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Jeffery J. Johnson



529 College Plan

First the grim news: The cost of a college education has continued to increase at rates well above the general inflation rate in recent years. Now the good news: Your options for setting aside college money in tax-efficient investment accounts have increased as well. We’ll examine three of the most popular: 529 plans, custodial accounts and Coverdell accounts. The Lowdown on 529 Plans Created in 1996 and named after the section of the federal tax code that governs them, 529 plans are generally sponsored by individual states, but in some cases may also be sponsored by qualified educational institutions. College savings plans—a type of 529 plan. Many of these plans are national plans: no matter which state or school sponsors them, residents of any state can participate.

The potential advantages of 529 plans include:

Tax-free earnings – Earnings in a 529 plan accumulate free from taxes, and qualified withdrawals are federally tax free. Withdrawals may be exempt from state taxes as well (tax rules vary from state to state). Nonqualified withdrawals from a 529 plan may be subject to income taxes and a 10% additional federal tax.

Gift tax benefits for contributors – A contribution to a 529 plan is considered a gift for federal tax purposes. Tax rules currently let you give up to $13,000 in 2011 to as many individuals as you choose, free from federal gift taxes. Gifting schedules can also be accelerated through a lump-sum contribution of $65,000 to a 529 plan in the first year of a five-year period.

• Generous contribution rules– Lifetime contribution limits on 529 plans vary from state to state, but often exceed $200,000 per beneficiary, including earnings. In addition, there usually are no income restrictions on contributors to a 529 plan.

• Account control – The individual who creates a 529 plan account on behalf of a beneficiary generally maintains complete control over the account. This is not the case with Coverdell Education Savings Accounts or certain types of custodial accounts. Account owners may also change beneficiaries.

Finally, contributions to 529 plans may provide a state tax deduction for residents of the sponsoring state. As with all tax-related decisions, consult your tax advisor. Withdrawals for expenses other than qualified education expenses are subject to income tax and an additional 10% penalty on earnings. You should consider a 529 plan’s fees and expenses such as administrative fees, enrollment fees, annual maintenance fees, sales charges and underlying fund expenses which will fluctuate depending on the 529 plan invested in and the investments chosen within the plan. You should also consider the inherent risks associated with investing in 529 plans, such as investment return and principal fluctuation, which will also vary based on the investments made within the plan. More information is available in each plan’s official statement, which should be read carefully before investing.


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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named representative, broker - dealer, state - or SEC - registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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