College Savings
529 Plan
(Eligibility, tax considerations, and contribution limits are based on IRS rules and State regulations, which are subject to change after 2008.)
529 College Savings plans are a tax-advantaged investment vehicle designed to help you meet the challenges of saving and investing for the costs of higher education. 529 Plans were established by Congress in 1996 in recognition of the escalating costs of higher education and named for Section 529 of the Internal Revenue Code. These plans are created by states. Additionally, certain education institutions sponsor their own qualified tuition programs that generally apply specifically to that institution. Although each state determines particular plan features, like contribution maximums, there are some similarities. The following features are common to all 529 Plans:
Flexibility
- Anyone can contribute—Any U.S. citizen or legal U.S. resident can establish a 529 Plan on behalf of an individual beneficiary, including parents, grandparents, other relatives and friends. There are no adjusted gross income limits to meet and no age requirements for account owners.
- Investments can be used at a wide range of higher education institutions—When a student is ready for college the money accumulated in a 529 Plan account can be withdrawn to pay for qualified higher education expenses at any accredited college, university, professional or technical school in the U.S. or overseas.
Income Tax Advantages
- Tax-deferred growth—Account earnings grow free from federal income taxes.
- Tax-free qualified withdrawals—Withdrawals used to pay for qualified higher education expenses are federally tax-free. (Note: For non-qualified withdrawals, the earnings portion is subject to federal income taxes and a 10% federal excise tax penalty. Also, state and local taxes may apply.)
- State Tax Advantages—Investors may enjoy additional state or local tax benefits for participating in their own state’s plan.1
Gift and Estate Tax Benefits
Under current tax laws, account owners can contribute up to $13,000 annually ($26,000 for married couples filing jointly) to a 529 Plan account of any beneficiary in a single year without incurring federal gift taxes. Subject to special rules, 529 Plan account owners can contribute five times the annual gift amount all at once — $65,000 per beneficiary ($130,000 for married couples filing jointly) without incurring federal gift taxes.
High Contribution Limits
High contribution limits allow clients to add to their investment until the account value reaches the state-mandated maximum amount. Many states allow contributions in excess of $250,000. Earnings may continue to accumulate beyond this limit.
Account Control
The account owner maintains control at all times, even after the beneficiary turns age 18. If the beneficiary elects not to attend college, the account owner can choose to change the beneficiary to another family member, gift the investment or liquidate the account. (Note: Non-qualified withdrawals may be subject to federal income and other taxes.)