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529 Plans

In 1996, Congress, concerned about the upward-spiraling cost of college, created qualified state tuition programs under Section 529 of the Internal Revenue Code. A 529 plan is a tax-advantaged plan administered by a state that is designed to help people save for the expenses of a college education. The state typically contracts an investment management firm as the program manager who provides a variety of investment options. You invest in the option(s) of your choice that are appropriate for your risk tolerance and investing time horizon.

No Income Restrictions

One of the biggest advantages of 529 plans is that there are no income restrictions, everyone is eligible to have a 529 plan.

High Contribution Limits

With the InvestEd Plan, contributions can be made until a maximum balance of $340,000 (2009-2010 academic year) is reached for all Program accounts per beneficiary. Plus, there are no income restrictions on the account owner, so the InvestEd account may be maintained regardless of income.

Broad Eligibility

Anyone can establish a 529 account, and anyone can contribute to the account once it's established. Qualified expenses can include tuition, room and board, supplies, etc. in connection with attendance at an eligible institution. More than 8,000 schools, including colleges, universities, community colleges and technical/vocational schools, currently qualify as eligible institutions.

Account Owner Stays In Control

As a 529 account owner, you stay in control of the account. You determine how your investment is used, you can change the beneficiary at any time and you can determine when withdrawals are taken. So for example, if you're the registered account owner and your child doesn't attend college, you may change beneficiaries ¹ or withdraw the assets you have accumulated. Please note that non-qualified withdrawals are subject to taxation and penalties. ²

Tax Advantages³

Earnings in 529 plans grow federal income tax-deferred, enabling your account to grow faster than a comparable taxable account. Also withdrawals are federal income tax-free if used for qualified higher education expenses. Additionally, states may offer some tax breaks such as a deduction for contributions or income exemption on withdrawals. The availability of tax or other benefits may be conditioned on meeting certain requirements, such as residency or purpose for or timing of distributions.

Gift And Estate Tax Advantages

Contributions to a 529 plan are treated as completed gifts to the beneficiary. As a result, the contributions and any earnings in the account are generally not included in the estate of the contributor. Through use of the annual $13,000 gift tax exclusion ($26,000 in the case of a married couple), it's possible to contribute substantial amounts to an account without incurring any gift tax.

You can make an election (on the federal gift tax return) to spread up to $65,000 of a contribution to a 529 plan over five years. ⁴ Thus, each donor can generally make a lump sum contribution of $65,000 (e.g., $130,000 in the case of a married couple) to a 529 plan or on behalf of each beneficiary without any gift tax consequences (assuming the donor makes no other gifts to the same beneficiary in the five-year period). ⁵

Estate Planning

Advantages 529 plans offer special advantages for estate planning purposes. Subject to certain limitations, contributions to a 529 plan are generally excluded from your taxable estate for federal estate tax purposes, provided you aren't also the beneficiary on the account.

Won't Affect Hope Or Lifetime Learning Credits

The use of Hope Scholarships and Lifetime Learning Credits won't affect participation in, or the receipt of, benefits from a 529 plan.⁶ Similarly, contributions to a 529 plan won't affect your use of, or receipt of, benefits from a Hope Scholarship or Lifetime Learning Credit.

¹ There may be federal gift or generation skipping transfer tax consequences if the new beneficiary is a member of a lower generation than the prior beneficiary.

² The earnings portion of any non-qualified withdrawals (i.e., generally those not used for qualified higher education expenses) is subject to a federal tax and possibly state tax. In addition, the earnings portion of a non-qualified withdrawal is subject to an additional federal penalty in the form of an additional 10% tax on the earnings portion of the withdrawal. The 10% penalty doesn't generally apply to certain distributions made after the death or disability of the beneficiary or after the receipt of certain scholarships.

³ Information is based on current tax laws, regulations, rules and interpretations, which are subject to change at any time. Please consult your tax advisor regarding the tax consequences of your contributions to and withdrawals from any 529 plan.

⁴ If the contributor dies before the end of the five-year period, the portion of the gift allocable to the years remaining in the five-year period would be in the contributor's estate for federal estate tax purposes.

⁵ Although additional contributions may also be made (subject to contribution limitations under the plan) by a contributor that exceed the annual gift tax exclusion (including the effect of the five-year election), such contributions may, depending upon the circumstances, result in gift, estate or generation skipping transfer tax consequences to the contributor.

⁶ The total amount of qualified higher education expenses in a year is reduced by the amount of expenses taken into account in determining the amount of any allowable Hope Scholarship and Lifetime Learning Credits.

An Investor should consider the investment objectives, risks, charges and expenses of a 529 Plan before investing. More information about 529 plans can be found in the issuer's official statement, which should be read carefully before investing.