529 plans are commonly known as college savings plans. They are governed by Section 529 of the Internal Revenue Code, hence the name. As you guessed, their purpose is to help save for college tuition and they offer some tax saving advantages.

They include two main categories; “Pre-paid Tuition Plans” which are sponsored by colleges, universities and, College Savings Plans usually sponsored by States.

Pre-paid Tuition Plans: usually you as parents would pick a university or college to pre-pay for your child(ren)’s college tuition at today’s college costs. The benefit to you is that you lock in the costs and you need not worry about inflation in the coming years when it could make the amount “unthinkable”. The downside is that if the college or the university that you pre-pay goes out of existence before your child is ready to go, you will be taking a loss since most of the states don’t cover this situation. Or if you child decides not to go to the college you have pre-paid you will not be able to recover all that you have already paid in.

College Savings Plans: each state has sponsored at least one plan, and some states offer tax deductions in the state returns – for example: the state of New York offers the deductions for a certain dollar amount while the state of New Jersey offers none.

The Savings Plan account is set up with an account owner (usually the parents, the grand-parents or any U.S. Citizens age 18 or older) and a beneficiary (the child, the grand-child or even the account owner himself/ herself). The account owner contributes the money into the account, selects which mutual fund(s) to invest, distributes the money (ideally paid directly to the college of choice), and can change the beneficiary (certain conditions apply).

The 529 plans usually offer mutual funds (the most common scenario) to invest in with the aim of growing the account balance. Mutual funds could be selected with the assistance of a financial advisor using a security broker/dealer, or the account owner could “do-it-yourself”. The 529 plans can be set up two ways; therefore, the states could offer more than one 529 plan. Keep in mind that the expense ratios and investment options are usually not the same between the one guided by a financial advisor vs. the DIY one.

Which plan will you choose? Would you consider the expense ratio? Or the investment performance underlying the funds (net of expense ratio)?

When 529 plans were just being introduced, they could only offer to pay for college related expenses, but now they can pay for the tuition of public or private elementary or secondary school. This change offers more flexibility when setting up a 529 plan account; at the same time, if you pay for the elementary or secondary tuition, the account will not have as much left to pay for college and less time to invest, to ride out the ups and downs of the market – in other words, the investment return could possibly be less if there is less time for the account to grow.

In addition, 529 plan could be construed as one of the Estate Planning vehicles. The contribution amount follows the annual gift exclusion amount and is $15,000 for the years of 2018, 2019, and 2020.

Grandparents could contribute the annual gift exclusion for the amount of $15,000 a year for the next five years. This way, they could get the dollars out of their estate (and live for the next five years so that the amount won’t be recaptured back to the estate if they don’t). It is very powerful if both grandparents contribute five years’, then between the two, it is a total of ten years’ contribution for a total amount of $150,000.

So far so good.

There are some drawbacks, for example, if the beneficiary applies for scholarship, the 529 plan will be included as part of his/her assets which reduces the chance of getting a grant. Please consult your CPA or tax advisor for the details.

Lastly, there are some other programs/plans/accounts that could be used for Education Planning. I am here to listen and help you and your family to determine which one(s) are most beneficial to your personal situation.

529 disclosure: Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors.. Before investing in any state’s 529 plan, investors should consult a tax professional. If withdrawals from 529 plans are used for purposes other than qualified education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.

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