529 Plans Presented by: John Agee Jimmy Chowdhury Bryan Kight.

529 Plans

Presented by:

John AgeeJimmy ChowdhuryBryan Kight

Agenda/Topics to Be Covered

• Existing Plans• 529 Plan Overview• 529 Plan Benefits• Disadvantages• Plan Management and Fees• FAQs • Additional Resources• References• Appendix: IRC Code

Existing College Plans

• One of the best ways to increase the affordability of your child’s education is to take advantage of federal tax breaks aimed at families saving and paying for college. These include the following:

• Qualified Tuition Programs (529 plans) — Earnings grow tax-deferred and distributions are tax-free when used for qualified post-secondary education costs before 2011.

• Coverdell Education Savings Accounts — Earnings grow tax-deferred and distributions are tax-free when used for qualified post-secondary education costs. May also be withdrawn tax-free for primary and secondary school expenses before 2011.

• U.S. Savings Bonds — EE and I bonds purchased after 1989 by someone at least 24 years old may be redeemed tax-free when the bond owner or the bond owner's spouse or dependent pays for college tuition and fees. In 2005, the tax exclusion is phased out for incomes between $61,200 and $76,200 (between $91,850 and $121,850 for married taxpayers filing jointly). These income limits increase each year.

• Individual Retirement Accounts — Early withdrawal penalties are waived when Roth IRAs and traditional IRAs are used to pay the qualified post-secondary education costs of yourself, your spouse, your children, or your grandchildren. (Taxes may still be due on the withdrawals, however.)

Source: http://www.savingforcollege.com/tutorial101/federal_tax_incentives_to_education.php

Existing College Plans (cont.)• Hope Scholarship Credit—A parent may claim a tax credit for 100% of the first $1,000

and 50% of the next $1,000, of a dependent child’s college tuition and mandatory fees, for a maximum $1,500 annual tax credit per child. Students may claim the credit only if they are not claimed as a dependent on another person’s tax return. In 2005, the credit is phased out for incomes between $43,000 and $53,000 (between $87,000 and $107,000 for married taxpayers filing jointly). The credit is allowed only for students who are attending a degree program at least half-time and who have not completed their first two years of academic study before the beginning of the taxable year. It cannot be claimed in more than two tax years for any one student.

• Lifetime Learning Credit—A taxpayer may claim a tax credit for 20% of up to $10,000 in combined tuition and mandatory fees for himself, his spouse, and his dependent children. This equates to a $2,000 tax credit. In 2005, the credit is phased out for incomes between $43,000 and $53,000 (between $87,000 and $107,000 for married taxpayers filing jointly). Claiming the Hope Scholarship credit described above means that you may not claim a Lifetime Learning credit for any of that student’s expenses in the same tax year. There is no requirement that the student be studying towards a degree or be enrolled at least half-time, and there is no limit on the number of years the credit may be taken.

• Tuition and Fees—An above-the-line deduction (this means you do not have to itemize your deductions) for up to $4,000 of the college tuition and related expenses of yourself, your spouse, or your dependent is available in 2004 and 2005 if your income is $65,000 or less ($130,000 or less if you are married filing jointly). For taxpayers with incomes between $65,000 and $80,000 (between $130,001 and $160,000 for married taxpayers filing jointly), the deduction limit is $2,000. The deduction is not available if anyone claims a Hope or Lifetime Learning credit for that student's expenses in the same tax year. This deduction disappears after 2005.


Existing College Plans (cont.)

• Deduction for Student-loan Interest—Up to $2,500 in student loan interest may be deducted above-the-line as long as the debt was incurred to pay the college costs for yourself, your spouse, or your dependent, while enrolled as a student at least half-time in a degree program. For 2005, the full deduction is allowed for singles with income below $50,000 and a partial deduction is allowed for singles with income up to $65,000. Married couples filing jointly get the full deduction with income up to $105,000 and a partial deduction with income up to $135,000. A student claimed as a dependent may not take the deduction on his or her own return.

• Tax-free Scholarships—Most scholarships and grants are tax-free if the recipient does not have to provide services in exchange for the award.

• Tax-free Educational Assistance—Employers may pay and deduct up to $5,250 in college and graduate school costs for each employee under a Section 127 educational assistance plan. The education does not have to be job-related. The benefit is tax-free to the employee, but cannot be used to pay for an employee’s children or other family members.

• For more information on tax incentives for education, see IRS Publication 970, Tax Benefits for Higher Education, available at www.irs.gov.


What is a 529 plan?

• It is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant (Section 529 of the Internal Revenue Code).

Source: http://www.savingforcollege.com/intro_to_529s/

What is a 529 plan? (Cont.)

• 529 plans are usually categorized as either prepaid or savings, although some have elements of both. Every state now has at least one 529 plan available. It's up to each state to decide whether it will offer a 529 plan (or possibly more than one), and what it will look like. Educational institutions can offer a 529 prepaid plan but not a 529 savings plan (the private-college Independent 529 Plan is the only institution-sponsored 529 plan thus far).


What's so great about 529 plans?

• First, you get unsurpassed income tax breaks. Your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free. This treatment applies for distributions in the years 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). Assuming that the student isn't earning hundreds of thousands of dollars running a dot-com company out of her dorm room, you should still save taxes with her 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 treatment.



• Second, you the donor stay in control of the account. With few exceptions, the named beneficiary has no rights to the funds. You are the one who calls the shots; you decide when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. (However, the earnings portion of the "non-qualified" withdrawal will be subject to income tax and an additional 10% penalty tax).


What's so great about 529 plans? • Third, a 529 plan can provide a very easy hands-off way to

save for college. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). Then you can relax and forget about it if you like. 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. If you want to move your investment around you may change to a different option in a 529 savings program every year (program permitting) or you may rollover your account to a different state's program provided no such rollover for your beneficiary has occurred in the prior 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.)



• Finally, everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $230,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions. Thinking about going back to college or graduate school in the future? Then set up a plan for yourself!


529 Benefits

• The Benefits: Tax Treatment

• All of the account's earnings are exempt from federal tax when they are withdrawn if they are used for qualified education expenses. This means that, unlike the taxes you have to pay on earnings from regular stock investments, you won't pay any tax on the 529 account earnings unless you end up using the money for something other than higher education. Earnings are currently tax-deferred in most states, as well.

• A break on the earnings tax isn't the only tax advantage, either. Although your contributions aren't pre-tax (you pay state and federal tax on the money you put into the account), there are some states that let you deduct a portion of your contributions from your state taxes. More states will probably follow suit in the coming years.

• Exemption• The tax exemption on 529 account earnings is in effect at least until

2011, which is when it can revert to the original plan where the earnings are taxed at the child's rate. It is very likely that Congress will revisit the 529 issue and vote to make the tax-free status permanent prior to that date.

Source: http://money.howstuffworks.com/529.htm

529 Benefits

• The Benefits: Account Control

• Unlike custodial accounts or Education Savings Accounts (ESAs, formerly Education IRAs), the beneficiary does not gain control of the money at a specific age (usually 18 or 21 for those types of accounts). The account owner always has control of the money. This helps lessen that parental anxiety that Junior will take the money and tour Europe or buy a Porsche instead of going to college.

• There are no restrictions on who can open an account for whom. You can open an account for your child, a friend's child, a relative, the paper boy, or even yourself.

• Anyone can contribute to the account. Now all (or at least some) of that birthday money from Grandma and Grandpa that's usually blown on candy and soon-forgotten toys can be funneled into the college savings account!


529 Benefits

• The Benefits: Income Eligibility

• Did you know that with an ESA, you aren't eligible to contribute if you make more than $110,000 per year ($220,000 for married couples)? Unlike ESAs, your income does not affect your eligibility to open a 529 account.

• Contributions to 529 plans also qualify for the $11,000 ($22,000 for married couples in 2002) annual gift tax exclusion. You can also contribute up to five years of gifts during the first year, meaning you can put in up to $55,000 ($110,000 for married couples). This is a great benefit in situations where inheritance money enters the picture.

• Your account can grow up to $268,000 in some states. • You can contribute as little as $25 to $50 per month.


529 Benefits

• The Benefits: How the Money Can Be Used

• In most states, there is no age limit or time limit for when the money has to be used. Your child can put off college indefinitely, in which case you have the option of rolling the account over to another child as long as that child is in the same family of the first beneficiary. In case you're wondering just who is considered "family," the plan defines family members as "the original beneficiary's spouse, children, sisters, brothers, nephews, nieces, first cousins, and any spouses of those persons."

• Your child can go to any accredited degree-granting educational institution, whether it is public, private, two-year, or four-year. There are even some international schools that qualify.

• In most states, qualified education costs include tuition, books, room, board, transportation, and even computers.

• In the event that your child gets a scholarship, then the remainder of the 529 account can be rolled over to another sibling (or relative), or it can be cashed out with no penalty other than the tax paid (at your rate) on the earnings. The same rule applies in the event of the child's death or disability.


529 Benefits


529 Benefits

• The Benefits: Investment Control

• If the thought of turning over your hard earned money to the state makes you a little uneasy, rest assured that the state doesn't control your money. In fact, most states are signing on with well-known, successful investment companies such as TIAA-CREF, Vanguard and Fidelity. The number and types of investment options vary by state, and once you select your option you can't change it. You can, however, roll your money over into another state's plan if you're not happy with your chosen investment option. There is no penalty to roll the money over into another state's plan, and you can do it once every 12 months. Most states have no residence requirement for their 529 plans.

• Many plans are also offering investment choices that are age-based. This means that if you're starting early, perhaps when your child is age one to three, the investments can begin aggressively in stocks then gradually shift to bonds and money market accounts as your child gets closer to college age. Some state plans offer several levels of options for aggressive, moderate and conservative investments.

• If you can't reach the risk level you want in one plan, you can always open a second 529 account in the same or another state. You can have as many accounts as you want and can also contribute to both a 529 plan and an ESA. That way, you can diversify your investments in the event that the plan doesn't offer the investment mix you would like.


Example of Age Based Portfolios


This graphic will cycle/change when in slide show mode.

529 Plan Benefit Recap

• A 529 college savings plan is a very simple way to save money for your kids' (or anyone else's) college education. The benefits are tremendous. Here are some of the heavy hitters:

• You pay no taxes on the account's earnings. • The child doesn't have control of or access to the

account -- you do. • If the child doesn't want to go to college, you can

roll the account over to another family member. • Anyone can contribute to the account. • There are no income limitations that might make

you ineligible for an account. • Most states have no age limit for when the money

has to be used. • If the child gets a scholarship, any unused money

can be withdrawn without paying any penalty (just the tax).


529 Disadvantages• If your child applies for financial aid, the 529 account may affect eligibility.

According to FinancialAidOfficer.com: • ...the 529 account is treated as an asset of the parent or other account owner in

determining eligibility for federal financial aid. This means that your expected contribution towards your child's college costs will include 5.6 percent, or less, of the value of your 529 account for each academic year. This is actually much better than the 35 percent assessment against money that is in your child's name or in a custodial account.

• The only real drawback comes in when calculating eligibility the second year. At this point, 50 percent of the money that was withdrawn from the 529 account the first year shows up on your child's tax return. This decreases your child's eligibility for the next year by 50 percent of that amount. For example, if you withdraw $10,000 from the account to pay for college expenses the first year, then $5,000 (50 percent of the total) will show up as the child's taxable income. That will decrease your child's eligibility the following year by $2,500, because there is a 50 percent eligibility assessment on the child's tax return from the prior year. (Remember -- we're talking about tax laws -- all of this can change.)

• If the student owns the 529 account, which is what happens when a custodial account has been transferred to a 529 account, then the amount of the account will greatly affect his or her eligibility for financial aid. Because the student owns the account and it is one of the student's assets, a 35 percent assessment against those assets kicks in.


• One thing to watch out for is that the new tax laws regarding 529 plans will "sunset" in 2011. This means that lawmakers will have to make the tax change permanent before then or else the plans will revert to their original tax-deferred status (see sidebar in previous section). This possible reversal could affect you if your children will be going to college after 2011.

• The money in your 529 plan can't be used as collateral for a loan. • You don't control the investments (more about how the money is

invested in the next section). Your only option for changing the investments made with your money is to roll the account over to another state's plan. You can do this once a year with no penalty.

• If you have to withdraw the money for some reason other than to pay for qualified higher education, then you pay tax (at your rate) and a 10 percent penalty.

• You can only make cash contributions to the account; stocks can't be rolled over into it.

• Although you are the account owner, 529 accounts are considered gifts and are, therefore, not calculated as part of your own estate assets.

• Each beneficiary must have his/her own account. Siblings or cousins can't share an account. You can, however, roll any remaining portion of an account over to another child once the account's beneficiary has completed college.

529 Disadvantages (cont.)


Choosing the Right 529 Plan

• Choosing the right 529 plan is not much easier than choosing anything else in financial world. It takes some research, some luck, and the ability to accept some level of risk. The variations in state plans don't make the process any easier. Here are few guidelines that can get you started:


Choosing the Right 529 Plan

Research Tips

• The Kiplinger Web site offers information about the best deals for 529 plans. SavingForCollege.com is also a great resource for all kinds of information about 529 plans. It provides state-specific information and links to state programs.

• The first thing to do is to look at your own state's plan. There are currently 16 states that offer a tax deduction on 529 contributions, and many that also exempt state tax on the earnings upon withdrawal. Some states may offer matching grants or loan programs. This can make a fairly significant difference and is worth weighing against other state plans that may have lower fees.

• The next thing to look at is the manager of the plan. Because the plans haven't been around for very long, you can't really rely on the success record of the plan manager. Look at the investment company's record of dealing with mutual funds and pension plans.


529 Plan Fees

• Finding a low-cost plan means looking at several possible charges. For instance, some states charge an enrollment fee to open the account, and some also charge annual maintenance fees. Then there is the expense ratio, which is the percentage of fund assets that pays for operating expenses and management fees. This includes 12b-1 fees (basically, fund marketing fees), administrative fees, and all of the other asset-based costs that the fund incurs, with the exception of brokerage costs. Expense ratios often decrease as a fund gathers more dollars from investors, because the fund’s managers can spread the fixed costs of running the fund over a larger asset base. Expense ratios for 529 plans vary from a low of 0.31 percent to a high of 2.24 percent. Additional costs can also be incurred with plans that are sold by brokers. The commissions currently range from about 3.25 percent to 5 percent, payable upfront! Usually, buying direct eliminates the brokers' fees.


529 Flexibility

• Look at how flexible the plan is. You don't want to be penalized when you want to change beneficiaries or roll the account over to another state's plan. You also don't want to be limited in how the funds can be used. For example, most states allow the funds to be used for all qualified education expenses including the expense of books, housing, etc., as well as graduate school. Look at the amount you will most likely have when your child enters college and make the decision about whether the eligibility of those other expenses will be an issue. For example, if you know you will only have $20,000 in the account and tuition alone is $40,000, then whether the money can be used for housing isn't relevant. Another issue is the age limitation. There are a few states that may require your child to use the money prior to a certain age, or that may require that the child be under a certain age in order for you to be able to open an account. There may even be limits to how long the accounts can remain open without any withdrawals.


529 Plan Management

• Investigate the availability and fees related to withdrawing your cash. Although the IRS set a 10-percent fine for withdrawal of funds that are not used for qualified education expenses, plans can charge more than that. Also find out about how easy it is to get your money in the event of an emergency. Sometimes, there are time requirements about how long the money has to stay in the account before it can be withdrawn. If you do have to withdraw a portion of the money for a non-education expense, find out what happens to the rest of the account. Is it closed? Is a fine charged for the entire amount?

• Look at the maximums and minimums for contributions. Determine how much you want to have in the account when your child enters college. Make sure the plan allows at least that amount. You also may need a low minimum if you want to start the plan out without a large sum of money.

• Find out what happens with the ownership of the account if the account owner dies. Does it go directly to the beneficiary? Or, do you have the right to determine a successor? Also, check to see if you can change beneficiaries with little hassle from either the plan or the current beneficiary.

• Finally, check to make sure the plan is well managed and has the resources devoted to it that it needs. Check for program materials that answer all of your questions, good program support staff, and an easily navigated Web site offering quick program information and access to information about your account.


How 529 college savings plans work

Direct-sold• 1 Select a beneficiary. Most contributors set up 529 plans for their children or grandchildren, but you can designate

anyone as a beneficiary, even someone who isn't related to you.• 2 Select a direct-sold state plan, and decide how you want your money invested. Most plans offer several

investment portfolios. You can find a list of plans at www.savingforcollege.com.• 3 Send money to the state offering the plan. You won't pay a sales commission, although you may have to pay an

enrollment fee, depending on the plan.• 4 Once the beneficiary reaches college-age, withdraw the money to pay for tuition and fees. As long as the money

is only used for college-related expenses, you won't pay taxes on interest or gains.

Broker-sold• 1 Select a beneficiary.• 2 Contact a financial adviser who offers 529 plans. Some financial services firms, such as A.G. Edwards, offer more

than a dozen different plans. The adviser should be able to explain the investment options and help you decide how to invest.

• 3 Give the adviser money to invest in the plan. In most cases, you'll pay a sales commission, usually 3.5% of your investment. Some broker-sold plans also offer B shares, which have no upfront loads but charge higher annual fees the first eight years or more.

• 4 Withdraw the money to pay for the beneficiary's college tuition and fees. Interest and gains will be tax-free.

Prepaid• 1 Contact the prepaid tuition plan for your state. You can locate your state plan through the College Savings Plan

Network, www.collegesavings.org. Most prepaid plans are limited to state residents.• 2 Invest in the plan, either through an upfront cash payment or a series of payments. Some states also allow you to

purchase units that represent a fraction of costs of attending a state college or university. In both cases, the state allows you to buy tomorrow's tuition at today's prices.

• 3 When your child reaches college age, the state will pay tuition and fees at any state college or university. You can also use your savings at an out-of-state or private college, but you lose your guarantee. If the cost of an out-of-state or private school exceeds the value of your account, you'll have to make up the difference.


• Why invest in a 529 plan when I can't be sure that my child will attend a public university in my state?

• There's a misconception that state-sponsored 529 plans are only geared to families that send their children to a state school. That's just not true. There are two general types of 529 plans: prepaid programs and savings programs. The states offering prepaid tuition contracts covering in-state tuition will allow you to transfer the value of your contract to private and out-of-state schools (although you may not get full value depending on the particular state). If you decide to use a 529 savings program, the full value of your account can be used at any accredited college or university in the country (along with some foreign institutions).

529 FAQs


529 FAQs

• What's this I hear about a penalty on refunds? What happens if my child doesn't go to college or if I simply end up with more in the account than he needs for college?

• Federal law imposes a 10% penalty on earnings for non-qualified distributions beginning in 2002. The penalty is not assessed on principal. An exception to the penalty can be claimed if you terminate the account because the beneficiary has died or is disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship.

You can change the beneficiary to another qualifying family member at any time in order to keep the account going and avoid (or at least delay) taking non-qualified withdrawals when the original beneficiary doesn't need those funds.


529 FAQs

• Can I transfer my existing Coverdell education savings accounts and U.S. savings bonds into a 529 plan?

• Yes, you can accomplish these transfers without triggering tax, but you should be careful about ownership issues. For instance, the Coverdell ESA (formerly the Education IRA) is effectively owned by your child and so it may not be proper to transfer the funds into a 529 account that is owned by you. Also, for 529 distributions after the 2010 "sunset" the untaxed earnings transferred into the 529 plan from a ESA will be subject to tax when withdrawn from the 529 plan. Also note that the tax-free transfer of U.S. savings bond redemption proceeds into a 529 plan requires that you meet all the qualification requirements for the education exclusion, including the income limits in the year of the redemption.


529 FAQs

• Can I transfer my child's existing Uniform Transfers to Minors Act (UTMA) account into a 529 plan?

• Many, if not all, 529 plans accept funds coming from an existing UTMA or UGMA. However, because these funds belong to the minor under a custodial arrangement, any withdrawals from the UTMA/529 account must be for the benefit of that minor only. Program rules and state laws will generally prevent you from making any beneficiary changes to the UTMA/529 account, and the minor will assume direct ownership of the account when the custodianship terminates at the age of majority. Parents who are nervous about a child getting their hands on money in an UTMA account, and who may be looking to "regain control" of the money by transferring the funds to a 529 account, may be disappointed to learn that they are not able to accomplish that objective without violating state laws (see your attorney). Still, the placement of UTMA funds in a 529 account can provide all the tax and investment benefits associated with 529 plans. Remember, however, that a 529 plan can only accept cash and so any appreciated securities in the UTMA would first have to be sold and capital gains would be reportable on the minor's tax return.


529 FAQs

• I thought there were some gift and estate tax advantages with 529 plans, but you didn't mention that as a benefit. Am I wrong?

• The gift and estate tax treatment of an investment in a 529 plan is a good news, bad news situation.

• The bad news is that your contribution is treated as a gift to the named beneficiary for gift tax and generation-skipping transfer tax purposes and so you need to be aware of this exposure particularly if you are making other gifts to the beneficiary during the same year.

The good news is that your contribution qualifies for the $11,000 annual gift tax exclusion and so most people can make fairly large contributions without incurring the gift tax.

Even better news is that if you make a contribution of between $11,000 and $55,000 for a beneficiary, you can elect to treat the contribution as made over a five calendar-year period for gift tax purposes. This allows you to utilize as much as $55,000 in annual exclusions to shelter a larger contribution. The money (and the growth of your account) gets out of your estate faster than if you made contributions each year.

And the best news is that the asset leaves your estate but doesn't leave your control. This is a truly remarkable benefit when you compare it to the "normal" gift and estate tax laws. Anyone who is being advised to reduce their estate tax exposure through gifting, but cannot stand the thought of irrevocably giving away their assets, can now have their cake and eat it too. Of course, if you later revoke the account its value comes back into your estate. Your estate will also have to include a portion of any contribution made with the five-year averaging election if you don't live past the fourth year.


529 FAQs

• Can I invest for one beneficiary in more than one state's 529 plan?

• Most 529 savings plans have no state residency requirements. You can open accounts in as many of these states as you want, although in most cases there is little reason to have accounts in more than one or two states.


529 FAQs

• Can I contribute the maximum amount in more than one state if I want to?

• The IRS currently does not require that states count your investment in other state 529 plans when applying their own contribution limits. And there are no "contribution police" out there looking for people who are intent on using multiple states to stuff hundreds of thousands of dollars into 529 plans as a kind of tax shelter. But you are looking for trouble if you contribute more on an aggregate basis than you can reasonably argue might be needed for your beneficiary's future higher education costs. Of course, between a pricey private college, medical school, and then business school you might be able to support a pretty hefty sum. A state will not want to see its program misused as a tax shelter (its tax status as a 529 plan could be threatened) and if a state determines that you have made contributions without the intent to use the account for college it will terminate your account and perhaps assess an extra penalty.


529 FAQs

• What's this I hear about a penalty on refunds? What happens if my child doesn't go to college or if I simply end up with more in the account than he needs for college?

• Federal law imposes a 10% penalty on earnings for non-qualified distributions beginning in 2002. The penalty is not assessed on principal. An exception to the penalty can be claimed if you terminate the account because the beneficiary has died or is disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship.

You can change the beneficiary to another qualifying family member at any time in order to keep the account going and avoid (or at least delay) taking non-qualified withdrawals when the original beneficiary doesn't need those funds.


States with 529 Program

All 50 states have 529 programs.

Source: http://www.savingforcollege.com/529_plan_details/

Additional Resources

• http://www.savingforcollege.com/

• http://www.collegesavings.org/

• http://www.usatoday.com/money/covers/2002-07-08-529-college-plans.htm

• http://money.howstuffworks.com/529.htm

• http://www.sec.gov/investor/pubs/intro529.htm

References

• Obringer, Lee Ann. Retrieved November 06, 2005, from How Stuff Works Web site: http://money.howstuffworks.com/529.htm

• Retrieved November 06, 2005 from Saving For College Web site: http://www.savingforcollege.com/intro_to_529s/

• Section 529 of the Internal Revenue Code of 1986. Retrieved November 4, 2005, from RIA Checkpoint Website: http://checkpoint.riag.com/Checkpoint?usid=116c11136c6c&feature=tcheckpoint&jsp=%2FJSP%2FmainFs.jsp&lkn=frameSrch&tabPg=30&tmpl=%2FJSP%2FmainFs.jsp&ufrm1=mainTb&ufrm2=srchFrame.

APPENDIX:

529 IRC

§ 529 Qualified tuition program.

(a) General rule. A qualified tuition program shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, such program shall be subject to the taxes imposed by section 511

(relating to imposition of tax on unrelated business income of charitable organizations).

(§ 529 )

IRC (cont.)

(b) Qualified tuition program. For purposes of this section—

(1) In general. The term “qualified tuition program” means a program established and maintained by a State or agency or instrumentality thereof or by 1 or more eligible educational institutions—

(A) under which a person—

(i) may purchase tuition credits or certificates on behalf of a designated beneficiary which entitle the beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary, or

(ii) in the case of a program established and maintained by a State or agency or instrumentality thereof, may make contributions to an account which is established for the purpose of meeting the qualified higher education expenses of the designated beneficiary of the account, and

(§ 529 )

IRC (cont.)

(B) which meets the other requirements of this subsection.

Except to the extent provided in regulations, a program established and maintained by 1 or more eligible educational institutions shall not be treated as a qualified tuition program unless such program provides that amounts are held in a qualified trust and such program has received a ruling or determination that such program meets the applicable requirements for a qualified tuition program. For purposes of the preceding sentence, the term “qualified trust” means a trust which is created or organized in the United States for the exclusive benefit of designated beneficiaries and with respect to which the requirements of paragraphs (2) and (5) of section 408(a) are met.

(2) Cash contributions. A program shall not be treated as a qualified tuition program unless it provides that purchases or contributions may only be made in cash. (§ 529 )

IRC (cont.)

(3) Separate accounting. A program shall not be treated as a qualified tuition program unless it provides separate accounting for each designated beneficiary.

(4) No investment direction. A program shall not be treated as a qualified tuition program unless it provides that any contributor to, or designated beneficiary under, such proram may not directly or indirectly direct the investment of any contributions to the program (or any earnings thereon).

(5) No pledging of interest as security. A program shall not be treated as a qualified tuition program if it allows any interest in the program or any portion thereof to be used as security for a loan.

(6) Prohibition on excess contributions. A program shall not be treated as a qualified tuition program unless it provides adequate safeguards to prevent contributions on behalf of a designated beneficiary in excess of those necessary to provide for the qualified higher education expenses of the beneficiary. (§ 529 )

(c) Tax treatment of designated beneficiaries and contributors.

(1) In general. Except as otherwise provided in this subsection, no amount shall be includible in gross income of—

(A) a designated beneficiary under a qualified tuition program, or

(B) a contributor to such program on behalf of a designated beneficiary,

with respect to any distribution or earnings under such program.

(2) Gift tax treatment of contributions. For purposes of chapters 12 and 13—

(A) In general. Any contribution to a qualified tuition program on behalf of any designated beneficiary—

(i) shall be treated as a completed gift to such beneficiary which is not a future interest in property, and

(ii) shall not be treated as a qualified transfer under section 2503(e). (§ 529 )

IRC (cont.)

IRC (cont.)

(B) Treatment of excess contributions. If the aggregate amount of contributions described in subparagraph (A) during the calendar year by a donor exceeds the limitation for such year under section 2503(b), such aggregate amount shall, at the election of the donor, be taken into account for purposes of such section ratably over the 5-year period beginning with such calendar year.

(3) Distributions.

(A) In general. Any distribution under a qualified tuition program shall be includible in the gross income of the distributee in the manner as provided under section 72 to the extent not excluded from gross income under any other provision of this chapter.

(B) Distributions for qualified higher education expenses. For purposes of this paragraph—

(i) In-kind distributions. No amount shall be includible in gross income under subparagraph (A) by reason of a distribution which consists of providing a benefit to the distributee which, if paid for by the distributee, would constitute payment of a qualified higher education expense. (§ 529 )

IRC (cont.)

(ii) Cash distributions. In the case of distributions not described in clause (i), if—

(I) such distributions do not exceed the qualified higher education expenses (reduced by expenses described in clause (i), no amount shall be includible in gross income, and

(II) in any other case, the amount otherwise includible in gross income shall be reduced by an amount which bears the same ratio to such amount as such expenses bear to such distributions.

(iii) Exception for institutional programs. In the case of any taxable year beginning before January 1, 2004, clause (i) and (ii) shall not apply with respect to any distribution during such taxable year under a qualified tuition program established and maintained by 1 or more eligible educational institutions.

(iv) Treatment as distributions. Any benefit furnished to a designated beneficiary under a qualified tuition program shall be treated as a distribution to the beneficiary for purposes of this paragraph. (§ 529 )

IRC (cont.)

• (v) Coordination with hope and lifetime learning credits. The total amount of qualified higher education expenses with respect to an individual for the taxable year shall be reduced—

• (I) as provided in section 25A(g)(2), and • (II) by the amount of such expenses which were taken

into account in determining the credit allowed to the taxpayer or any other person under section 25A.

• (vi) Coordination with Coverdell education savings accounts. If, with respect to an individual for any taxable year—

• (I) the aggregate distributions to which clauses (i) and (ii) and section 530(d)(2)(A) apply, exceed

• (II) the total amount of qualified higher education expenses otherwise taken into account under clauses (i) and (ii) (after the application of clause (v)) for such year, (§ 529 )

IRC (cont.)

the taxpayer shall allocate such expenses among such distributions for purposes of determining the amount of the exclusion under clauses (i) and (ii) and section 530(d)(2)(A).

(C) Change in beneficiaries or programs.

(i) Rollovers. Subparagraph (A) shall not apply to that portion of any distribution which, within 60 days of such distribution, is transferred—

(I) to another qualified tuition program for the benefit of the designated beneficiary, or

(II) to the credit of another designated beneficiary under a qualified tuition program who is a member of the family of the designated beneficiary with respect to which the distribution was made.

(ii) Change in designated beneficiaries. Any change in the designated beneficiary of an interest in a qualified tuition program shall not be treated as a distribution for purposes of subparagraph (A) if the new beneficiary is a member of the family of the old beneficiary. (§ 529 )

IRC (cont.)

(iii) Limitation on certain rollovers. Clause (i)(I) shall not apply to any transfer if such transfer occurs within 12 months from the date of a previous transfer to any qualified tuition program for the benefit of the designated beneficiary.

(D) Operating rules. For purposes of applying section 72—

(i) to the extent provided by the Secretary, all qualified tuition programs of which an individual is a designated beneficiary shall be treated as one program,

(ii) except to the extent provided by the Secretary, all distributions during a taxable year shall be treated as one distribution, and

(iii) except to the extent provided by the Secretary, the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins. (§ 529 )

IRC (cont.)

(4) Estate tax treatment.

(A) In general. No amount shall be includible in the gross estate of any individual for purposes of chapter 11 by reason of an interest in a qualified tuition program.

(B) Amounts includible in estate of designated beneficiary in certain cases. Subparagraph (A) shall not apply to amounts distributed on account of the death of a beneficiary.

(C) Amounts includible in estate of donor making excess contributions. In the case of a donor who makes the election described in paragraph (2)(B) and who dies before the close of the 5-year period referred to in such paragraph, notwithstanding subparagraph (A), the gross estate of the donor shall include the portion of such contributions properly allocable to periods after the date of death of the donor.

(5) Other gift tax rules. For purposes of chapters 12 and 13— (A) Treatment of distributions. Except as provided in subparagraph (B), in no event shall a distribution from a qualified tuition program be treated as a taxable gift. (B) Treatment of designation of new beneficiary. The taxes imposed by chapters 12 and 13 shall apply to a transfer by reason (§ 529 )

IRC (cont.)

of a change in the designated beneficiary under the program (or a rollover to the account of a new beneficiary) unless the new beneficiary is—

(i) assigned to the same generation as (or a higher generation than) the old beneficiary (determined in accordance with section 2651), and (ii) a member of the family of the old beneficiary.

(6) Additional tax. The tax imposed by section 530(d)(4) shall apply to any payment or distribution from a qualified tuition program in the same manner as such tax applies to a payment or distribution from an education individual retirement account. This paragraph shall not apply to any payment or distribution in any taxable year beginning before January 1, 2004, which is includible in gross income but used for qualified higher education expenses of the designated beneficiary.

(d) Reports. Each officer or employee having control of the qualified tuition program or their designee shall make such reports regarding such program to the Secretary and to designated beneficiaries with respect to contributions, distributions, and such other matters as the Secretary may require. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary. (§ 529 )

IRC (cont.)

(e) Other definitions and special rules. For purposes of this section—

(1) Designated beneficiary. The term “designated beneficiary” means—

(A) the individual designated at the commencement of participation in the qualified tuition program as the beneficiary of amounts paid (or to be paid) to the program,

(B) in the case of a change in beneficiaries described in subsection (c)(3)(C), the individual who is the new beneficiary, and

(C) in the case of an interest in a qualified tuition program purchased by a State or local government (or agency or instrumentality thereof) or an organization described in section 501(c)(3) and exempt from taxation under section 501(a) as part of a scholarship program operated by such government or organization, the individual receiving such interest as a scholarship. (§ 529 )

IRC (cont.)

(2) Member of family. The term “member of the family” means, with respect to any designated beneficiary—

(A) the spouse of such beneficiary;

(B) an individual who bears a relationship to such beneficiary which is described in subparagraph (A) through (G) of section 152(d)(2(;

(C) the spouse of any individual described in subparagraph (B); and

(D) any first cousin of such beneficiary.

(3) Qualified higher education expenses.

(A) In general. The term “qualified higher education expenses” means—

(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and

(ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance. (§ 529 )

IRC (cont.)

(B) Room and board included for students who are at least half-time.

(i) In general. In the case of an individual who is an eligible student (as defined in section 25A(b)(3)) for any academic period, such term shall also include reasonable costs for such period (as determined under the qualified tuition program) incurred by the designated beneficiary for room and board while attending such institution. For purposes of subsection (b)(6), a designated beneficiary shall be treated as meeting the requirements of this clause.

(ii) Limitation. The amount treated as qualified higher education expenses by reason of clause (i) shall not exceed—

(I) the allowance (applicable to the student) for room and board included in the cost of attendance (as defined in section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll) , as in effect on the date of the enactment [6/7/2001] of the Economic Growth and Tax Relief Reconciliation Act of 2001) as determined by the eligible educational institution for such period, or (§ 529 )

IRC (cont.)

(II) if greater, the actual invoice amount the student residing in housing owned or operated by the eligible educational institution is charged by such institution for room and board costs for such period.

(4) Application of section 514. An interest in a qualified tuition program shall not be treated as debt for purposes of section 514.

(5) Eligible educational institution. The term “eligible educational institution” means an institution—

(A) which is described in section 481 of the Higher Education Act of 1965 ( 20 U.S.C. 1088 ), as in effect on the date of the enactment [6/7/2001] of this paragraph, and

(B) which is eligible to participate in a program under title IV of such Act.

(§ 529 )

529 Plans Presented by: John Agee Jimmy Chowdhury Bryan Kight.

Documents

Transcript of 529 Plans Presented by: John Agee Jimmy Chowdhury Bryan Kight.