College Savings Plan | Section 529

Section 529 College Savings Plan

A "529 Plan" is one of several investment plans sponsored by a state designed to help families save for future college costs.

There are two types of Section 529 plans: Prepaid Programs and Savings Programs.

What’s so great about the 529 plans? With the enactment of the 2001 tax law changes, there are several advantages:

The tax breaks are incomparable. Your investment grows tax-free for as long as your money stays in the plan. When the plan makes a distribution to pay for the beneficiary's college costs, the distribution is federally tax-free as well. This treatment applies to distributions during 2002 through 2010. Unless Congress decides to extend this tax break, qualifying distributions made after 2010 will be taxable to the beneficiary (earnings portion only). You should still be able to save on taxes with the child’s lower income tax bracket. 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 tax-free treatment.

As the donor, the account stays in your control. With few exceptions, the named beneficiary has no rights to the funds. You decide when withdrawals are taken and for what purpose. This is unlike the Uniform Transfers to Minors Act (UTMA) Accounts, where the child gets control at age 18 (21 in NH and Maine), whether they are going to college or not.

A 529 plan is easy to create. Once you decide which 529 state plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). 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. You won't even receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals. Most programs allow you to change to a different option in a 529 savings program every year (program permitting) or you may roll over your account to a different state's program as often as once every 12 months. 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.

Everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $200,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions.

Almost every state has their own plan. Each state’s plan is different and not meant for every family’s circumstances.

If your child decides he/she doesn’t want to attend college or you have more money in the account than they possibly need, there will be a 10% penalty on earnings only, in addition to applicable state income taxes for non-qualified distributions.
You will receive 100% of your principal and only 90% of your earnings.
You are able to change the beneficiary at any time in order to keep the account going and not falling subject to those penalties for unqualified distributions. Siblings and first cousins are allowable beneficiaries.

We’ll help you to decide which plan is the best option for saving for your child’s education.

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