Education Planning
A 529 Plan allows you to either prepay tuition for qualified universities or save funds in a tax-deferred account to be used to pay higher education costs. You can do this for any child in your life -- your child, a grandchild, or cousin. You don't necessarily have to live in the state of the plan that you choose.
529 Plans allow you to put away larger sums of money -- more than $200,000 in some states -- versus the annual $2,000 Education IRA contribution. And most of these plans have no age or income limitations, so higher-bracket taxpayers can participate.
Another big advantage is that the person who establishes the account decides when distributions may be made. That differs greatly from a custodial account, which could allow your child to use his or her education money as soon as they are 18. Taxes on the earnings within a 529 Plan are deferred until the money is withdrawn. Since none of the earnings or gains are taxed during the life of the plan, you receive all of the tax benefits of deferral, building a college fund much faster than you ever could if you had to pay taxes on the investment gains and income every year. When the money is used to pay for qualified college expenses, the earnings are not taxed.
For more information please see our FAQ section
Contribution limits are subject to periodic review. Contributions are not permitted if total account value exceeds this limit. Contributions are generally treated as gifts to the beneficiary for federal tax gift tax purposes and are subject to annual federal gift tax exclusion amount ($12,000 for 2007). Contributor may elect to treat contribution in excess of that amount (up to $60,000 for 2007) as pro-rated over 5 years. Election is made by filing a gift tax return. While contributions are generally excludable from contributor's gross estate, if electing contributor dies during 5-year period, amounts allocable to years after death are includible in contributor’s gross estate. Consult your tax advisor.
Qualified expenses are defined by the Internal Revenue Code. Only accredited post-secondary educational institutions are acceptable.
Withdrawals for qualified higher education expenses subject to tax if HOPE Scholarship or Lifetime Learning credit is claimed for same expenses. If withdrawing funds for qualified higher education expenses from both a 529 account and a Coverdall Education Savings Account, a portion of the earnings distribution may be subject to tax and penalty on amounts that exceed qualified higher education expenses. State taxes may apply. Please read the Offering Statement for complete details.
State & Local taxes may apply.
Funds in a pre-paid plan are generally not considered assets but are used to reduce the "cost of attendance" resulting in a dollar-for-dollar reduction of financial need and the financial aid.
You should consult your financial advisor if you are uncertain as to which investment option or investment options to select for your account or if you wish to evaluate your financial circumstances.