Section 529 Plans
In the last few years one of the most popular accounts has been the Section 529 plan, known to most investment reps as simply a "529". The federal tax treatment of state-run 529 plans was modified by the Economic Growth and Tax Relief Reconciliation Act of 2001 to allow for federally tax-free treatment of qualified withdrawals. In other words, if contributions to 529 plans were used for qualified educational expenses, such as tuition, room and board, books, lab fees and other education-related costs, any earnings and gains on the principal amount invested was free of federal income taxes.

Each state determines the specific rules that govern contribution amounts, investment choices and state tax deductibility. In addition, a state may have two or more state-sponsored 529 plans, each administered by a particular investment company. Parents can construct a mutual fund portfolio based on the child's age, an assortment of pre-selected asset allocation models developed by the fund company, or their investment representative's recommended fund choices. Earnings and capital gains are reinvested in the funds and grow tax-deferred as long as they remain inside the account, and they come out free of federal taxes if used for qualified educational expenses. Lifetime contribution amounts per beneficiary can be as high as $255,000 in some states. While contributions are not federal-tax deductible, some states allows state income tax deductions for residents.

Two of the main benefits of the 529 plan involve ownership and beneficiary designations. Unlike custodial accounts, where the child gains custody of the money in the account upon reaching the age of majority, the parent, grandparent, distant relative or family friend can start a 529 as owner, for the benefit of a child. If the child decides not to attend college, the person who started the 529 can switch the beneficiary designation to another child or even use the funds for his or her own continuing education. Any withdrawals from the 529 that are not used for qualified educational purposes are taxed as ordinary income and subject to a 10% penalty.

If you would like to have a little more information on 529 plans, consult the following tutorial: 529 Plans

Before recommending a particular 529 plan to a client, be sure you are recommending the right kind by reading the article Choosing the Right Type of 529 Plan.



Introduction

Related Articles
  1. Personal Finance

    Saving for College: 7 Options to Consider

    There are many options choose from when you're looking for the right educational savings plan for your child.
  2. Personal Finance

    Stop Procrastinating! Enroll In A College Savings Plan

    The cost of sending your kids to college could be a serious financial burden - unless you get prepared. Now.
  3. Financial Advisor

    College Funding Decisions: 529 and Custodial Plans

    A look at the differences between custodial accounts and 529 plans, including which to draw upon first to begin funding your child’s college tuition.
  4. Financial Advisor

    Using 529 Plans to Save for College

    Paying for college is no easy feat. Here is a lowdown on 529 plans, the educational savings plans that help families set aside funds for college costs.
  5. Personal Finance

    There's More to 529 Plans Than the Tax Benefits

    College costs aren't like to suddenly drop anytime soon. That's why checking out a 529 plan, with its tax incentives, makes sense for many.
  6. Investing

    Top 7 Mistakes To Avoid On Your 529 Plan

    A 529 can go a long way to easing the burden of college education, as long as you start saving as soon as possible after your child is born.
  7. Managing Wealth

    The Top Seven 529 Plans for 2015

    With so many choices and so many features (tax advantages, fees, annualized returns) to consider, it's hard to know which 529 plan to choose. Here's help.
  8. Personal Finance

    529 Plan Contribution Limits in 2016

    Learn about the contribution and account balance limits on 529 plan accounts and discover how these contribution limits differ in each state.
  9. Financial Advisor

    Why Ignoring Your 529 Plan Could Cost You Big

    Saving for your kids' college tuition can be difficult. Here's how a 529 plan can help and how you, too, can help your 529 plan.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center