529 Plan
Named for the section that describes them in the Internal Revenue Code, these plans are a type of municipal fund security. Such arrangements enable families to save for education on a tax advantaged basis and to a significantly greater degree than a Coverdell account or UTMA/UGMA account. Most of the time, investors in one state may invest in another state's 529 plan which does not affect the school that one chooses to apply for and matriculate at. Almost every state has a 529 plan. Major plan benefits include, to wit:

  • Contribution amounts are substantial (up to $300,000 per beneficiary) and neither income limitations nor age restrictions exist.
  • Investment grows on a tax-deferred basis.
  • Withdrawals to pay for college costs are tax-free
  • Donor may change beneficiary.
  • Some states may offer tax benefits as well.
  • The donor retains control of the funds. Earnings on non-qualified withdrawals are subject to ordinary income tax and a 10% withdrawal penalty.
  • Simplicity. Enrollment in and contributions to the plan are easy to accomplish. Either the state treasurer's office or an outside investment management company (mutual fund) manage the plan's assets.
  • Tax Reporting: Form 1099 to report (non) taxable earnings is mailed only in the year that the withdrawals are made.
  • Flexibility in allocating assets are rolling over from one plan to another is afforded the investor. Each plan's rules differ, however, and should be consulted.

Coverdell Education Savings Accounts
While other education savings accounts (such as state-sponsored 529 plans) are not covered on the Series 65 exam, the Coverdell ESA is tested. Formerly known as the Education IRA, it had been included with other IRAs in the testing process. Therefore, basic questions about the Coverdell are likely to be found on the exam. Make sure you know the following information:

Annual contribution limit is $2,000; up from the $500 limit for the old Education IRA

  • This limit is per student, so it is not possible for two sets of grandparents to each contribute $2,000 to two different Coverdell ESAs for the same student
  • No tax deduction is available for the contribution, but earnings grow tax deferred
  • Withdrawals of earnings are tax free, if used for qualified education expenses
  • Withdrawals of earnings not used for qualified education expenses are taxed at the student's ordinary income tax rate and will also be subject to a 10% penalty


Introduction

Related Articles
  1. Managing Wealth

    Education Savings Account Tutorial

    This comprehensive guide goes through what an Education Savings Plan is and how to set one up, contribute to it and withdraw from it.
  2. Retirement

    4 Smart 529 Plan Alternatives to Consider

    Learn about some alternatives to the popular college-saving 529 plan that may also make sense, such as prepaid tuition plans and Coverdell accounts.
  3. Taxes

    Tax-Smart Ways To Help Your Kids/Grandkids Pay For College

    Learn about plans and accounts that allow you to efficiently save for your child or grandchild’s education while shielding the savings from the IRS as much as possible.
  4. Personal Finance

    Are 529 College Savings Plans Right For You?

    The 529 College Savings Plan may be the most popular of its type, but does it fit your needs?
  5. Investing

    Spoil Your Grandkids, Cut Your Tax Bill

    Helping your grandchildren save for college is a way to spoil them and reap some benefits yourself.
  6. 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.
  7. Personal Finance

    529 Plans: Your Most Pressing Questions Answered

    When parents start preparing for college costs, here are the most commonly asked questions about 529 plans.
  8. Personal Finance

    Advising FAs: Explaining College Savings Accounts to Clients

    There are several types of savings accounts designed for higher education available today. The right one for you will depend upon factors such as your tax bracket, time horizon, investment objectives ...
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center