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Parenting Tips > 529 Plan Benefits: An Education for Your Student, Tax Breaks for You
529 Plan Benefits: An Education for Your Student, Tax Breaks for You
By Joel Marius
 With
the pace of higher-education costs rising faster than the general Consumer Price
Index (CPI), it’s easy to understand why saving enough money to fund a child’s
college education has become a financial challenge for many parents and
grandparents. The numbers tell the story: The first-year college tuition bill in
2020 is projected to be $32,803 for an in state average public education
institution and $66,036 for an average private institution.* So whether college
for your child or grandchild is years away or right around the corner, put time
on your side – consider the benefits of contributing to a 529 plan for a student
(beneficiary) in your family.
Made possible by federal legislation, 529 plans (named after section 529 of the
Internal Revenue Code, 26 U.S.C. §529) are implemented at the state or
institution level. Nearly all states have approved and adopted these qualified
tuition assistance programs. Most states let nonresidents participate in their
plans, although the tax benefits may be greater for residents than for non
residents.
The student can use 529 plan account balances at any participating accredited
postsecondary school in the United States or certain schools abroad for tuition,
room and board, books, equipment, and supplies. Qualified expenses also include
computer technology, related equipment and Internet-access costs.
As the owner, you retain control of the assets and can change beneficiaries
within the designated student’s family at any time without penalty. A qualified
family member generally includes siblings, descendants, ancestors, aunts, uncles
and first cousins. Other key advantages of these plans include:
Federal-income-tax-free qualified distributions. The student may be able
to take qualified distributions federal-income-tax-free.
No income limitations for participation. There is no income limit for
contributing to a 529 plan, which is a benefit for higher-income families.
Substantial contribution amounts. Contribution limits are significantly
higher than those allowed for other education savings plans. Maximum account
balance limits vary from state to state.
Significant estate-planning benefits. A single person can contribute up
to $65,000 in one year per beneficiary; a married couple can contribute up to
$130,000 in one year per beneficiary with no gift-tax consequences. Such a
contribution will be considered a five-year accelerated annual-exclusion gift,
so no additional gifts can be made for that beneficiary for the next four years
without incurring gift-tax implications unless the annual exclusion gift
increases. The gift amount and subsequent appreciation, however, are removed
from your taxable estate. (A portion of the contribution amount may be included
in the donor’s taxable-estate calculation if the donor should die within the
five-year period.)
No burden of investment decisions. The plan’s chosen investment manager
will be responsible for portfolio management of all contributions. Initially,
some plans may let you select from several asset-allocation-model alternatives,
which generally may be changed once every calendar year and/or with a
beneficiary change.
If for some reason the account balance is not used for qualified higher
education expenses, every withdrawal from a 529 plan is separated into two
components: an “earnings” portion and a “return of your investment” portion. If
a withdrawal is not used for qualified higher-education expenses, the “earnings”
portion of the withdrawal is subject to federal income tax and potentially a 10%
IRS penalty. The “return of your investment” portion in the 529 plan is never
subject to federal income tax or IRS penalty. (State laws regarding taxes and
penalties can vary from state to state, however, and may apply; you should
always check with your tax professional before making this type of withdrawal.)
If the beneficiary dies, becomes disabled or receives a tax-free scholarship,
you may take penalty-free withdrawals from the 529 balance within that same
calendar year.
Keep in mind that 529 plan investment balances may affect eligibility for
financial aid:
• If a parent owns the 529 account, up to 5.64% of the value is included in
Expected Family Contribution (EFC) as a parental asset. Any 529 accounts owned
by a dependent student, or by a custodian for the student, are reported on the
Free Application for Federal Student Aid (FAFSA) as a parental asset. Any
qualified withdrawals from these accounts are not included as income to the
student.
• If a 529 account is owned by a grandparent (or someone other than a parent or
the student), the value of the 529 plan is not reportable as an asset on the
FAFSA.
However, any distributions from these third-party accounts are considered
financial support to the student and are reportable on the following year’s
FAFSA as student income. Student income is assessed at the student’s rate of
50%.
There are many 529 plan choices – discuss college-funding alternatives with your
Financial Advisor and choose the one that best fits your needs.
* Total yearly costs for in-state tuition, fees, books, room and board,
transportation, and miscellaneous expenses. Base is 2009-2010 school year. Costs
for 2020 projected by Wells Fargo Advisors in October 2009 assuming a 5.4%
increase per year. Source: Trends in College Pricing. ©2009
collegeboard.com, Inc.
Reprinted with permission.
collegeboard.com. All rights reserved.
As Wells Fargo Advisors does not render tax advice, you should consult with a
tax advisor before making any investment decisions which could have tax
consequences.
An investment in a 529 plan will fluctuate such that the shares when redeemed
may be worth more or less than the original investment. There are no guarantees
that an investment in a 529 plan will cover higher-education expenses. Investors
should consult the plan’s offering document for the fees and expenses associated
with that plan. You should consider a 529 plan’s investment objectives, risks,
charges and expenses carefully before investing. The plan’s official statement,
which contains this and other important information, should be read carefully
before investing.
This article was written by Wells Fargo Advisors and provided courtesy of
Joel Marius, Financial Advisor in St. Petersburg, FL at 727-551-2373.
Investments in securities and insurance products are: NOT FDIC-INSURED/NOT
BANK-GUARANTEED/MAY LOSE VALUE
Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a
separate non-bank affiliate of Wells Fargo & Company. ©2010 Wells Fargo
Advisors, LLC. All rights reserved. CAR 0710-3598
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