Sunday, June 3, 2012


Name the top 7 benefits of 529 plans

COMMON QUESTIONS

Have you signed up for Upromise yet?

Federal tax benefits

529 plans offer unsurpassed income tax breaks. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free. The tax-free treatment was made permanent with the Pension Protection Act of 2006.

State tax benefits

Your own state may offer some tax breaks as well (like an upfront deduction for your contributions or income exemption on withdrawals) in addition to the federal treatment. You should research what benefitsresidents receive for investing in your own state's 529 plan. If you don't get any benefits from your state, you have the pick of every 529 plan on offer...so compare plan features.

Donor retains control of funds

You, the donor, stay in control of the account. With few exceptions, the named beneficiary has no rights to the funds. You are the one who calls the shots; you decide when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. (However, the earnings portion of the "non-qualified" withdrawal will be subject to income tax and an additional 10% penalty tax). Compare this level of control to a custodial account under the Uniform Transfers to Minors Acts (UTMA) and you will find the 529 plan gives you much more say in how your investment is used!

Low maintenance

Third, a 529 plan can provide a very easy hands-off way to save for college. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). Then you can relax and forget about it if you like. The ongoing investment of your account is handled by the plan, not by you. Plan assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager.

Simplified tax reporting

You won't receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals.

Flexible

If you want to move your investment around you may change to a different option in a 529 savings program every year (program permitting) or you may rollover your account to a different state's program provided no such rollover for your beneficiary has occurred in the prior 12 months. Hint: There is no federal limit on the frequency of these changes if you replace the account beneficiary with another qualifying family member at the same time.
Each 529 plan will have different rules that may impact the number of changes you can make, so compare the features of individual plans if flexibility is important to you.

Substantial deposits allowed

Everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $300,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions. Thinking about going back to college or graduate school in the future? Then set up a plan for yourself!
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