David Lerner Associates: College Savings Plans: 529

David Lerner Associates: College Savings Plans: 529

Core Facts

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Section 529 college savings plans are tax-advantaged college savings vehicles and one of the most popular ways to save for college today. Similar to the way 401(k) plans transformed the world of retirement savings a few decades ago, 529 college savings plans have revolutionized the world of college savings. As of June 2013, assets in 529 college savings plans totaled $205.7 billion (Source: College Board's 2013 Trends in Student Aid Report).

Tax benefits and more

529 college savings plans offer a unique combination of attributes that no other college savings vehicle could match:

  • Federal tax advantages: Contributions to your account grow tax deferred and earnings are tax free if the money is used to pay the beneficiary's qualified education expenses. (The earnings portion of any withdrawal not used for college expenses is taxed at the recipient's rate and subject to a 10 % penalty.).
  • State tax benefits: Many states offer income tax incentives for state residents, including a tax deduction for contributions or a tax exemption for qualified withdrawals.
  • High contribution limits: Most plans let you contribute over $300,000 over the life of the plan.
  • Unlimited participation: Anyone can open a 529 college savings plan account, regardless of income level.
  • Professional money management: College savings plans are provided by states, but they are handled by designated financial companies who are accountable for managing the plan's underlying investment portfolios.
  • Versatility: Under federal rules, you are allowed to change the beneficiary of your account to a qualified family member at any time along with rollover the money in your 529 plan account to a different 529 plan once per year without income tax or penalty implications.
  • Wide use of funds: Money in a 529 college savings plan could be used at any college in the United States or abroad that's accredited by the Department of Education and, depending upon the individual plan, for graduate school.
  • Accelerated gifting: 529 plans provide an excellent estate planning advantage through accelerated gifting. This could be a favorable way for grandparents to add to their grandchildren's education. Specifically, individuals can make a lump-sum gift to a 529 plan of up to $70,000 ($140,000 for married couples) and avoid gift tax, provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years.

Choosing a college savings plan

Although 529 college savings plans are a creature of federal law, their implementation is delegated to the states. Currently, there are over 50 different college savings plans available because many states offer more than one plan.

You can sign up with any state's 529 college savings plan, but this variety may create confusion when it comes time to choose a plan. To help make the procedure easier, it helps to consider a few key features:

  • Your state's tax benefits: A majority of states offer some type of income tax break for 529 college savings plan participants, such as a deduction for contributions or tax-free earnings on qualified withdrawals. However, some states limit their tax deduction to contributions made to the in-state 529 plan only. So be sure to find out the exact scope of the tax breaks, if any, your state offers.
  • Investment options: 529 plans vary in the investment alternatives they provide. Preferably, you'll wish to find a plan with a wide variety of investment options that range from conservative to more growth-oriented to fit your risk tolerance. To take the uncertainty out of picking investments appropriate for your child's age, most plans offer aged-based portfolios that automatically adapt to more conservative holdings as your child moves toward college age. (Keep in mind, however, that any investment involves risk, and past performance is no guarantee of how an investment will perform later on.).
  • Fees and expenses: Fees and expenses can vary widely among plans, and high fees can take a bigger bite away from your savings. Normal fees include annual maintenance fees, administration and management fees (typically called the "expense ratio"), and underlying fund expenses.
  • Reputation of financial institution: Make sure that the financial institution managing the plan is reputable and that you can reach customer service with any questions.

With so many plans available, it may be helpful to consult an experienced financial professional who can help you select a plan and pick your plan investments, giving you peace of mind. In fact, some 529 college savings plans are advisor-sold only, meaning that you're required to go through a designated financial advisor to open an account. Always carefully read the 529 plan issuer's official materials before investing.

Account mechanics

Once you've selected a plan, opening an account is easy. You'll need to fill out an application, where you'll name a beneficiary and select one or more of the plan's investment portfolios to which your contributions will be allocated. Also, you'll typically be required to make an initial minimum contribution, which must be made in cash or a cash equivalent.

Thereafter, most plans will allow you to contribute as often as you like. This gives you the flexibility to tailor the frequency of your contributions to your own needs and budget, as well as to systematically invest your contributions. You'll also be able to change the beneficiary of your account to a qualified family member (e.g., siblings, stepsiblings, parents, nieces, nephews, aunts, uncles, first cousins) with no income tax or penalty implications. Most plans will also allow you to change your investment portfolios (either for your future or current contributions) if you're unhappy with their investment performance.

529 prepaid tuition plans-- a distant cousin

There are actually two types of 529 plans-- college savings plans and prepaid tuition plans. As of June 2013, assets in 529 prepaid tuition plans totaled $22.6 billion (Source: College Board's 2013 Trends in Student Aid Report). The tax advantages of college savings plans and prepaid tuition plans are the same, but the account features are very different. A prepaid tuition plan lets you prepay tuition at participating colleges at today's prices for use by the beneficiary in the future. The following chart describes the main differences:

College Savings Plans

Prepaid Tuition Plans

Offered by states

Offered by states and private colleges

You can join any state's plan

State-run plans require you to be a state resident

Contributions are invested in your individual account in the investment portfolios you have selected

Contributions are pooled with the contributions of others and invested exclusively by the plan

Returns are not guaranteed; your account may gain or lose value, depending on how the underlying investments perform

Generally a certain rate of return is guaranteed

Funds can be used at any accredited college in the U.S. or abroad

Funds can only be used at participating colleges, typically state universities

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.



Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.




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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates Cal 516-921-4200 Visit our website: http://www.davidlerner.com

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