Filling the GapFilling the Gap

529 Plans529 Plans

2005 NYSFAAA Guidance Counselor Workshop2005 NYSFAAA Guidance Counselor Workshop

What is a 529 plan?What is a 529 plan?

A 529 plan is a tax-advantaged savings plan A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college designed to encourage saving for future college costs. 529 plans, legally known as “qualified costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state tuition plans,” are sponsored by states, state agencies, or educational institutions and are agencies, or educational institutions and are authorized by Section 529 of the Internal authorized by Section 529 of the Internal Revenue Code – hence the name.Revenue Code – hence the name.

There are two types of 529 plans: pre-paid There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group least one type of 529 plan. In addition, a group of private colleges and universities sponsor a of private colleges and universities sponsor a pre-paid tuition plan called the Independent pre-paid tuition plan called the Independent 529 Plan.529 Plan.

Pre-paid tuition plansPre-paid tuition plans

Pre-paid tuition plans are currently Pre-paid tuition plans are currently offered in 13 states. New York is not offered in 13 states. New York is not one of them.one of them.

These plans generally allow college These plans generally allow college savers to try and to lock in future costs savers to try and to lock in future costs of colleges by purchasing units of future of colleges by purchasing units of future expenses at participating colleges and expenses at participating colleges and universities. universities.

Many state governments guarantee Many state governments guarantee investments in pre-paid tuition plans investments in pre-paid tuition plans that they sponsor.that they sponsor.

Residency in the state is often requiredResidency in the state is often required

The Pre-paid downsideThe Pre-paid downside

Prepaid contract programs are the less popular option.Prepaid contract programs are the less popular option. The purchaser has limited options on where their The purchaser has limited options on where their

money can be spent.money can be spent. The purchaser also limits the potential gains their The purchaser also limits the potential gains their

investment might have.investment might have. Some states, like Texas, have stopped accepting new Some states, like Texas, have stopped accepting new

enrollments all together. Rising tuition rates have put enrollments all together. Rising tuition rates have put a burden on the guaranteed nature of the funds. a burden on the guaranteed nature of the funds.

Expect pre-paid tuition 529 plans to close in the future Expect pre-paid tuition 529 plans to close in the future as they don’t make as much financial sense for as they don’t make as much financial sense for family’s in most cases. For the ones that do, they are family’s in most cases. For the ones that do, they are costing states too much money to continue.costing states too much money to continue.

College savings plansCollege savings plans

College savings plans generally permit a college saver to College savings plans generally permit a college saver to establish an account for a beneficiary for the purpose of establish an account for a beneficiary for the purpose of paying the beneficiary’s eligible college expenses. paying the beneficiary’s eligible college expenses.

An account holder may typically choose among several An account holder may typically choose among several investment options for his or her contributions, which the investment options for his or her contributions, which the college savings plan invests on behalf of the account college savings plan invests on behalf of the account holder.holder.

Investment options often include stock mutual funds, bond Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to conservative investments as the beneficiary gets closer to college age.college age.

Withdrawals from college savings plans can generally be Withdrawals from college savings plans can generally be used at any college or university.used at any college or university.

Investments in college savings plans that invest in mutual Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are funds are not guaranteed by state governments and are not federally insured.not federally insured.

More detailsMore details

Savings programs are offered by every state. Savings programs are offered by every state. There are usually tax benefits for residents.There are usually tax benefits for residents. Some plans have residency requirements, Some plans have residency requirements,

some don’t. Ones that are limited to some don’t. Ones that are limited to residents might do something special like residents might do something special like match a certain level of contribution based match a certain level of contribution based upon income and dependency age.upon income and dependency age.

Plans can be sold directly to the investor or Plans can be sold directly to the investor or through a broker. Be aware that brokers through a broker. Be aware that brokers sometimes steer clients towards more sometimes steer clients towards more expensive options since they make a expensive options since they make a commission on the sale.commission on the sale.

What does NY State What does NY State do?do? New York Saves Website: www.nysaves.comNew York Saves Website: www.nysaves.com In New York State, individuals can deduct up to $5,000 In New York State, individuals can deduct up to $5,000

from their state return; $10,000 for joint return.from their state return; $10,000 for joint return. New York offers fifteen investment options managed by New York offers fifteen investment options managed by

Vanguard. Three are age based and 12 are varied based Vanguard. Three are age based and 12 are varied based on investment strategy and risk tolerance of the account on investment strategy and risk tolerance of the account holder.holder.

There is a maximum contribution limit of $235,000 for a There is a maximum contribution limit of $235,000 for a single beneficiary.single beneficiary.

Minimum contributions are $25 or $15 with payroll Minimum contributions are $25 or $15 with payroll deduction.deduction.

No fees to enroll or maintain an account. Only .58% fee No fees to enroll or maintain an account. Only .58% fee for management.for management.

Easy link to Upromise (www.upromise.com). Upromise is Easy link to Upromise (www.upromise.com). Upromise is a cash back program that invests a percentage of certain a cash back program that invests a percentage of certain purchases you make directly into your 529 Plan.purchases you make directly into your 529 Plan.

On the horizonOn the horizon

Sunset clause – all these great tax benefits Sunset clause – all these great tax benefits may expire in 2011. It will be very unpopular may expire in 2011. It will be very unpopular politically though, so don’t be surprised to politically though, so don’t be surprised to see these changes made permanent.see these changes made permanent.

Potential tax changes were just Potential tax changes were just recommended by President’s Advisory Panel recommended by President’s Advisory Panel on Federal Tax Reform may impact 529 planson Federal Tax Reform may impact 529 plans

529’s would be combined with other tax 529’s would be combined with other tax favored plans and replaced by “Save for favored plans and replaced by “Save for Family Accounts”. These all in one accounts Family Accounts”. These all in one accounts would have a $10,000 annual limit and could would have a $10,000 annual limit and could cover education, medical, home and cover education, medical, home and retirement needs.retirement needs.

How does investing in a How does investing in a 529 plan impact financial 529 plan impact financial aid?aid?

Each educational institution may Each educational institution may treat assets held in a 529 plan treat assets held in a 529 plan differently.differently.

Generally, investing in a 529 plan Generally, investing in a 529 plan will reduce to some degree a will reduce to some degree a student’s eligibility for need student’s eligibility for need based financial aid. based financial aid.

More pre-paid More pre-paid downsidedownside Assets held in pre-paid tuition plans are Assets held in pre-paid tuition plans are

generally treated differently for financial generally treated differently for financial aid purposes than assets held in college aid purposes than assets held in college savings plans.savings plans.

Assets held in pre-paid tuition plans Assets held in pre-paid tuition plans typically reduce need-based financial typically reduce need-based financial aid on a dollar for dollar basis.aid on a dollar for dollar basis.

If you expect your beneficiary to receive If you expect your beneficiary to receive a significant amount of need-based a significant amount of need-based financial aid, it is probably best not to financial aid, it is probably best not to invest in a pre-paid tuition plan if you invest in a pre-paid tuition plan if you have an option.have an option.

College savings plan College savings plan advantageadvantage Assets held in college savings plans Assets held in college savings plans

generally receive more favorable generally receive more favorable financial aid treatment than pre-paid financial aid treatment than pre-paid tuition plans.tuition plans.

Financial aid treatment for college Financial aid treatment for college savings plans depends on whether the savings plans depends on whether the assets held in the plan are considered assets held in the plan are considered to be assets of the parent or the to be assets of the parent or the student.student.

Where you save Where you save mattersmatters According to Federal Methodology, According to Federal Methodology,

about 6% of parental assets, in contrast about 6% of parental assets, in contrast to 35% of student assets, are expected to 35% of student assets, are expected to be contributed toward the student’s to be contributed toward the student’s college expenses for each academic college expenses for each academic year.year.

According to Institutional Methodology, According to Institutional Methodology, 25% of student assets are expected to 25% of student assets are expected to be contributed towards a student’s be contributed towards a student’s college expenses each yearcollege expenses each year

An exampleAn example

Mary’s parents saved $40,000 for her in an UGMA Mary’s parents saved $40,000 for her in an UGMA account through a one time gift from her account through a one time gift from her grandparent’s estate. When she applies for need-grandparent’s estate. When she applies for need-based aid, her student contribution from assets is based aid, her student contribution from assets is between $10,000 and $14,000 depending on what between $10,000 and $14,000 depending on what formula is used.formula is used.

Bill’s parents also received $40,000 but opened up a Bill’s parents also received $40,000 but opened up a 529 savings plan in their name with Bill as the 529 savings plan in their name with Bill as the beneficiary. When he applies to college, his student beneficiary. When he applies to college, his student contribution from assets is $0. His parent’s contribution from assets is $0. His parent’s contribution from assets increases by approximately contribution from assets increases by approximately $1,600 to $2,400, depending on which formula is $1,600 to $2,400, depending on which formula is used.used.

The net difference is at least $8,400 in financial aid for The net difference is at least $8,400 in financial aid for the family.the family.

Control of the moneyControl of the money

In the previous example, the money from In the previous example, the money from Mary’s UGMA account is considered a student Mary’s UGMA account is considered a student asset because that’s exactly what it is – asset because that’s exactly what it is – Mary’s asset. Instead of going to college, Mary’s asset. Instead of going to college, Mary could also choose to spend that money Mary could also choose to spend that money on a new BMW and a shot at Hollywood!on a new BMW and a shot at Hollywood!

Bill however, does not own any assets. He is Bill however, does not own any assets. He is the the beneficiarybeneficiary. If Bill leaves school to join . If Bill leaves school to join the circus, his parents can designate another the circus, his parents can designate another sibling to receive the money, or they can sibling to receive the money, or they can choose to take the money for themselves choose to take the money for themselves and pay taxes on it. No BMW for junior!and pay taxes on it. No BMW for junior!

Another wrinkleAnother wrinkle

Since 529 plans are considered to be the Since 529 plans are considered to be the property of the account owner, and not property of the account owner, and not the beneficiary, the beneficiary, anyoneanyone can own one. can own one.

This means that grandparents and This means that grandparents and friends of the family could start accounts friends of the family could start accounts for a student who is not their child.for a student who is not their child.

Under current financial aid rules, this Under current financial aid rules, this information is not collected, and is information is not collected, and is therefore invisible to a financial aid office therefore invisible to a financial aid office when determining the family when determining the family contribution.contribution.