The student does not
necessarily have to attend school in the state where the plan is created.
The 529 Plan is merely a state-sponsored savings vehicle. Please note that
some states do have different plans for residents and non-residents, and
some states do not presently allow participation by non-residents. About
2/3 of the states have non-resident programs.
The donor (contributor)
to the account is generally the account owner. The donor names a
beneficiary (the future student). In the event the future student decides
not to attend college, or for some other reason does not need the support,
the donor can change beneficiaries.
The amounts invested in
the 529 Plan are not tax-deductible; however, the investments grow
tax-free until they are needed. Then, provided the funds are used for the
beneficiary's qualified school costs, they are tax-free to the
No one pays tax on the
interest, dividends, gains or other investment return earned by the 529
Plan as long as the distributions are for qualifying costs of education.
This was a major law change that took effect for
distributions in 2002.
Even better news is that
there is no income limit on who may establish an account. The contribution
amounts vary by state but please be aware that if you contribute more than
$13,000 in a given year, there may be gift tax consequences. You may be
"frontload" an account and spread the gift over five years. To
illustrate frontloading, assume a proud new grandparent wants to pay for
the cost of her new grandchild's college.
Grandmother may be able to
establish a 529 plan with a contribution of $50,000. She will then elect
to spread the gift over five years and use her annual gift exclusion to
avoid any gift tax exposure. For reference, a $50,000 gift will grow to
about $200,000 in 18 years at an 8% rate.
Such large contributions
are certainly not required. Monthly contributions are probably more
practical for most families. The 529 Plan does represent a good way to
begin an education savings program.
If you are interested in
establishing a 529 Savings Plan for your child, please contact our
office. We can assist you in examining the options and opportunities
that are available to you.