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One note of extreme caution
however! Section 529 Plans are administered by the individual states and
as a result, each state's rules can and will be a little different so we can
only speak in generalities in our responses below. When we say that
"anyone" can participate or that there are "no" age
restrictions, please bear in mind that a particular state plan you're looking at
may very well have age and participation restrictions, but for the most part,
the majority of states do not. As always, read the restrictions carefully
before entering into any agreement.
What are Section 529 Plans?
Quite simply, Section 529 Plans
are state-sponsored savings plans which allow you to set aside money that can
accumulate earnings tax free for the future higher education needs of a child,
grandchild, family member, friend or even yourself.
Does my state offer a
Section 529 Plan?
Yes. All states have now
established Section 529 Plans. However, even though your state may offer
attractive incentives if your beneficiary plans to attend a state school, you
are not required to participate in your own state's plan and the student is
generally not required to attend a school in that state. The states are
basically competing for business right now and you are free to choose which plan
might offer the best return or the most flexible options.
Once I contribute the money, who owns the account?
You own the account. You
generally have to name the future beneficiary, but that gives him or her no
right to the money until you decide when and how it is spent.
Are my contributions tax
deductible?
No. The tax advantage of
establishing a Section 529 Plan comes in the fact that the earnings on your
account are exempt from income tax and the distributions are tax free to the
beneficiary as long as they are used for qualified education expenses.
What if my child decides not
to attend college? Can I get my money back?
Yes. However, the
earnings on your contribution will be subject to ordinary income tax as well as
a 10% penalty tax unless the beneficiary is deceased, disabled or obtained a
scholarship. For example, lets assume you contributed $5,000 to a Section
529 Plan for your granddaughter who later decides not to attend college.
If the total funds in your Plan has reached $8,000 when you decide to remove
your money, the $3,000 which represents earnings on your original investment
($8,000 less $5,000) will be subject to both ordinary income tax and a $300
penalty tax ($3,000 x 10%).
Can I change the beneficiary if one grandchild decides not to attend college
and another does?
Generally the answer is yes,
but check your plan's rules carefully before committing.
Will a 529 Plan hinder the
student's ability to obtain financial aid?
Since the plan assets are owned
by the donor and not the student, a 529 Plan will generally only be taken into
consideration as usable assets if it is on a parent's financial aid application
and even then it is considered as only a small percentage of assets available
for the student. However, distributions from a 529 Plan in a given year
will generally be considered as income to the student on the following year's
financial aid request.
Is there an income limit for
establishing a Section 529 Plan?
Not generally.
How much can I contribute to
a Plan?
The contribution amounts vary by state but
may approach $11,000 per year. Further, you may “frontload” an account and
spread the “gift” over five years. For example, if you set up a 529
plan and contribute $55,000, you can elect to spread the gift over five years
and use your annual gift exclusion ($11,000 in 2003) to avoid any gift tax
exposure. However, since that is beyond the means of most people, the
average 529 Plan is funded with smaller monthly or annual contributions.
The total maximum that you can contribute to a plan can be as much as $200,000
in some states presently.
As we mentioned above, please
remember that the answers we have given here are GENERALITIES and not absolute
answers! Each plan will differ in its terms and regulations, so please
read them carefully. As always, if you need assistance understanding some
of the specifics, please do not hesitate to contact our office.
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609.581.0300
Free Consultation
Tel: 609-581-0300
Fax: 609-581-0898
