BEST 529 PLANSBEST 529 PLANSTax Advantaged Saving for Tax Advantaged Saving for

CollegeCollege

IRS Circular 230 DisclosureIRS Circular 230 Disclosure

Pursuant to requirements imposed by the Internal Pursuant to requirements imposed by the Internal Revenue Service, any Revenue Service, any statement contained in this statement contained in this communication concerning U.S. tax matters communication concerning U.S. tax matters is not is not intended to be used, and cannot be used, for intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, United States Internal Revenue Code or promoting, marketing or recommending to another person any marketing or recommending to another person any tax-related matter.tax-related matter.

Individuals should not use or rely upon the Individuals should not use or rely upon the

information provided herein without first consulting information provided herein without first consulting with their tax or legal professional about their with their tax or legal professional about their particular circumstances.particular circumstances.

Two Types of 529 Plans

529 College Savings Plan – most 529 College Savings Plan – most common and more flexiblecommon and more flexible

529 College Prepaid Plan – less 529 College Prepaid Plan – less common and more restrictivecommon and more restrictive

What is a 529 college What is a 529 college Prepaid Plan?Prepaid Plan?

Prepaid Plans allow savers to Prepaid Plans allow savers to purchase tuition credits in their purchase tuition credits in their state’s university system at today’s state’s university system at today’s rates.  rates. 

Main Advantage of a 529 Main Advantage of a 529 College Prepaid PlanCollege Prepaid Plan

Protection against future price Protection against future price increases increases

Disadvantages of 529 Disadvantages of 529 Prepaid PlansPrepaid Plans

Limits the student to attending a Limits the student to attending a state school in their home state. state school in their home state. 

Parents who choose a prepaid plan Parents who choose a prepaid plan should be confident that their child should be confident that their child will attend a particular school.will attend a particular school.

What is a 529 college What is a 529 college savings plan?savings plan?

A tax-advantaged account that A tax-advantaged account that allows a student to accumulate allows a student to accumulate assets for use at any accredited assets for use at any accredited college or vocational school in the college or vocational school in the U.S. and even at some foreign U.S. and even at some foreign schools. schools.

You Do Not Have to Use Your You Do Not Have to Use Your Own State’s 529 PlanOwn State’s 529 Plan

What can 529 funds be used for?

Tuition, room and board (if at least a Tuition, room and board (if at least a full time student) books, and other full time student) books, and other “required” fees.“required” fees.

What are the tax What are the tax advantages?advantages?

You pay NO federal income tax on You pay NO federal income tax on investment growth. investment growth.

Some state offer state tax deductions Some state offer state tax deductions for contributions.for contributions.

Flexibility and ControlFlexibility and Control

The person who establishes the The person who establishes the account retains control over the account retains control over the assets assets

The person who establishes the The person who establishes the account may choose to change the account may choose to change the beneficiary beneficiary

What if my child doesn’t What if my child doesn’t use all the money?use all the money?

Money can be transferred to a Money can be transferred to a “qualified member” of the “qualified member” of the beneficiary’s family, including beneficiary’s family, including siblings, children, parents, spouse, siblings, children, parents, spouse, cousins, aunts, uncles, and others.  cousins, aunts, uncles, and others. 

Any money withdrawn for non-Any money withdrawn for non-educational purposed would incur a educational purposed would incur a 10% federal tax penalty and be 10% federal tax penalty and be subject to normal taxation (forfeiture subject to normal taxation (forfeiture of the tax-advantaged benefits).of the tax-advantaged benefits).

How much can I How much can I contribute?contribute?  

As much as $14,000 ($28,000 for married As much as $14,000 ($28,000 for married couples) can be contributed each year without couples) can be contributed each year without gift-tax consequences as of 2013. gift-tax consequences as of 2013.

Under a special election, up to $70,000 ($140,000 Under a special election, up to $70,000 ($140,000 for married couples) can be contributed at one for married couples) can be contributed at one time by accelerating five years’ worth of time by accelerating five years’ worth of contributions (as gifts) as of 2013. This feature contributions (as gifts) as of 2013. This feature makes it an attractive estate planning tool for makes it an attractive estate planning tool for many. many.

The maximum value of the account is $360,000 The maximum value of the account is $360,000 market value.  This means that you cannot market value.  This means that you cannot contribute more once the account reaches this contribute more once the account reaches this limit, but the assets can grow beyond $360,000 limit, but the assets can grow beyond $360,000 through investment gains.through investment gains.

How do I choose the right How do I choose the right 529 college savings plan?529 college savings plan?

Start with your tax situationStart with your tax situation

Costs matter -- a lot. Costs matter -- a lot.

Start with your tax situation

Whether or not you get a tax Whether or not you get a tax incentive helps determine where you incentive helps determine where you should invest.should invest.

Tax incentivesTax incentives

Most states offer some kind of tax Most states offer some kind of tax incentive for investing in a 529 plan. incentive for investing in a 529 plan. (Alaska, Florida, Nevada, South (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Dakota, Texas, Washington and Wyoming have no state income taxes Wyoming have no state income taxes and therefore no tax break.)and therefore no tax break.)

No tax break in these No tax break in these statesstates

The followings states do have income The followings states do have income tax but do NOT offer a tax break. tax but do NOT offer a tax break.

California, Delaware, Hawaii, California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, Kentucky, Massachusetts, Minnesota, New Hampshire, New Jersey and New Hampshire, New Jersey and Tennessee (New Hampshire and Tennessee (New Hampshire and Tennessee tax only dividend and Tennessee tax only dividend and interest income.)interest income.)

States with the most States with the most flexible tax incentivesflexible tax incentives

Residents of three states -- Kansas, Residents of three states -- Kansas, Missouri and Pennsylvania -- get a Missouri and Pennsylvania -- get a tax break if they invest in tax break if they invest in anyany state's state's plan. plan.

The other states with tax breaks The other states with tax breaks require residents to stick with their require residents to stick with their in-state plans.in-state plans.

State tax deductionsState tax deductions

Most states with tax breaks allow Most states with tax breaks allow residents to deduct their residents to deduct their contributions, up to certain limits, contributions, up to certain limits, from their taxable income. (You can from their taxable income. (You can see details of each state's tax break see details of each state's tax break herehere.) .)

States which offer tax credits

Three states -- Indiana, Utah and Three states -- Indiana, Utah and Vermont -- offer tax Vermont -- offer tax creditscredits, which , which directly reduce tax bills. directly reduce tax bills.

No reason to stay put? Go for the best!

If your state doesn't give you a tax If your state doesn't give you a tax incentive or doesn't require you to incentive or doesn't require you to invest in your own state's plan to get invest in your own state's plan to get it, then you should consider one of it, then you should consider one of Morningstar's top-rated plans that Morningstar's top-rated plans that are sold directly to investors (rather are sold directly to investors (rather than through an adviser). than through an adviser).

Buy Direct - Avoid advisor fees

Advisors fees can substantially reduce Advisors fees can substantially reduce the return on your investment.the return on your investment.

You can invest directly in a 529 plan You can invest directly in a 529 plan and avoid advisors fees. and avoid advisors fees.

It doesn’t make sense to pay big sales It doesn’t make sense to pay big sales loads and high continuing expenses loads and high continuing expenses when asset selection and rebalancing, when asset selection and rebalancing, is done by the fund rather than by the is done by the fund rather than by the adviser.adviser.

Consider an age-based Consider an age-based option.option.

Automatically becomes more Automatically becomes more conservative as the child approaches conservative as the child approaches college age. college age.

Rebalances in a disciplined way, while Rebalances in a disciplined way, while both individuals and advisors often both individuals and advisors often performance chase.performance chase.

Don't count on your ability to predict Don't count on your ability to predict markets and reduce risk as the child markets and reduce risk as the child approaches college age.approaches college age.

Advantages of Index Funds

Index funds have lower fees.Index funds have lower fees.

Using indexing, rather than active, Using indexing, rather than active, allows you to capture more tax-free allows you to capture more tax-free gains afforded by 529 plans by gains afforded by 529 plans by minimizing costs. minimizing costs. 

Save more costs

You can sometimes avoid additional You can sometimes avoid additional maintenance fees by choosing maintenance fees by choosing electronic delivery of statements electronic delivery of statements

BOTTOM LINE

The best approach to college saving The best approach to college saving is to actually do it! is to actually do it!

Did you like this Did you like this presentation?presentation?

Have more questions?Have more questions?

Visit us at Visit us at www.ascendfinancial.netwww.ascendfinancial.net to to learn more about how we can help learn more about how we can help you clarify your options and you clarify your options and empower you to simplify and take empower you to simplify and take control of your financial life. control of your financial life.