Retirement and College Savings Plans - Section 529 College Savings Plans

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.

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