federal gift tax consequences.

Contributions excluded from taxable estate: Funds contributed are excluded from your taxable estate (an accelerated gift exemption may apply) and you still retain the right to determine how the account is used.

Low minimum investments: Because you can open an account with virtually any amount, it’s easy to start saving today, and continue saving with small monthly contributions.

Wide list of eligible family members, including cousins: For the purpose of tax-free rollovers and changes of designated beneficiaries, “a member of the family will include first cousins, children, grandchildren, parents, grandparents, nieces nephews and spouses of all of the above, of the original beneficiary.

Simplified and flexible rollover between 529 plans: Direct transfers from one 529 plan to another will be allowed for the same beneficiary. A limit of one rollover per 12-month period will apply to new amounts distributed from a 529 plan and later re-contributed within 60 days.

Expansion of room and board expenses: For students enrolled at least half time, qualified room and board expenses have increased from $2,500, for those living off campus, and $1,500, for those living at home, to the full room and board cost by each institution. Specifically, tax-free distributions will be full invoiced amount calculated as part of the “cost of attendance for federal financial aid purposes.

Tax-Deferred earnings and tax-free withdrawal: The earnings on your investments grow tax-deferred-much like a 401k or Traditional IRA, but are not taxed upon a qualified withdrawal.

Your assets can be used for college expenses at any accredited institution of higher learning in the U.S.

No Income Limits: There are no income limits restricting who is eligible to contribute.
Control and liquidity: You may withdraw funds at any time for non-higher education expenses or change the beneficiary for the account. (Federal and State income tax on the earnings and a 10% penalty will apply.)

Investment choices: You may choose from a variety of investment options depending on the 529 plan offered by the investment manager of the plan.

Fidelity Investments fidelity advisor ScholarShare application

Fidelity Investments Fidelity Advisor ScholarShare Atlantic Financial 838719.PDF

For more information about 529 plans, a powerful way to save for college education, please contact Atlantic Financial at (800) 559-2900, or use this contact form.

Financial Planning with Section 529 Plans

When Congress enacted Section 529 of the Internal Revenue Code, it is a sure bet it did not foresee the creative ways education savings plans could be put to use. Advisors with one eye on the code and another on the future are finding a wide variety of estate and retirement planning applications in this code section.

Section 529 plans allow owners to accumulate a large amount of wealth in savings plans sponsored by individual states.
The states set the rules, along certain federal guidelines, as to how the savings may be invested, how long the plan can stay in existence and for whom the money may be spent.

The account is owned by an adult, for the benefit of a named beneficiary. Once the money goes into the account, it is removed from the estate of the owner and considered a completed gift, without the requirement to file a gift tax return providing the beneficiary is not more than one generation removed from the owner. However the donor/owner of the account maintains total control over the account, determining when, how much and to whom the distributions will be made.

If the money is used for the beneficiary’s higher education needs (including tuition, books, room and board) the earnings from the investment can be distributed tax-free. Some states even allow a deduction against state income taxes for the contributions…California is not in that group.

If the money is paid out to the beneficiary for any other reason, the earnings are taxable to the beneficiary and subject to an additional 10% excise tax. Here is a key point: the owner may change the beneficiary on the account not more often than once a year, and now many states allow the account owner to be the beneficiary.

Multiple accounts may be established for multiple beneficiaries, subject to the per-beneficiary account limits set by the state sponsors generally ranging from $100,000 up to $250,000. Owners may open accounts in multiple states.

Each state dictates the range and style of investment alternatives. Generally the investments go into bundled variable or mutual fund products selected by the state. However, a number of states offer the more conservative prepaid tuition plan option. The latter are indexed to the rising cost of education determined by that state…and according to the College Board, have averaged a compounded return of 6.3% since 1991-92.

Since a large amount of wealth can be accumulated outside of the estate of the donor/owner, the planning opportunities are intriguing. For example, to date 11 states consider the assets beyond the reach of creditors. Potentially a donor/owner could create multiple plans in multiple states, shielding a large amount of wealth from creditors…while still maintaining all control of that wealth.

These plans, acting as a storehouse of wealth, can be stretched out to benefit multiple generations or even to provide retirement income for the owner. Assume that Joan established a plan naming Beth as the beneficiary. Beth gets a scholarship and doesn’t use the money in the account. Joan could delay distributions. (States have different rules…some require distributions must be made within 10 years after projected college enrollment while others allow an unlimited duration.)

Joan could name Beth’s future children as beneficiary(s). Since this is a generation skip, it requires the filing of a gift tax return. Or, Joan could keep the account intact, taking advantage of the continuing tax deferral, and name herself as the beneficiary. She could use the money to pay for that graduate degree she always wanted or she could elect to withdraw the money for her own retirement, paying income and excise taxes on the earnings.

In addition to saving for college did you know that Creative IRA Roth planning can leave a significant tax free legacy for a young child?