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October 3, 2011

Securing the Future – College 529 Plans

With the average cost for one year at a private college (tuition, room and board, and other expenses) climbing to $35,636 ($15,213 at a public in-state university), it’s no wonder that many American families are concerned about their college savings. College is a big investment.  It’s important not to jump in without doing your homework. …

Securing the Future – College 529 Plans

With the average cost for one year at a private college (tuition, room and board, and other expenses) climbing to $35,636 ($15,213 at a public in-state university), it’s no wonder that many American families are concerned about their college savings.

College is a big investment.  It’s important not to jump in without doing your homework.  Learn about college costs, applying for scholarships and grants, applying for the best aid package, taking out education loans, and paying the college bill.  529 plans are investment programs designed with one basic purpose in mind — providing families with an easy and effective means to save for future college costs. But they also have tax, retirement, and estate planning implications that extend far beyond this basic purpose.

Most states have a 529 plan of some sort. Most of these programs are open to residents and nonresidents of the sponsoring state, so you can shop among them for the one that best meets your objectives.

Anyone Can Use a 529

Do not assume you are not in a position to use a 529 plan. Unlike most other tax-advantaged programs, 529 plans are open to everyone, regardless of income level or age of children or grandchildren. You do not even need to have children or grandchildren— you can establish an account for your favorite niece, or with some plans, yourself. Many plans will allow you to make a contribution of $300,000 or more into an account with no time limit on its use.

The ability to take assets out of an estate can be a powerful estate tax planning tool, and a great way to utilize a 529 plan.  Your financial advisor can show you how a 529 plan may fit into your financial picture and help you select the one that is right for your family. You can do the research on your own, but may find that the investment options and features vary considerably among the different programs, and the comparisons can become confusing.

Types of Plans

There are two general types of 529 plans: prepaid tuition plans and college savings plans.  States may offer one type of plan or the other, and some states are now offering both.

  • Prepaid tuition plans are state- or institutional-operated trusts offering contracts that promise to cover future tuition costs at designated public and private institutions.  The price of the contract is pegged to current tuition levels, although some plans may provide discounts under certain circumstances.  These programs may be restricted to in-state residents.
  • College savings plans, on the other hand, are essentially state-sponsored investment portfolios, and many are open to residents as well as nonresidents.  The account owner’s contribution to the 529 plan potentially will grow in value over time to help keep up with the increasing price of higher education.  As with any investment, returns will depend on the market and on the portfolio’s allocation between stocks and bonds.

Tax Advantaged Investing

Earnings in 529 plans are tax deferred, and withdrawals are free from federal tax if used for qualified higher education expenses.  If you withdraw money for something other than qualified higher

education expenses, you will be subject to federal income tax on your earnings and may face a 10% federal tax penalty.  There are exceptions to the penalty if the beneficiary dies, becomes disabled, or receives a scholarship that reduces his or her need for college funds.

Qualified education expenses from a 529 savings plan include the following costs at just about any accredited post-secondary institution in the country, including graduate school:

  • tuition
  • fees
  • books
  • supplies

In addition, room and board expenses can qualify (subject to limits) if the student is attending college on at least a half-time basis.

As its name implies, a prepaid tuition plan covers only tuition and mandatory fees.

Estate Planning Features

With a 529 plan, you can help fund a college education and at the same time potentially reduce estate taxes– which makes it a great tool for many grandparents.  Under current rules, you can gift up to $13,000 per year ($26,000 per married couple) per beneficiary without incurring federal gift-tax consequences.  Or you may gift up to $65,000 ($130,000 per married couple) to each beneficiary.  You will not incur federal gift taxes as long as no additional gifts are made to the beneficiary for four years after the year during which you make the one-time gift and the appropriate tax form is filed.

Control of Assets

For each prepaid tuition contract or savings plan account, there is an “owner” (generally the donor) and a “beneficiary.”  You name a beneficiary when you sent up an account; the individual you name does not have to be related to you.

With a 529 plan, you are the owner and retain all rights to the account, including the right to determine when withdrawals are taken and for what they are used.  You can change the beneficiary to another beneficiary to another relative (of the beneficiary) at any time, and you can even decide to revoke the account and take back the funds.

The Opportunity

The following example demonstrates how powerful this opportunity can be.  Grandma and Grandpa have a significant estate, including $1 million in bonds and cash.  They want to reduce their estate tax exposure and like the idea of targeting some of their money for the college education of their six young grandchildren.  They decide to contribute a combined $120,000 into a 529 plan on behalf of each grandchild.  The result is that Grandma and Grandpa have removed $720,000 ($120,000 x 6 grandchildren) from their estates in one day, without gift tax consequences and without incurring the costs associated with irrevocable trusts.  Further, the contributions are invested in professionally managed investment account that may grow tax deferred without the burden of annual income taxes.  Withdrawals are tax free.  And best of all, Grandma and Grandpa can always get the money back if they do not mind paying income tax plus a 10% penalty on their earnings.

Financial Aid Treatment

According to the US Department of Education, if the parent is the account owner, the assets in a 529 savings plan account are treated in the federal financial aid formula as assets of the parent.  Since parental assets are generally assessed at a maximum 5.6% in determining aid eligibility (as compared with 20% for assets owned by the student), a 529 plan owned by the parents may help families qualify for more student aid.

Investment Issues

Each state-sponsored 529 plan is free to design an investment approach that it feels will best accomplish the goal of saving for college.  One condition imposed by tax law is that the account owner in the 529 plan may not have the unlimited ability to direct the investment of the account.  For example, as the account owner you can reallocate your account balance among investment options only once a year or upon a change to the designated beneficiary of the account.  Although this somewhat “big brother” provision is seen by some as a reason not to use 529 plans, the fact is that among the many 529 plans offered; there are a variety of investment approaches.  Many plans have out-sourced the investment and program management to large financial services companies that provide professional investment management to account owners.

Many plans now offer an “age-adjusted” investment program much like a 401k.  Your account is invested primarily in equity funds while your child is young and shifts to more conservative fixed income funds as your child gets closer to college age.  In addition to an age-adjusted program, some plans now include a menu of fixed-allocation investment portfolios, ranging from all-equity portfolios to 100% fixed-income portfolios.


There are additional fees associated with 529 savings plans.  Investments in 529s are generally municipal securities and involve investment risks.  You should consider your financial needs, goals, and risk tolerance prior to investing.  Some states may limit your ability to roll over your 529 account from their plan to another state’s plan.

Just like any investment decision, it is important to conduct due diligence and speak with your advisor.  Be sure to check the 529 plan in the state you reside to see if there are any special benefits for state residents (such as a tax deduction for your contribution, matching grants, or state financial aid preference).  Depending on your state of residence and the state of residence of the beneficiary, an investment in a 529 plan may not afford you or your beneficiary state tax benefits.

It is important to look at various 529 programs, both those sponsored by states and those sponsored by institutions.  Your financial advisor can help compare and contrast these types of plans to help determine the best fit for you and your family.  A 529 plan can be a great tax-advantaged way to save for your child’s future.

For more information on 529 Plans or to schedule a free consultation, please contact the South Coast Office.

Posted by Chris



Disclosures/Citations: All investments and tax strategies have risks–see risk factors in PPM. Past performance and/or forward looking statements are never an assurance of future results. This is neither an offer to sell nor a solicitation of an offer to buy any security. Such an offer may only be made by means of a private placement memorandum that must accompany or precede this information. Offering facts and terms are controlled by final PPM only.( &

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