529 College Savings Plan

The county of San Diego is proud to offer information regarding the 529 College Savings Plan.

What is a 529 plan?

The 529 College Savings Plan is designed to aid families in saving for their children's education. The plan lets you save money in a tax-deferred account (earnings only) to be used to pay for education at future tuition rates. This savings allows your investment to possibly grow to meet the higher costs of future education.

The 529 plan is sponsored by the state and set up with an asset management company. 529 accounts are opened with that asset management company according to the state's predetermined plan features. You are the owner of the account and the child for whom the account is set up for is the beneficiary.

The 529 plan varies between states, so make sure you compare plans among states other than your own. Remember, you can choose from a plan in a state other than your own. Most states don't require residency in order to participate, so shop around different states for the best deal.

The Benefits

• Tax Treatment
• Account Control
• Income Eligibility
• How the Money Can be Used
• Investment Control

Tax Treatment

• The account's earnings are exempt from federal tax when they are withdrawn if they are used for qualified education expenses. This means that you won't pay taxes on the 529 account earnings unless the money is used for something other than higher education. Earnings may be tax-deferred in most states, as well.

Account Control

• The account owner always has control of the money. This prevents your beneficiary from taking the money and using it for expenses other than college.
• There are no restrictions on whom you may open an account for; your child, a friend's child, a relative, the paper boy, even yourself.
• Anyone can contribute to the account. This is a great way to save birthday money.

Income Eligibility

• Your income does not effect your ability to open a 529 account.
• Contributions to 529 plans also qualify for the $11,000 ($22,000 for married couples) annual gift tax exclusion. You can also contribute up to five years of gifts during the first year totaling $55,000. This is a great benefit when inheritance money enters the picture.
• Your account can grow up to $268,000 in some states.
• You can contribute as little as $25 to $50 per month.

How the Money Can be Used

• Most states do not have an age or time limit for when the money can be used.
• College can be put off indefinitely, which allows you the opportunity to roll the account over to another child as long as that child is in the same family of the first beneficiary.
• The plan defines family as “the original beneficiary's spouse, children, sisters, brothers, nephews, nieces, first cousins, and any spouses of those persons.”
• Your beneficiary can go to any accredited degree-granting educational institution, whether it is public, private, two-year, or four-year. There are even some international schools that qualify.
• In most states, qualified education costs include tuition, books, room, board, transportation, and even computers.
• If your child obtains a scholarship, the remainder of the 529 account can be rolled over to another sibling (or relative), or it can be cashed out with no penalty other than the tax paid (at your rate) on the earnings. This rule also applies in the event of the child's death or disability.

Investment Control

• Your money is managed by an investment company, not the state.
• While you can't change your investment option, you can roll your money over into another state's plan if you are not satisfied. There is no penalty to roll the money over into another state's plan (beware of fees from investment companies), and you can do it once every 12 months.
• You can always open a second 529 account in the same or another state. You can have as many accounts as you want. This is a way to diversify your investments in the event that the plan doesn't offer the investment mix you would like.

The Drawbacks

• Financial Aid
• Sunset of 529 Plan in 2011
• No Option for Emergency Loan
• No Investment Control
• Withdrawal Penalty
• No Stock Rollover Option
• 529 Plan Counts as a Gift
• No Account Sharing Option

Financial Aid

• The 529 account may decrease the amount of financial aid a student can receive. Contact a plan provider for more details.

Sunset of 529 Plan in 2011

• The tax laws regarding the 529 plan sunset in 2011. This means that lawmakers will have to make the tax change permanent before then or else the plan will revert to the original tax deferred status.

No Loan Option for Emergency Loan

• The money used in a 529 plan can't be used as collateral for a loan.

No Investment Control

• You don't have control over the investment. Your only option for changing the investments made with your money is to roll the account over to another state's plan. You can do this once a year with no penalty.

Withdrawal Penalty

• If you must withdraw the money for some reason other than to pay for qualified higher education, then you pay income tax and a 10 percent penalty.

No Stock Rollover Option

• You can only make cash contributions to the account; stocks can't be rolled over into it.

529 Plan Counts as a Gift

• Although you are the owner of the 529 plan, the accounts are considered gifts and are not calculated as part of your own estate assets.

No Account Sharing Option

• Each beneficiary must have their own account. Siblings or cousins can't share an account. You are allowed to rollover any remaining portion of an account to another child once the accounts beneficiary has completed college.

Is the 529 Plan Right for me?

Before saving specifically for college, you should consider your overall financial situation. You may want to focus on saving for retirement, buying a home, or paying off high interest credit card bills as opposed to saving for college. You will face penalties if you do not use the money in a 529 plan for a qualified education expense. If you decide that saving college is right for you, the next step is to determine if the 529 plan is your best college savings option. A 529 plan is only one of several ways to save for college. Other options include Coverdell Education Savings Account, Uniform Gifts to Minors Act accounts, Uniform Transfer to Minors Act accounts, tax-exempt municipal securities, and savings bonds.

Each college savings option has advantages and disadvantages, so you should evaluate each option carefully. If you need help determining which options work best for your circumstances, you should consult with your financial professional or tax advisor before you start saving.

  Choosing the Right Plan

It is important to take certain steps before you select a 529 plan. The safest way to select a 529 plan is to conduct research on available plans. Here are a few guidelines that can get you started:

• The plans have not been around very long so it's hard to rely on the success record of the plan manager. Look at the investment company's record of dealing with mutual funds and pension plans

Look at the Fees the Plan Charges

• Finding a low cost plan means looking at several possible charges. Some states charge an enrollment fee to open an account, and some also charge annual maintenance fees. Then there is the expense ratio, which is the percentage of fund assets that pays for operating expenses and management fees. Expense ratios often decrease as a fund gathers more dollars from investors, because the fund's managers can spread the fixed costs of running the fund over a larger asset base. Expense ratios for 529 plans vary from a low of 0.31 percent to a high of 2.24 percent. Additional costs can also be incurred with plans that are sold by brokers. Their commissions currently range from about 3.25 percent to 5 percent, payable upfront! Usually, buying direct eliminates the broker fees.

Look at How Flexible the Plan Is

• You don't want to be penalized when you want to change beneficiaries or roll the account over to another state's plan. You also don't want to be limited in how the funds can be used. Reconfirm that the funds can be used for all qualified educational expenses including the expenses of books, housing, etc., as well as graduate school.

Beware of Age Limitations

• Few states may require that your child use the money prior to a certain age or that the child be under a certain age in order for you to be able to open an account. There may even be limits to how long the accounts can remain open with or without withdrawals.

Investigate the Fees Related to Withdrawing Your Cash

• The IRS sets a 10-percent fine for withdrawal of funds that are not used for qualified educational expenses, but plans can charge more than that. How easy is it to get your money in the event of an emergency? Sometimes there are time requirements about how long the money has to stay in the account before it can be withdrawn.

Look at the Maximum and Minimum Contributions

• Determine how much you want to have in the account when your child enters college. Make sure the plan allows at least that amount. You also may need a low minimum if you want to start out without a large sum of money.

Investigate What Happens with the Ownership of the Account if the Owner Dies

• Does it go directly to the beneficiary? Do you have the right to determine a successor? Check to see if you can change beneficiaries with little hassle from either the plan or the current beneficiary.

Make Sure the Plan is Well Managed and has the Resources Devoted to its Needs

• Check for program materials that answer all of your questions, have good program support staff, and an easily navigated website that offers quick program information and access to information about your account.

Where Can I Find More Information?

Below is a list of websites with more in depth information about the 529 plan.

www.savingforcollege.com
www.collegesavings.org

We have provided this information as a service to our employees. It is not a legal interpretation of the 529 plan. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in tax law.