529 Plan Basics

of 2 Ameriprise Financial Greg Younger, CRPC® 14755 N. Outer Chesterfield, MO 63017 636.534.2092 gregory.d.younger@ampf.com 529 College Savings Plans 529 college savings that's accredited by the Department of Education and, plans are tax-advantaged depending on the individual plan, for graduate school. college savings vehicles • Accelerated gifting: 529 plans offer an excellent estate and one of the most planning advantage in the form of accelerated gifting. This popular ways to save for can be a favorable way for college today. Much like grandparents to contribute A brief history the way 401(k) plans to their grandchildren's edu- revolutionized the world 529 plans were cation. Specifically, indi- of retirement savings a first authorized by viduals can make a lump- few decades ago, 529 Congress in 1996. sum gift to a 529 plan in college savings plans are revolutionizing the world of college Known officially as 2009 of up to $65,000 savings. By 2011, assets in 529 plans (college savings plans quot;qualified tuition ($130,000 for married cou- and prepaid tuition plans) are expected to grow to $257 billion. programs,quot; 529 plans ples) and avoid gift tax, (Source: Financial Research Corporation) are so named because provided the gift is treated they are governed by Tax advantages and more as having been made in section 529 of the equal installments over a 529 college savings plans offer a unique combination of Internal Revenue five-year period and no features that no other college savings vehicle can match: Code. other gifts are made to that beneficiary during the five • Federal tax advantages: Contributions to your account years. grow tax deferred and earnings are tax free if the money is used to pay the beneficiary's qualified education Choosing a college savings plan expenses. (The earnings portion of any withdrawal not used for college expenses is taxed at the recipient's rate Although 529 college savings plans are a creature of federal and subject to a 10% penalty.) law, their implementation is left to the states. Currently, there are over 50 different college savings plans available because • State tax advantages: Many states offer income tax incen- many states offer more tives for state residents, such as a tax deduction for than one plan. contributions or a tax exemption for qualified withdrawals. You can join any state's • High contribution limits: Most college savings plans let you 529 college savings contribute over $300,000 over the life of the plan. plan, but this variety may create confusion • Unlimited participation: Anyone can open a 529 college when it comes time to savings plan account, regardless of income level. select a plan. To make • Professional money management: College savings plans the process easier, it are offered by states, but they are managed by helps to consider a few designated financial companies who are responsible for key features: managing the plan's underlying investment portfolios. • Your state's tax benefits: A majority of states offer some • Flexibility: Under federal rules, you are entitled to change type of income tax break for 529 college savings plan the beneficiary of your account to a qualified family mem- participants, such as a deduction for contributions or tax- ber at any time as well as rollover the money in your 529 free earnings on qualified withdrawals. However, some states limit their tax deduction to contributions made to the plan account to a different 529 plan once per year without in-state 529 plan only. So make sure to find out the exact income tax or penalty implications. scope of the tax breaks, if any, your state offers. • Wide use of funds: Money in a 529 college savings plan can be used at any college in the United States or abroad See disclaimer on final page May 10, 2009

of 2 Ameriprise Financial • systematically invest your contributions. You'll also be able to Investment options: 529 plans vary in the investment change the beneficiary of your account to a qualified family options they offer. Ideally, you'll want to find a plan with a member (e.g., siblings, stepsiblings, parents, nieces, nephews, wide variety of investment options that range from conser- aunts, uncles, first cousins) with no income tax or penalty im- vative to more growth-oriented to match your risk toler- plications. Most plans will also allow you to change your in- ance. To take the guesswork out of picking investments vestment portfolios (either for your future or current contribu- appropriate for your child's age, most plans offer aged- tions) if you're unhappy with their investment performance. based portfolios that automatically adjust to more conser- vative holdings as your child approaches college age. 529 prepaid tuition plans--a distant cousin Caution: Remember, though, that any investment There are actually two types of 529 plans--college savings involves risk, and past performance is no guarantee of plans and prepaid tuition plans. The tax advantages are the how an investment will perform in the future. same, but the account features are very different. A prepaid tuition plan lets you prepay tuition at participating colleges at • Fees and expenses: Fees and expenses can vary widely today's prices for use by the beneficiary in the future. The among plans, and high fees can take a bigger bite out of following chart describes the main differences: your savings. Typical fees include annual maintenance fees, administration and management fees (usually called the quot;expense ratioquot;), and underlying fund expenses. College savings plans Prepaid tuition plans • Reputation of financial institution: Make sure that the Offered by states Offered by states and financial institution managing the plan is reputable and private colleges that you can reach customer service with any questions. You can join any state's State-run plans require you to With so many plans available, it may be helpful to consult an plan be a state resident experienced financial professional who can help you select a plan and pick your plan investments, giving you peace of mind. Contributions are invested Contributions are pooled with in your individual account the contributions of others and In fact, some 529 college savings plans in the investment portfolios invested exclusively by the plan are advisor-sold only, meaning that you have selected you're required to go through a designated financial advisor to open an ac- Returns are not guaranteed; Generally a certain rate of count. Always carefully read the 529 your account may gain or lose return is guaranteed plan issuer's official materials before value, depending on how the investing. underlying investments perform Account mechanics Funds can be used at any Funds can only be used at Once you've selected a plan, opening accredited college in the U.S. participating colleges, typically an account is easy. You'll need to fill out or abroad state universities an application, where you'll name a beneficiary and select one or more of the plan's investment Note: Investors should consider the investment objectives, portfolios to which your contributions will be allocated. Also, risks, charges, and expenses associated with 529 plans before you'll typically be required to make an initial minimum contribu- investing. More information about specific 529 plans is avail- tion, which must be made in cash or a cash equivalent. able in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider Thereafter, most plans will allow you to contribute as often as whether your state offers a 529 plan that provides residents you like. This gives you the flexibility to tailor the frequency of with favorable state tax benefits. your contributions to your own needs and budget, as well as to Disclosure Information -- Important -- Please Review The information contained in this material is being provided for general education purposes and with the understanding that it is not intended to be used or interpreted as specific legal, tax or investment advice. It does not address or account for your individual investor circumstances. Investment decisions should always be made based on your specific financial needs and objectives, goals, time horizon and risk tolerance. The information contained in this communication, including attachments, may be provided to support the marketing of a particular product or service. You cannot rely on this to avoid tax penalties that may be imposed under the Internal Revenue Code. Consult your tax advisor or attorney regarding tax issues specific to your circumstances. Neither Ameriprise Financial Services, Inc. nor any of its employees or representatives are authorized to give legal or tax advice. You are encouraged to seek the guidance of your own personal legal or tax counsel. Ameriprise Financial Services, Inc. Member FINRA and SIPC. The information in this document is provided by a third party and has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial Services, Inc. While the publisher has been diligent in attempting to provide accurate information, the accuracy of the information cannot be guaranteed. Laws and regulations change frequently, and are subject to differing legal interpretations. Accordingly, neither the publisher nor any of its licensees or their distributees shall be liable for any loss or damage caused, or alleged to have been caused, by the use or reliance upon this service. Prepared by Forefield Inc, Copyright 2009. May 10, 2009

529 Plan Basics

by Greg Younger on May 10, 2009

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529 Plan Basics — Document Transcript