529 College Savings Plans

Whether you are saving for your child’s education, your grandchild’s, your niece’s, your nephew’s, or even your own, you may have considered using a 529 college savings plan to help you save. 529 plans are tax-advantaged programs that help families save for college. They may be used to pay for qualified education expenses, usually including tuition, fees, books, supplies, computers, equipment, and room and board at eligible colleges, universities, and other post-secondary institutions.

College savings plans allow for students of all ages to save for college, and these savings plans are not just for children. Adults considering going back to college or graduate school may open plans as well. Should you decide not to attend school, the money can be transferred tax-free to another 529 plan for your children, your spouse, or another family member, or may be taken as a distribution subject to an IRS penalty.

Almost every state offers at least one 529 plan, and many of these plans are open to non residents. The tax advantages, investment options, restrictions, and fees vary from state to state.

529 plans are not limited to in-state public colleges or state residents. In fact, many states offer college savings plans that have no residency restrictions. 529 plans may be used at any accredited college, university, or vocational school in the U.S. and certain schools abroad. However, you may want to check on the tax advantages in the state you reside, or you may miss out on these advantages should you opt for another state’s 529 plan.

Two of the biggest advantages offered by 529 plans are their tax advantages, and that there are no income limitations on contributions. You may reduce your exposure to federal estate taxes while funding the college education of your loved ones. Contributions are treated as completed gifts for tax purposes, allowing you to transfer assets out of your estate. Currently you may contribute up to $12,000 per child per year gift-tax free ($24,000 for married couples filing jointly). You may make a one-time contribution of up to $60,000 per beneficiary ($120,000 for married couples filing jointly) in the first year of a five-year period, provided that no other gifts are made to the beneficiary during the same five-year period, and average the gift over the next five years.*

Contribution limits vary by the maximum and minimum contribution limits set by the plan. Maximum amounts of contributions vary from state to state and most states offer very flexible minimum contribution limits. Currently, the IRS only requires that contributions for one child cannot be more than the amount necessary for the qualified higher education expenses of that child. Many plans have contribution limits in excess of $200,000. For more information please visit www.irs.gov.

Other important factors to consider when reviewing 529 plans include investment options, risks, fees, charges, and expenses.

Each plan offers a number of investment options allowing you to invest in various portfolios of mutual funds. Some offer age-based portfolios of mutual funds: from high risk when the child is young with higher potential returns, to a gradual shift to conservative as your child grows older. Many states also offer non-age based investment options, allowing you to select portfolios with conservative, moderate, and aggressive asset allocations. In some cases certificates of deposit are offered with interest rates linked to an index that measures the average cost of college tuition.

The IRS allows you to change your investment options once every calendar year, although not all plans have made the changes to permit this. Check with the plan you are considering to confirm changes to investment options every year.

As with any investment, investing in college savings plans does come with risk. These plans do not lock in tuition prices, nor does the state back or guarantee the investments. You could lose money in a declining market, or the plan may not grow enough to pay for college. Although past performance may be considered when choosing an investment it is no guarantee of future results.

Keep in mind that all 529 plans have various fees and expenses, whether you purchase them directly or though a broker. Fees vary among funds and some plans have different classes similar to mutual funds. Refer to the offering document for complete information on different classes of funds, fees, and expenses. The most common fees, charges, and expenses include enrollment fees, annual maintenance fees, sales charges, deferred sales charges, administration/management fees, and underlying fund expenses. Investors should compare these fees and expenses prior to investing.

You may find links to 529 plan Web sites at www.collegesavings.org or visit www.msrb.org for more detailed information.

For more information on the risks and rewards of bond ownership you should contact your Financial Consultant. Take care to become fully aware of all of the risks as well as the rewards before you purchase a bond or any other investment product. Remember that knowledge is the key to your financial future.