What is a 529 plan

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.
Money from a 529 plan can be used for tuition, fees, books, supplies and
equipment required for study at any accredited college, university or
vocational school in the United States and at some foreign universities.
Off-campus housing costs are covered up to the allowance for room.
Qualified education expenses do not include student loans and student loan
interest.

Which states offer 529 plans

Nearly every state now has at least one 529 plan available. It's up to each state to
decide whether it will offer a 529 plan and what it will look like, meaning 529
plans can differ from state to state.

Types of 529 plans

a. Prepaid plans
a. 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.
b. Prepaid plans may be administered by states or higher education
institutions.
c. Currently, 8 states provide a prepaid tuition plan that is accepting new
applicants. Those states include Florida, Illinois, Maryland,
Massachusetts, Michigan, Nevada, Texas, and Virginia
b. Savings plans

a. Savings plans are different in that all growth is based upon market
performance of the underlying investments, which typically consist of
mutual funds.
b. 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.
c. Savings plans may be administered by states only.
d. 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.
Prepaid Tuition Plan
Locks in tuition prices at eligible
public and private colleges and
universities.

College Savings Plan

No lock on college costs.

All plans cover tuition and mandatory Covers all "qualified higher education
fees only. Some plans allow you to
expenses," including:
purchase a room & board option or use
Tuition
excess tuition credits for other
Room & board
qualified expenses.
Mandatory fees
Books, computers (if required)
Most plans set lump sum and
Many plans have contribution limits in
installment payments prior to purchase excess of $200,000.
based on age of beneficiary and
number of years of college tuition
purchased.
Many state plans guaranteed or backed No state guarantee. Most investment
by state.
options are subject to market risk. Your
investment may make no profit or even
decline in value.
Most plans have age/grade limit for
beneficiary.

No age limits. Open to adults and

children.

Most state plans require either owner

No residency requirement. However,

or beneficiary of plan to be a state

resident.

nonresidents may only be able to

purchase some plans through financial
advisers or brokers.

Most plans have limited enrollment

period.

Enrollments open all year.

Gift tax considerations

Contributions to 529 plans are considered gifts under the federal gift tax
regulations and hence any contributions in excess of $14,000 if filing single (or
$70,000 over five years) or $28,000 if filing married jointly (or $140,000 over a
five-year period) count against the one-time gift/estate tax exemption. The fiveyear period is known as the five-year carry-forward option: Once the single donor
puts in $70,000 or the married jointly donor puts in $140,000, they are not able to
make another contribution (gift) to that individual (without using part of their
lifetime gifting exclusion) for five years.
The gift and estate tax treatment of an investment in a 529 plan is good news, bad
news situation.
The bad news is that your contribution is treated as a gift to the named beneficiary
for gift tax and generation-skipping transfer tax purposes and so you need to be
aware of this exposure particularly if you are making other gifts to the beneficiary
during the same year.
The good news is that your contribution qualifies for the $14,000 annual gift tax
exclusion and so most people can make fairly large contributions without incurring
the gift tax.
Tax Benefits
Investing in a 529 plan may offer college savers special tax benefits. Earnings in
529 plans are not subject to federal tax, and in most cases, state tax, as long as you
use withdrawals for eligible college expenses, such as tuition and room and board.
However, if you withdraw money from a 529 plan and do not use it on an eligible
college expense, you generally will be subject to income tax and an additional 10%
federal tax penalty on earnings. Many states offer state income tax or other
benefits, such as matching grants, for investing in a 529 plan. But you may only be
eligible for these benefits if you participate in a 529 plan sponsored by your state

of residence. Just a few states allow residents to deduct contributions to any 529
plan from state income tax returns.
Transferability and flexibility
change to a different option every year or rollover account to a different
state's program. Each 529 plan have different rules for number of changes.
ability to transfer unused amounts to other qualified members of the
beneficiary's family without incurring any tax penalty.
Advantages
Federal and state tax benefits for the money being contributed to the plan
Low maintenance of a 529 plan
Flexible for changing from one plan to another
Eligible to everyone, irrespective of age
Transferable from one beneficiary to another
Full Donor control
Estate tax evasion benefit when the full money is not being taken up for
use of beneficiary, the amount withdrawn is considered as assets and the
assets are not being counted on estate tax purposes. So it can also be used for
estate tax planning
disadvantages
Unlike other types of tax-deferred plans, such as 401(k) plans, IRS rules
allow only a single exchange or reallocation of assets per year in a 529 plan.
The earnings portion of money withdrawn from a 529 plan that is not spent
on eligible college expenses will be subject to income tax, an additional 10%
federal tax penalty, and the possibility of arecapture of any state tax
deductions or credits taken. For example, if you contribute $50,000 into a
529 plan and it grows to $60,000 over time and you make an unqualified
withdrawal for the entire amount, you are taxed on the $10,000 gain plus a
10% penalty on the $10,000 which would be $1,000 penalty.
Paying tuition directly from a 529 account may reduce a student's
eligibility for need-based financial aid.
Paying college expenses directly from a 529 account may reduce eligibility
for the American Opportunity Tax Credit. To claim the full credit (in

addition to meeting other criteria, such as income limits), $4,000 of college

expenses per year should be paid from non-529 plan funds