1. College Investment Calculator
Use this T. Rowe Price calculator to understand the future cost of college expenses and to estimate how much you will need to save to reach your college investment goal by using a 529 plan.
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Find out what a 529 is, how it's different than other savings vehicles, tax advantages, and information about contributions.
By Larry Glazer Comments 0 | Recommend 0
What is a 529 College Savings Plan?
Named after Section 529 of the Internal Revenue Code, this state-sponsored
college savings program allows individuals to accumulate tax-advantaged funds
for financing college expenses for a beneficiary.
Is it a new plan?
No, the 529 College Savings Plan is not a new plan. However, the Economic
Growth and Tax Relief Reconciliation Act of 2001 helped make 529 College Savings
Plans more attractive by allowing distributions for qualified higher-education
expenses to be exempt from federal taxes.
How does the 529 College Savings Plan affect financial-aid considerations?
Unlike gifting accounts such as
UGMA/UTMAs and Coverdell Education Savings Accounts (formerly Education
IRAs), 529 College Savings Plan assets are currently attributed to the account
owner, not the student, thereby usually lowering the impact on financial aid.
Keep in mind, however, that this could change, given ever-changing financial-aid
rules.
options don’t?
In general, the 529 College Savings Plan offers tax-deferred growth, tax-free
qualified distributions, higher contribution limits, no income or age
restrictions, and greater control for the account owner.
Is a 529 College Savings Plan the same as a prepaid tuition plan?
No. Although both are state-sponsored programs and fall under Section 529 of
the Internal Revenue Code, they are not the same. With a prepaid tuition plan,
you prepay tuition at today’s rates for a beneficiary to attend college at a
future date. This involves pre-selecting a participating school, which is
generally a public school. With the 529 College Savings Plan, you have the
flexibility to use funds at just about any college in the United States as well
as some abroad. Additionally, you can build assets tax-deferred.
USE OF FUNDS
What can funds be used for?
You can use 529 College Savings Plan assets to pay for qualified education
expenses at almost any college or any post-secondary program in the United
States or in select foreign countries.
What education expenses qualify?
Qualified expenses include tuition, room and board, books, fees, supplies,
and equipment such as a computer.
Can funds be used for private elementary or high-school tuition?
No, the 529 College Savings Plan is limited to undergraduate and graduate
tuition and expenses only.
MAKING CONTRIBUTIONS
Who can set up a 529 plan?
Parents, grandparents, other family members, friends—anyone can establish a
529 College Savings Plan. You can even establish a plan for yourself. There are
no age or income restrictions.
What is the maximum amount
I can contribute?
Maximum contributions vary by plan. The highest maximum available today
allows you to invest a lump sum of up to $300,000 per beneficiary. In doing so,
however, only $55,000 may be used to satisfy your federal gift-tax exclusion in
any five-year period.
Can I continue to contribute to a Coverdell Education Savings Account if I’m
enrolled in a 529 College Savings Plan?
Yes, you may. In fact, you may use the money in a Coverdell Education Savings
Account to pay for K-12 expenses.
Can I make automatic contributions?
Yes, you can arrange to have funds automatically deducted from a checking or
savings account.
Can I roll over or transfer an Educational IRA, UGMA/UTMA, or existing 529
College Savings Plan?
You may roll over or transfer assets from any gifting or qualified savings
plan to a 529 College Savings Plan.
TAX ADVANTAGES
What are the tax benefits of 529
College Savings Plans?
There are a number of tax benefits associated with a 529 College Savings
Plan. Your contributions and earnings grow tax-deferred, and you don’t have to
pay federal taxes when funds are withdrawn to pay for qualified expenses.
Exemption on earnings from state taxes is determined by the individual state.
Plus, in most cases, both your contributions and earnings are not considered
part of your taxable estate.
Are contributions tax deductible?
No, contributions are not deductible from federal taxes. For state tax
purposes, each state makes its own determination.
What does tax-deferred growth mean?
When you invest in a 529 College Savings Plan, your earnings will not be
assessed federal or state taxes, allowing your assets to accumulate without
paying taxes on capital gains, dividends, or interest.
Do I have to pay gift taxes on contributions?
The IRS grants each person an $11,000 annual gift-tax exclusion. In addition,
529 College Savings Plans allow you to accelerate the use of this so that you
may contribute $55,000 immediately and avoid gift taxes by using up the next
five years of gift-tax exclusions.
What are the estate-tax benefits of the 529 College Savings Plan?
The plan’s high contribution limit means that a contributor can give away a
substantial sum of money in a single year. Couples filing jointly can make a
gift of up to $110,000 per beneficiary.. Giving away large sums as gifts can
effectively lower the value of one’s taxable estate upon death.
CONTROL
Who maintains control of the account—the student or me?
Unlike other college savings plans, a 529 College Savings Plan allows you,
not the beneficiary, to maintain control of the plan.
Can I change beneficiaries?
Yes, you have the flexibility to do so at any time.
Can I be a beneficiary?
Yes, if you are planning on continuing your education in an undergraduate or
graduate program, you can list yourself as a beneficiary.
What if the beneficiary does not attend college?
You have three options: 1) leave the money in the account in case the
beneficiary changes his mind; 2) change the beneficiary; or 3) make a
non-qualified withdrawal (which would be subject to a 10 percent federal penalty
on earnings plus any applicable taxes).
INVESTMENTS
What are my investment options?
Most 529 College Savings Plans are invested in a portfolio of publicly traded
mutual funds or similar investment vehicles.
Are my plan assets FDIC or DIF insured?
No, because your assets are invested in mutual funds, they are not protected
by FDIC or DIF insurance and can decline in value.
Can I change the investment options for the assets in my account?
Each time you contribute to your account, you can elect how each contribution
should be allocated among the investment options. However, you may reallocate
the assets in your account to one or more alternative investment option(s) only
once every calendar year or whenever you change the account’s beneficiary.
How much must I invest to start?
Depending on the plan that best suits your needs, you may be able to get
started with as little as $15 and continue to invest periodically. You can also
invest a lump sum if you prefer.
Please review the prospectus for each plan carefully before making any
investment decisions. Market fluctuation can result in the loss of principal.
According to the Tax Relief Act of 2001, beginning on January 1, 2002,
withdrawals for qualified higher-education expenses are free from federal income
tax. State income taxes may continue to apply. The provisions exempting earnings
on qualified withdrawals from federal income tax expire on Dec. 31 2010,
requiring the government to take some further action in order for these
provisions to remain in effect after Dec. 31, 2010. For more information on tax
consequences, consult your tax adviser.
Larry Glazer is a senior vice president at Advest, a financial services company in Boston, and founder of the Web site www.529EducationPlan.com. E-mail editors@workforce.com to comment.
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