Getting Started with a 529
Q: Who can set up a 529 account? Who can the be beneficiary?
A: Any citizen or legal resident of the U.S. can establish a 529 account for the benefit of any U.S. citizen or legal resident. The account owner and the beneficiary can even be the same person. Only one individual may be the owner of the account; joint ownership is not permitted
Contributions to a 529
Q: How much do I need to open a 529 account?
A: It depends on the particular 529 plan, but many plans allow you to establish an account with as little as $250 (some may even accept less).
Q: What is the maximum I can contribute to a 529 account?
A: Again, it depends on the particular 529 plan, but some plans will accept contributions until the account value exceeds $250,000.
Q: What and how can I contribute to my 529 account?
A: You may contribute funds by check, wire transfer or an automatic purchase plan. You cannot contribute securities or other property. For an employer-sponsored program, contributions must be made through bank transfers from the account owner’s bank account.
Q: Can someone other than the account owner contribute to the 529 account?
A: Yes. Anyone can contribute to the account. However, only the account owner can make decisions regarding the account, including taking withdrawals from the account, changing the account’s investments and changing the beneficiary.
Beneficiaries
Q: Can I change the beneficiary on my 529 account?
A: Yes. The account owner can change the beneficiary of a 529 account at any time. To avoid federal income tax and a 10% federal tax penalty on earnings, the new beneficiary must be a member of the family of the previous beneficiary.
Q: What happens if the beneficiary receives a scholarship, becomes disabled or dies?
A: The account owner can withdraw the assets if the beneficiary receives a scholarship, becomes disabled or dies. A withdrawal on account of the beneficiary’s death, disability or receipt of a scholarship (to the extent of the scholarship award) is subject to federal income tax but no federal tax penalty.
Using Your 529 Account
Q: How can I use the funds in my 529 account?
A: You can use the assets in your 529 account to pay for the beneficiary’s qualified higher education expenses. Earnings withdrawn for any use other than qualified higher education expenses are subject to federal income tax and a 10% federal tax penalty. However, a withdrawal on account of the beneficiary’s death, disability or receipt of a scholarship (to the extent of the scholarship award) is subject to federal income tax but no federal tax penalty.
Q: What is considered a qualified higher education expense?
A: Qualified higher education expenses are expenses incurred by a beneficiary attending an eligible educational institution. Generally, these expenses include:
· tuition
· all mandatory fees
· textbooks, supplies and required equipment
· room and board during any academic period during which the beneficiary is enrolled at least half-time in a degree, certificate or other program that leads to a recognized educational credential awarded by an eligible educational institution
To be considered qualified higher education expenses, room and board costs may not exceed the following amounts:
· on campus: actual invoice amount for room and board
· off campus: up to the applicable room and board portion of the cost of attendance as determined by the eligible educational institution
Q: Can I pay tuition at a private elementary or high school with my 529 assets?
A: A 529 account is designed to pay higher education expenses. Therefore, a withdrawal used for tuition at a private elementary or high school will be subject to federal income tax and a 10% federal tax penalty on earnings. Eligible educational institutions; however, may include such schools as a golf academy or a school of culinary arts. To check eligibility, consult www.fafsa.ed.gov, the financial aid website. Go to “Find my school codes” in step 1, and include a school year to conduct a search.
Q: Is there a minimum number of credit hours that the beneficiary must take in order to use 529 funds?
A: There is no minimum level of study. If, however, the student is enrolled on a less than half-time basis, withdrawals for room and board will not be considered qualified higher education expenses.
Q: Is there a time limit for using the assets in a 529 account?
A: Yes. The account owner must use the assets in the account or designate a new beneficiary within 30 years after the beneficiary graduates from high school or within 30 years after opening the account, whichever comes later. Requests for an extension of this time limit will be considered on a case-by-case basis.
Investments
Q: Can I change my account’s investment allocation?
A: Yes. You can change investments once every calendar year or when you change the beneficiary. Changing the allocation of future automatic investments does not count toward the one-year investment allocation restriction.
Tax Considerations
Q: How are the earnings in my 529 account taxed?
A: Earnings in a 529 account grow free from federal income tax. Earnings on withdrawals used to pay qualified higher education expenses may be excluded from income for federal tax purposes.
Q: What are the federal gift-tax consequences of contributing to a 529 plan?
A: Individuals can take advantage of the annual gift-tax exclusion by contributing up to $12,000 ($24,000 for married couples) per year per beneficiary without having to file a gift-tax return or pay gift taxes. A special rule applicable only to 529 plans allows an individual to accelerate up to five years’ worth of annual exclusions by contributing up to $60,000 ($120,000 for married couples) in one calendar year. While no gift taxes are payable, the donor can only take advantage of this rule by making an election on a federal gift-tax return, IRS Form 709. If you take full advantage of this special rule, additional contributions or other gifts to the same individual during that calendar year or the next four calendar years may exceed the annual gift-tax exclusion. Contributions made to a 529 plan in excess of the annual gift-tax exclusion will not cause gift taxes to be payable unless the contributions (together with all other gifts) also exceed the contributor’s lifetime gift-tax exemption of $1 million. However, those contributions will reduce the amount of the lifetime exemption.
Financial Aid Considerations
Q: What effect does having a 529 account have on the beneficiary’s eligibility for federal financial aid?
A: 529 accounts may affect a beneficiary’s ability to qualify for federal need-based financial aid. However, federal law provides that, effective as of July 1, 2006, a 529 account will be regarded as an asset of the account owner (unless the account owner is a dependent student) for federal financial aid purposes.
Other Considerations
Q: What other issues should investors consider when evaluating 529 plans?
A: Investors should consider whether the investor's or beneficiary's home state offers any state tax or other benefits available only from that state's 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state's 529 Plan. For 529 plans, please read the offering statement and participation agreement carefully for details including fees, expenses and risks prior to investing or sending money. Investor's home state may only offer favorable tax treatment for investing in a plan offered by such state.
