529 plan

WILLY HAS NOOOOOOOOOOOOOOOOOOOOOO TEETH!!!!! A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. It is named after section 529 of the Internal Revenue Code. The detailed behavior of 529 plans is determined by state legislation, and while most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as matching grant and scholarship opportunities, protection from creditors and exemption from state financial aid calculations, for investors who invest in 529 plans within their state of residence.

There are two types of 529 plans: prepaid and savings.

• Prepaid plans allow one to purchase tuition credits, at today's rates, to be used in the future. Therefore, performance is based upon tuition inflation.
• Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds. Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college-age. They also offer risk-based asset allocation options where the underlying investments maintain the same equity-to-fixed-income ratio regardless of the age of the beneficiary. Many savings plans also offer a stable value or guaranteed option designed to protect an investor's principal while providing for some investment growth, while others offer investments in certificates of deposit.

Prepaid plans may be administered by states or higher education institutions. Savings plans may only be administered by states. Although states administer savings plans, record-keeping and administrative services for many savings plans are usually delegated to a mutual fund company or other financial services company.

With the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 529 plans gained their current prominence and tax advantages. Before EGTRRA, distributions from 529 plans for qualified higher education expenses were taxed at the beneficiary's federal income tax rate. After EGTRRA, distributions from 529 plans for qualified higher education expenses are exempt from federal income tax. The 529 plan provisions of EGTRRA, originally set to expire in 2010 due to a sunset provision, were made permanent by the Pension Protection Act of 2006.

Advantages

• All money grows federal and state income-tax free.
• The account holder retains control of the assets within the program regardless of beneficiary's age.
• The beneficiary can be changed at any time to another member of the beneficiary's family.
• Many states exempt withdrawals from state income-tax for qualified higher education expenses.
• Money can be used to pay for tuition, fees, room, board, books, supplies and required equipment.
• High maximum contribution limits.
• Contributions are exempt from gift and estate taxes if certain criteria are met. Account owners can make a lump sum contribution of up to $60,000 per beneficiary or $120,000 if married filing jointly and avoid incurring a taxable gift on this amount by electing to use five years of the annual gift tax exclusion all in one year. After using this provision, the annual exclusion cannot be used until the five-year period has passed. Should a donor die within those five years, a pro-rata amount of the gift will revert back to their estate and be treated as a taxable gift. After the five-year waiting period, 529 plan assets are not part of the taxable estate of either the owner or the beneficiary.
• Assets within 529 plans are often protected from bankruptcy within the state offering the plan.
• Most plans have very low minimum monthly contribution limits making them attractive to all families regardless of income level.
• Each state offers a no-fee, low cost option that can be opened by contacting the plan directly.

The income tax advantages have contributed significantly to their popularity as a college savings tool.

While states administer various plans, one does not have to enroll in your state-of-residence's plans. It pays to compare when enrolling. In some cases, out-of-state plans may offer better fund choices and lower overall management costs for those funds than your own state that may more than offset any extra benefits that your own state's plan offers residents.

529 plans are often a wise investment for families with young children, even if it is not certain the children will go to college. If the children do not seek higher education, the funds can be used for qualified educational expenses of other family members. They may also be withdrawn for other purposes - however, earnings will be subject to income tax and an additional penalty.

Disadvantages

An article in Slate magazine showed the high fees associated with these plans make them less effective saving tools than more traditional funds.[1] A more recent analysis concluded that while some 529 have improved by reducing fees and expenses and offering more investment options, some 529 plans still charge exorbitant fees that effectively negate the plan's tax benefits[2]. For example, one of Louisiana's plans charged a very modest $19 over 10 years, while one of Montana's 529 plans managed by Pacific Life charged as much as 35% of the buyer's original investment over a 10 year period.

While the number and types of 529 plans is growing, not all investment vehicles are available in 529 form. For instance, Muslim investors do not yet have 529 plans that invest according to Islamic banking principles (see article below "Valuing Children, Knowledge and Money"). Gradually, other types of socially responsible investing options are becoming available, such as the plans now available in California, Illinois, Missouri, Pennsylvania and Washington D.C..[3]

See also

• Coverdell Education Savings Accounts
• Uniform Gifts to Minors Act
• Uniform Transfers To Minors Act
• List of finance topics
• List of personal finance topics

External links

• "MSRB general summary of 529 college savings plans" - Municipal Securities Rulemaking Board (MSRB)
• "Section 529 of the Internal Revenue Code" - (MSRB)
• "SEC Introduction to 529 Plans" - United States Securities and Exchange Commission
• "Qualified Tuition Program (QTP)", Publication 970 (2005) - Internal Revenue Service
• "Valuing Children, Knowledge, and Money"