January 2017

Here are some of the key
benefits of a 529 Savings Plan:
• Although contributions to these programs are not tax
deductible, under federal law growth in the account is taxdeferred.
• Withdrawals for qualified higher education expenses are
paid directly to the educational institution and are federal
income tax-free. Generally, tuition, fees, books, supplies,
and equipment required for attendance qualify. Reasonable
costs of room and board are also included if the student is
attending school at least half time. (Please note that state
and local law can vary widely. Therefore, contributions and
distributions may or may not be tax exempt from state and/
or local income tax.)
• Everyone is eligible to take advantage of a 529 plan, and the
amounts that can be put in are substantial (over $300,000
per beneficiary in many state plans). Generally, there are no
income limitations or age restrictions on donors.
• No federal gift tax will be payable if a contribution does not
exceed the annual exclusion limits by the Internal Revenue
Service (currently $28,000 for a married couple, $14,000
for a single taxpayer). However, the donor may elect to treat
contributions as having been made over a five-year period.
Thus, an individual could contribute up to $70,000 for a
single beneficiary in one calendar year and a married couple
up to $140,000.
• Contributions to a Qualified Tuition Plan of any type must
be in cash and may not exceed the amount necessary to
provide the beneficiary’s qualified higher education expenses.
Program sponsors will specify maximum total contribution
amounts based upon such factors as the beneficiary’s age,
current education costs, projected inflation, and anticipated
investment returns. (Note: Contributions may be made to
both a Qualified Tuition Plan and a Coverdell ESA without
penalty for the same beneficiary in the same year.)
• Most accredited post-high school
educational institutions offering associates,
bachelors, graduate-level, or professional
degrees qualify as eligible educational
institutions for a 529 Savings Plan. In
addition, certain vocational schools may
also qualify.
• The donor maintains control of the account, and (with few
exceptions) the named beneficiary has no rights to the funds.
In fact, most plans allow you to reclaim the funds for yourself
at any time. However, if a “non-qualified” withdrawal is made,
the earnings portion will be subject to income tax and an
additional 10 percent federal income tax penalty.
• Although the assets in a 529 Savings Plan can be reclaimed
by the donor at any time, the assets are not counted as part
of the donor’s gross estate for estate tax purposes. Thus,
529 plans are often used as an estate planning tool to move
assets outside of one’s estate while still retaining a measure
of control if the money is needed in the future.
• In most plans (yes, there are exceptions), your choice of
school is not affected by the state your 529 Savings Plan is
from. Therefore, you can be a New Jersey resident, invest
in a Connecticut plan, and send your student to college in
Florida.
Of course, the
rate of return
of a 529
Savings Plan
is determined
by the
performance
of the
investments
held in the
plan minus
fees and
expenses.
This means that you cannot predict with certainty
how your individual plan will perform over time.
Next month…529 Prepaid Tuition Plans
the PARKLANDER 79
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