A tax-free savings program
Section 529 Plans are one of the most commonly used college education investment vehicles. Beneficial tax and cost saving opportunities may be associated with these plans, such as:
- Tax-free growth
- Tax-free withdrawals for qualified education expenses
- Possible state income deductions
Section 529 Plans are state-sponsored plans that allow you to save for college education expenses on a tax-free basis. The money can be used at any federally accredited college – private or public, in-state or out-of-state. If the beneficiary does not attend college or has funds remaining, the money can be transferred to a qualified family member (as distant as a first cousin) or taken out of the account.
A non-qualified withdrawal is subject to income tax as well as a 10% penalty on earnings only.
Estate Planning Opportunities
Significant estate planning opportunities exist with Section 529 Plans. The assets are not considered part of the account owner’s estate, yet the owner retains control of the account. In addition, special provisions allow individuals to gift up to $65,000 (or $130,000 per couple) in one year to a specific person.
Selecting a 529 Plan
When selecting a 529 Plan, we recommend that you first review the state plan in which you reside. By investing in the plan in the state you reside, you may receive an income tax deduction. In most cases, investing in a state plan other than the state plan in which you reside, will cause you to forgo an income tax deduction.
Out of State 529 Plans
If you wish to invest in a 529 plan other than the plan in the state that you reside, we recommend that you invest in a plan that accepts direct enrollment versus a broker advised fund. The potential benefit to enrolling in a plan that accepts direct enrollment is that you avoid commissions associated with broker advised funds, likely reducing your management fees, and fund expenses.
Many 529 Plans offer age-based investment options. Age based options invest in broadly diversified investments and select a target asset allocation that corresponds with the age of the beneficiary. These options progressively change to invest in asset classes that are more conservative as the beneficiary ages.
Prepaid Tuition Program
Investors may also invest in Section 529 Prepaid Tuition Program, which is explained below:
- State-sponsored program that involves the purchase of tuition credits or certificates that entitle the beneficiary to a waiver or payment of future qualifying college costs
- Purchasing tomorrow’s tuition, at today’s price
- Institutional Sponsored Section 529 Plan
- Tax legislation allows institutions to sponsor their own plans
- Tuition Plan Consortium (TPC) is a not-for-profit national consortium of over 240 independent colleges and universities setting up Section 529 Plans