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529 plans*
Qualified State Tuition Programs (QSTPs), or 529 plans, have become an increasingly popular and available vehicle to help families fund the rising cost of education. By definition, a 529 plan is a tax-advantaged national college savings program authorized and created under section 529 of the Internal Revenue Code. Here is how it works:
- An investor, any family member (parent, grandparent, aunt, uncle, etc), selects a 529 Plan and puts money into the account for a designated beneficiary.
- The account holder chooses mutual funds from a selection offered by the 529 Plan of choice.
- The money grows federal income tax free
- When the beneficiary is ready for college, money is withdrawn from the plan and used to pay tuition and related costs.
- When the beneficiary applies to college the 529 account is not used "against" him or her in terms of financial aid elligibility. It reamins as an asset of the account holder and not the beneficiary.
HerTip: Contributions of up to $55,000 (single) and $110,000 (joint) to 529 plans are considered completed "gifts" for federal gift and estate tax purposes, and are excludable from your taxable estate.
What expenses are covered under a 529?
Educational expenses that can be covered under a 529 are broad and comprehensive. These include: - Tuition
- Fees
- Books
- Equipment required for enrollment or attendance at a college, university, or certain vocational and proprietary schools
- Room and board are included only if the student/beneficiary attends at least half of the time and may not exceed the amount normally assessed most residents at the institution.
- After 2001, off-campus room and board is the amount the educational institution uses when computing the cost of attendance.
For a comprehensive comparison chart of the CollegeBoundfundSM (offered by WFN at Siebert) vs. other 529 plans, custodial accounts (UGMA/UTMA), and educational IRAs, click here.
Advantages
529's have several attractive advantages. Here are just a few: - Earnings grow tax-free and can be withdrawn free from federal income tax if used for qualified college expenses.
- You may open a 529 account for any child you choose -- your own son or daughter, a grandchild, or even a non-family member. What's more, you may change your designated future college student at any time to another eligible college-bound family member.
- Although 529 plans are issued by state governments, you do not necessarily have to live in the state of the plan that you choose. To learn more about the plan offered by WFN at Siebert, click here or please call 1-877-WFN-4YOU (936-4968).
- Whereas some other college savings vehicles have relatively low limits on how much you can contribute each year, 529 Plans allow you to save far larger sums of money -- more than $100,000 in some states, and up to $265,000 in the case of the CollegeBoundfundSM. Additionally, these plans have no age or income limitations.
- Unlike a custodial account, with which the beneficiary ultimately gains total control of the funds in the account once he or she reaches a certain age, with a 529 plan the person who establishes the account decides when distributions may be made.
- Funds set aside in 529 accounts can be used at any accredited college, university, graduate school, trade school, or vocational school.
- Some contributions to 529 plans may be excluded from your taxable estate.
HerTip: 529s are not created equal. Compare portfolio managers, investment options, maximum and minimum contributions, fees, and in-state tax advantages.
Issues to consider
There are issues to consider when thinking about opening a 529. These include:
- If you withdraw your funds for something other than college-related expenses, you are required to pay taxes plus at least a 10% penalty on earnings.
- A good broker can help you to compare plans. You should consider in state tax advantages as well as fees, investment options and the like.
How has the new tax plan affected 529 plans?
The new Bush tax plan has made 529 plans even more attractive to potential investors. Here are a few of the important changes that will take effect January 1, 2002:- Before the tax bill was passed, the earnings in 529 accounts were tax-deferred and taxed at the student's ordinary income tax rate. 529 earnings will now be tax-free.
- Rollover procedures have been streamlined in an effort to make it easier to roll your account from one plan to another.
- Participants will be permitted to apply a greater amount of funds toward the expenses incurred when a student lives off campus.
- The definition of family will be expanded to include first cousins. Money in a 529 account not spent by one student can be spent by a brother, sister or now, first cousin.
- Investment choices will be broadened. Many states will now offer different "tracks" ranging from conservative to aggressive, and containing different ratios of investment products as a result.
- An educational institution can establish its own program without state sponsorship. (Keep in mind that these institutional programs will be more restricted than state sponsored programs.)
- Beneficiary changes may also apply to a spouse.
HerTip: Unless Congress decides to extend the tax plan, the new laws sunset on January 1, 2011 and the federal tax treatment of 529 plans will return to its status prior to January 1, 2002.
HerTip: You can open a 529 account right here at WFN at Siebert. Call 1-877-WFN-4YOU (1-877-936-4968) or open an account online to get started today.
Continue to: Part VII- Scholarships and private Scholarships
*WFN at Siebert does not provide investment or tax advice. 529 tax information from Practitioners Publishing Company - "Using Qualified State Tuition Programs to Build College Savings".
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