The 529 savings plan has become popular among investors because of its many benefits, which include:
- Tax-free savings growth
- Flexibility in spending
- Personal control of plan assets
- Professional management of plan assets.
Calvert and 529 Education Savings Programs
|
| Calvert is the program manager for the District of Columbia's DC College Savings Plan. For more information, visit http://www.dccollegesavings.com/. |
|
Plans offer easy participation, a very high contribution limit per beneficiary, and other attractive features. Once you have reviewed the information here, discuss 529 savings plan questions and goals with your financial advisor. If you do not currently have an advisor, Calvert can help you find one with the Calvert Advisor FinderTM Service.
What is a 529 plan?
To help parents, grandparents, and others save tax-advantaged for future college expenses, states provide "qualified state tuition programs." (These are often referred to as 529 plans after the section of the Internal Revenue Code that governs them.) Each state can decide whether to sponsor a plan or plans and what the requirements will be.
Two types of 529 plans exist:
- 529 savings plans, which are the focus of this discussion, allow you to save money in an account whose proceeds can be used at just about any higher education institution. For the most part, the 529 savings plan permits you to save more than does the 529 prepaid tuition plan and offers more flexibility as to where savings may be used.
- 529 prepaid tuition plans allow you to pay future education costs - generally at public universities in the state - at rates that are established now. These plans generally permit you to use the accumulated value of your account at other schools. However, their highest value is gained when they are used at a designated public university.
Generous savings plan eligibility
In general, there are no income or age limits for investors, and the investment limit is high (over $200,000 lifetime contribution per beneficiary in many states). The number of beneficiaries for whom any investor may contribute is not limited. And, in many cases you do not have to be a state resident to participate in the state's 529 savings plan. You are also eligible to invest in a plan for a person who is not a relative if you wish.
Generous savings plan tax advantages
In a 529 plan, your savings grow tax-deferred, and any distribution from the plan used for qualified college costs is free of federal tax through 2010. (After 2010, if Congress does not extend this exemption, the person for whose expenses the distributions are used would be responsible for taxes on the earnings portion of the distribution.)
In addition, contributions to a 529 plan up to $12,000 per year ($24,000 for married couples) qualify for the annual gift tax exclusion. There is no limit on the number of 529 plan beneficiaries to whom this gift tax exclusion applies. It is also possible to contribute up to $55,000 ($110,000 for married couples) per beneficiary in one year, applying the exclusion pro rata over five years.
Low minimum savings plan investment
In general, these plans encourage saving by keeping their minimum investment low.
Easy savings plan participation
Talk with your advisor to see if a 529 savings plan is right for you. If so, enrolling is as simple as completing a form and beginning your contributions. (Automatic deposits are available in many plans).
Savings plan flexibility
In addition to age-based and risk-based portfolios, single-fund investment options are available in some plans. Once each year, you can:
- Move plan assets to another state's plan.
- Change your contribution allocation within a plan.
- Any time, you can change the beneficiary of your plan assets and in so doing move plan assets to another state's plan or change your contribution allocation within the plan.
- You can move funds from an UGMA/UTMA account into a 529. Be sure you understand potential tax implications before you do this. We have provided a brief discussion, but it cannot address your particular tax situation. Talk with your financial advisor before you make decisions.
- You can invest in both a 529 plan and a Coverdell Education Savings Account for the same beneficiary in the same year(s).
Savings plan control
As the owner of the account, you decide what your account assets are used for, and when - even though you have named a beneficiary for whose use the account is intended. This level of control is another advantage of the 529 plan when compared with UGMA/UTMA accounts.
Cautions
You will owe a 10% penalty plus income tax on earnings if you use any distribution for an expense that is not for education as determined by the IRS. (An exception: if the account beneficiary receives scholarship aid which makes account funding of education unnecessary.)
While assets in a 529 plan are generally given low weighting in formulas for financial aid eligibility, it's important to understand how 529 plan savings might affect your eligibility.
For more information about the District of Columbia's 529 College Savings Program, visit http://www.dc529.com/ or call 1.800.987.4859. You may also discuss this plan with your financial advisor.
