529 College Savings Plans
The IRS allows each state to sponsor one tax-advantaged education savings plan per state. Most 529 plans have no residency requirement, so you may choose to contribute to a 529 plan in any state, not just the state in which you reside.There are various ways to contribute to these plans, which are dictated by state law. Generally, contributors may only make cash contributions and cannot directly manage how the funds are invested, nor can the funds be used as collateral or security for any type of loan. However, you may choose investment options, within the plan’s available choices, and change them annually, when the plan allows. Further, as contributor and owner of the plan, you will have complete control over withdrawals for the life of the account. The Beneficiary does not gain control at any specific age.
There is no income limit for opening a 529 plan account, so in effect, everyone qualifies. Most 529 plans don’t have an age or time limit for withdrawals and you can roll over the account to another child in your family, or into another state’s plan. Funds in one plan may be transferred to another qualified 529 plan at any time, as well as funds in a UGMA or UTMA account.
Contributions to 529 college saving plans are considered completed gifts to the future student, even though the owner, not the Beneficiary, maintains control over the money while it’s in the account. A special rule allows you to make a lump-sum contribution and spread it over five years for gift tax exclusion purposes. If you take advantage of this lump sum option, for that five year period you may not make any other gifts to the plan’s Beneficiaries that are exempt from taxes. If you die before the five years have passed, your estate will include the balance of the remaining contribution for estate tax purposes for the estate.
If the Beneficiary dies before the plan funds are used up, you may withdraw them without penalty, but they will be subject to income tax. You may also change the Beneficiary whenever you wish. However, the new Beneficiary must be related to the former one by blood or marriage.
A 529 College Savings Plan Beneficiary can be any permanent U.S. resident or citizen, of any age. Earnings from 529 plans are exempt from federal tax when they are withdrawn for qualified higher education expenses. Some states also allow you to deduct a portion of your contributions from your state taxes.
The funds in a 529 plan may ultimately be used to pay for tuition, books, supplies, and equipment required to either enroll in or attend any qualified educational institution. These include both undergraduate and graduate schools. They can also be used for room and board, as long as the student is attending at least half time.
529 College Savings Plans are a beneficial way to fund a child’s future college expenses, and for wealthy families, they offer excellent opportunities to transfer wealth as part of an overall estate plan.
