2003 Fall/Winter Volume No. 2

Saving for College

Looking at a 529 college saving options

In the past, choosing how to save for college was complicated, given the whole variety of options available, each with its own merits and limitations. One recent alternative is a 529 college savings plan, a state-administered qualified tuition program that allows individuals to save and invest for qualified higher education expenses on a tax-advantaged basis. This type of plan, first introduced in 1996, has been gaining widespread acceptance even as Congress has worked to make them more beneficial to savers and students alike.

The facts of a 529 savings plan

Contribution limits1
Up to $265,620 maximum account balance regardless of income (actual amount varies by state). $55,000 per donor in one five-year period for gift tax exclusion purposes ($110,000 for spouses splitting gifts)

Investment options
A variety of investment portfolios

Control of Assets
Account owner

Ability to change beneficiary
Allowed (income tax free if to eligible family member of current beneficiary)

Tax treatment2
Contributions may be deductible for state income tax purposes; Accumulates tax deferred; Distributions taken for qualified higher education expenses are federal income tax free3

Qualified Higher Education Expense
Tuition and fees, room and board, required books, supplies and equipment at any eligible institution may also apply; other penalties vary depending on state

Taxes and penalties for non-qualified use
Earnings subject to ordinary income tax, and a 10% federal income tax penalty

Treatment of asset for financial aid purposes4
Considered an asset of the account owner (usually a parent)

1. all contribution limits listed as of 2003 2. individual tax treatment may differ 3. the federal exemption for qualified withdrawals of earnings from a Section 529 Plan is scheduled to expire December 31, 2010. This exemption may or may not be extended. 4. when calculating financial aid, it is assumed that at least 35% of a student’s assets will be contributed for college costs, whereas less than 6% of parental assets will be; titling assets in a parent name may help qualify a child for more aid. Please consult your tax advisor for more information

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