529 College Savings Plans Frequently Asked Questions

Frequently Asked Questions about 529 Plans

A 529 plan is a great savings vehicle that can help you provide for a loved one’s education. 529 plans are offered by individual states, but you don’t have to be a resident of a particular state to open an account. Below are some commonly asked questions about the overall benefits of 529 plans:

What is a 529 plan?

Created in 1996 by Section 529 of the Internal Revenue Code, a 529 plan is a qualified tuition program, which is a tax-deferred vehicle designed specifically to save for education. Tax-deferred growth on earnings and federal income-tax-free distributions set 529 savings plans apart from other investment vehicles used to save for a child’s education.

Can my spouse and I set up a joint account?

Joint accounts aren’t permitted in this plan; however, you and your spouse may each establish separate accounts for the same beneficiary or you may both contribute to the same account.

Who can be a beneficiary?

Any individual can be named a beneficiary. The beneficiary may be of any age but must be a U.S. citizen or resident alien. The account holder can be the beneficiary.

Who can contribute?

Any individual can contribute to a beneficiary’s account. That person doesn’t have to be the account holder.

How do I open an account?

Simply complete the new account agreement provided to you by your financial professional. When you establish an account, you must name a beneficiary. The minimum contribution required to open an account is $250. This minimum is reduced to $50 if investing systematically on a monthly basis through automatic purchase or payroll deduction ($25 per paycheck if using payroll deduction and paying twice per month). The minimum subsequent contribution is $50.

What is the maximum amount that can be contributed?

You can invest until the combined account balances for a beneficiary reach $475,000.  It’s acceptable for earnings (but not contributions) to cause the total account value to go over this amount. This limit may change to reflect the increasing cost of higher education.

Can I change the beneficiary?

Yes, the account holder can change the beneficiary at any time. If the beneficiary is changed, the new beneficiary must be a member of the family of the current beneficiary, as defined by the IRS.

What is the impact on financial aid?

The treatment of investments in a 529 savings plan varies from school to school, but assets are typically not treated as assets of the student. However, any investment in a 529 plan may still affect a student’s eligibility to get financial aid based on need. You should check with the schools you are considering regarding this issue.

How is financial aid for college determined?

Financial aid is typically calculated by determining the cost of attendance of a school, which includes the tuition, fees, room and board, textbooks, and computers, less the Expected Family Contribution (EFC), which is the amount the family is expected to contribute to the cost of college for a particular year.

What if my beneficiary doesn’t go to college?

If your planned beneficiary doesn’t go to college, you have three options:

• Leave the money in the account in case the beneficiary subsequently decides to attend college.

• Leave the money in the account and select a new beneficiary.

• Take a distribution from the account and pay both the 10% federal penalty and state income taxes on your earnings.

What can the money be used for?

Distributions from 529 plans can be used to cover qualified education expenses for college and apprentice programs. In addition to tuition, qualified expenses include any college-related purchases, such as room and board, books, and computers. Additionally, you may also withdraw up to $10,000 (lifetime limit) tax free for payments toward qualified education loans.

Can I also pay for my child’s primary and secondary school education?

Yes, you can use your 529 account to pay for kindergarten through grade 12. The maximum withdrawal is $10,000 per school year and can only be used for tuition expenses. But check with your state: Some assess state taxes when 529s are used for this purpose.

What if I don’t use the money in the account for qualified education expenses?

If a distribution isn’t used for qualified expenses, any investment earnings will be subject to federal, and possibly state, income taxes—at the rate of whoever receives the distribution. The distribution will also be assessed a 10% federal penalty tax on any earnings.

I own an UGMA/UTMA account. Can I move those assets into a 529 account?

You can redeem assets from UGMA/UTMA (Uniform Gifts to Minors Act/Uniform Transfers to Minors Act) accounts, but you may be liable for income taxes on any gains on redemption. Once the UGMA/UTMA proceeds are used to contribute to a 529 plan, the minor must be named both the account holder and the beneficiary. The beneficiary of the 529 account can’t be changed.

Can I use my account to pay for any school?

For college, the account can be used for the beneficiary’s attendance at any eligible institution of higher education that meets specific federal accreditation standards. These institutions include most four-year colleges and universities (both for undergraduate and graduate degrees), two-year institutions, proprietary and vocational schools, and foreign schools that are eligible to participate in financial aid programs under Title IV of the Higher Education Act of 1965. For primary and secondary schools, the account can be used for tuition only, with a maximum withdrawal of $10,000 per year.

What are the federal income-tax advantages?

Any earnings on the money you invest in your account will grow tax deferred until they’re distributed. All qualified distributions for education expenses will be exempt from federal income tax. Please note that state income taxes may still apply. For more information, contact your financial professional.

What are the gift tax and estate planning advantages of an account?

Contributions made to a 529 savings plan are considered completed gifts for federal tax purposes. Generally, gifts to an individual that exceed $16,000 in a single year are subject to the federal gift tax. However, for 529 plans, gifts of up to $80,000 ($160,000 for a married couple filing jointly) can be made in a single year for a beneficiary and averaged over five years to qualify for exclusion from the federal gift tax.  If you die with money remaining in your account, it won’t be included in your taxable estate for federal estate tax purposes. (However, there are exceptions should you die within five years of making contributions that were gifts using the five-year rule.)