529 College Savings Plan

A 529 is basically an investment plan (much like an IRA or 401(k) - that is tailored to accumulating cash for college) and is currently the best plan to save for college funding because:

• They allow market-based returns from a portfolio of mutual funds.
• All earnings grow tax-free for federal and state when used for educational expenses.
• The contributor (donor) retains complete control over the recipient, timing and amount of withdrawals for the life of the plan (or account).
• The beneficiary (donee) may be a resident of any state and the proceeds may be used at any accredited school in the United States, as well as a variety of foreign ones.
• Contributions are considered gifts of a present interest and can lower the taxable value of a contributor's estate.
• Beneficiaries remain eligible for Hope Scholarships and Lifetime Learning Credit in the same year.
• Proceeds not used for qualified higher education expenses are taxes at the owners tax rate and are subject to an additional 10% penalty (the penalty does not apply in cases where the beneficiary receives enough in scholarships so as not to need the 529 money).
• Contributions and the earnings on them may be used for room, board, books and supplies--as well as tuitions and fees

Basics of a 529 Plan

A 529 is a plan with no income or age limitations, no limits on how much or where you can invest and no limits on how long it can be invested.  Many people believe it is an unbelievable plan and it's like an unlimited Roth IRA.  The name of 529 comes from the Internal Revenue Code, just like 401(k) plans.

Back in 1996, Congress first enacted legislation to give each state the authority to set up its own 529 program.  Since then, Wall Street firms and their nationwide sales forces got in action to help states to administer and market their plans.  As a result, investors put in nearly $2.5 billion into 529 plans last year.

What makes 529s so much better than other college savings options?  It is the tax benefits, which you never seen before.  Under a 529, your earnings grow tax-free.  If you like, you can put away a ton of money.  Under a 529, an investor can put in yearly gifts of $10,000 on as many loved ones he or she would like without triggering federal gift taxes ($20,000 for married couples).

A donor can contribute as much as $50,000 to an account at one time and $100,000 for married couples).  Currently, the maximum contribution limit for any one child or beneficiary averages about $250,000.  Although some states have residency requirements, such as New Jersey, many don't.  This means you can purchase a 529 plan offered by Ohio while you leave in New York.

Unlike other tax incentives, including Coverdell plans, which are phased out for high-income taxpayers, there are no income limitations or age restriction with 529s.  This means there is no reason why you cannot be the beneficiary of you own account if you are thinking about going back to graduate school or college.

The 529 money can be used not just for tuition, but also room and board and other college costs.  Again, you are not restricted to investing in your own state's 529 plan.  In reality, you can invest in almost any state's 529 plan and the money you save can be used at any college in the country.

However, each state-sponsored 529 plan is different; each has a mix of rules and restrictions, such as maximum contributions and investment options.  In addition, some are run by mutual-fund companies, state itself or brokerage houses.

When you open a custodial account under the Uniform Transfers to Minors Acts, for example, the money is typically in Junior's name and ultimately becomes his money to spend when he reaches a certain age.  However, 529s allow you, the parent or grandparent, to keep control of the money.  And the best part, there is no estate-tax penalty to doing so.

You are allowed to change beneficiaries if Junior has a change of heart and decides to buck the college tend altogether.  The switch is called a rollover and it requires the new beneficiary be a member of the family of the old beneficiary.

Once you have contributed you money to a 529 plan, all control over "future" investment decisions must be turned over to the state maintaining the investment program.  There will no adjustment to your asset allocation.  However, you will be allowed to roll over your account tax-free and penalty-free to a different state 529 plan as often as once every 12 months.

You lose all income tax benefits if the money does not go for college expenses.  Also, there is 10% of penalty on the earnings portion of a nonqualified withdrawal.  This means you will get back 100 percent of your principal and 90 percent of your earnings.  The penalty is not charged if you terminate the account because the beneficiary has died or become disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship.

You are able to contribute $1,000 to even $250,000 to a 529 plan for each of your kids or grandkids, no matter where you live and without regard to your income level.  The amount might triple in value and you will still be able to take withdrawals free of income taxes as long as those withdrawals are used for your beneficiary's college and even graduate school expenses.

Frequently Asked Questions

What if your child does not go to college?

 Since the donor retains control, you have the following options:

1. Change beneficiaries (the new beneficiary may be an immediate family member of the prior beneficiary).
2. Leave the assets invested for later use.
3. Withdraw the assets (subject to taxes and penalty mentioned earlier).

Can I change investments once they are made?

1. Once made and designated, the specific mutual fund selected may not be changed without changing the beneficiary.
2. Only new contributions can be directed to new investments.
3. However, each new contribution may be directed into a different option (or options).

Who can set up a 529 plan?

1. Any donor age 18 or over.
2. There are no donor's taxable income limitation.

Who can benefit?

1. Any beneficiary (including the donor) who has qualified higher education expense.
2. The beneficiary can be changed (with limitations as indicated earlier).
3. Beneficiary can be any age.

Are there web sites or a good book on this topic?

1. www.savingforcollege.com
2. www.collegesavings.org
3. www.ed.gov/thinkcollege.early
4. www.finaid.org
5. Hurley, Joseph. The Best Way to Save for College.

Can I roll-over from one 529 plan to another?

An account may be rolled over from one 529 plan to another--keeping the same beneficiary, once every 12 months.

Intangible assets are long-term assets used in the production of goods and services. They are similar to property, plant and equipment except for their lack of physical properties. Example of intangible assets include copyrights, patents, trademarks and goodwill. The cost of intangible assets is amortized by systematic charges to income over the period estimated to be benefited, but not to exceed 40 years.

Patents, copyrights and most franchises are examples of intangible assets with determinate lives, established by law or by contract. Other intangible assets, such as secret processes and goodwill, have no established term of existence, and the expected period of benefit may be indeterminable at the tiem of acquisition.

New accounting rules from the FASB, Statement no. 142, require companies to stop writing-off goodwill annually. The new rules require companies to review their goodwill for impairment. If the impairment occurs, then they must write them down to reflect the fair value of goodwill.

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