May 29th always makes us think of 529 Plans. This popular method of saving for college came into existence in 1996 but really gained prominence in 2001 with the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). In a nutshell, 529 Plans allow for the tax- advantaged growth of assets as long as those assets are used to pay for qualified higher education expenses. These plans come in two varieties: prepaid plans and savings plans. For the purposes of this paper, we will be referring only to 529 savings plans.
529 Plans can appear rather complicated. Each plan is sponsored by a state, but one does not have to live in that state, go to school in that state, or ever set foot in that state in order to invest in that state's plan. Each plan is sponsored by an investment company and some states have multiple plans, so the universe of 529 Plans quickly becomes complex. On top of that, not every state's plan(s) provides the same features, such as minimum contributions, maximum contributions, creditor protection, and state tax deductions for using in-state plans.
The 529 landscape has changed quite a bit since 2001. As a relatively new vehicle for education savings, 529 Plans have gone through some iterations. We expect that there will continue to be consolidation of 529 Plan sponsors and more consistency from one state's plan to another. Hopefully, the 529 Plan universe will become simpler, less complex, and more uniform.
A recent study by FidelityŽ reported that "70 percent of the class of 2013 is graduating with college-related debt - averaging $35,200 - including federal, state and private loans, as well as debt owed to family and accumulated through credit cards." Saving for college in a tax-advantageous way is still an important component of one's education plan. Unless there is a sea change in the way Americans view higher education, millions will continue to seek college and post-college degrees. Taking on college-related debt may be part of a student's education strategy, but the amount of debt should not be a surprise come graduation day. While many of our clients are familiar with 529 Plans and have used them as tools to save for a child or grandchild's education, below are some features of 529 Plans you may not be aware of.
Employer-Sponsored Plans
Just about any employer can establish a 529 Plan for their business. The minimum number of participants in such a plan could be as low as one, but being part of an employer-sponsored plan could entitle that participant to lower pricing options. For employers, there are 529 Plans with no start-up costs or recordkeeping expenses and no administrative burden. Plans also allow for payroll deductions for participants. For employees, because the costs are negligible for employers in terms of hard dollars and minimal in terms of time, working with your employer to construct an employer-sponsored plan may be a more cost effective way to save in a 529 Plan, even if you are the only plan participant.
501(c)(3) Organizations and Scholarship Programs
For non-profit 501(c)(3) organizations that sponsor college scholarship programs, a 529 Plan may be a useful tool. In the case of 501(c)(3) organizations, there are different features than 529 Plans for individuals. A non-profit organization could open a 529 Plan with no named beneficiary. This would allow the organization to name one or more beneficiaries at the time the scholarship is awarded. Additionally, the maximum contribution limits would not apply; the organization could fund such a 529 Plan with more than the maximum limit that applies to individuals. Currently, 529 Plans range from maximum account balances of $235,000 to $400,000; each plan is different. Contributors to such a 529 Plan for scholarships may be able to deduct their contributions on their federal income tax return as well.
Qualified College-Related Expenses Expanded
Starting in the 2009-2010 school year, distributions from 529s for the cost of the purchase of any computer technology, related equipment and/or related services are considered qualified. This represents a change from how the IRS viewed 529 Plan distributions when they first became available. These technology related costs include any computer, peripheral equipment (such as printers), computer software used for educational purposes, internet access costs, but does not include equipment used for amusement or entertainment (such as gaming devices).
Qualifying Institutions
The number of colleges, universities, and other post-secondary programs that are eligible to accept 529 Plan dollars has grown dramatically over the years. Basically, if a school is accredited and offers financial aid, it should be eligible to receive qualified 529 dollars. This includes schools outside of the United States as well as programs beyond the traditional 4-year degree (such as an associate's degree, vocational school, etc.). One can
search for eligible institutions at Savingforcollege.com. A quick look up of qualifying schools in Massachusetts results in 200 such institutions, from the Ailano School of Cosmetology in Brockton to the Zion Bible College in Haverhill.
529 Plans and Financial Aid
Before 529 Plans were created, many parents and grandparents used custodial accounts (UGMA and UTMA) as a way to save for education costs. For those applying for financial aid, UGMA/UTMA assets are considered assets owned by the student - the parent or the grandparent is the custodian of the account, but the asset belongs to the student. For financial aid purposes, colleges expect students to contribute up to 20% of their assets, but the parental contribution rate is 5.64%. Keeping assets in the name of the student can, therefore, possibly decrease the amount of financial aid a student receives. One can transfer UGMA/UTMA accounts to a 529 Plan. These UGMA/UTMA 529 Plans retain some of the features of the UGMA/UTMA accounts, but beginning with the 2009-2010 school year, this type of 529 Plan is considered a parental asset as opposed to a student asset. For those seeking to maximize their financial aid eligibility, this could be a valuable strategy.
Creditor Protection
In theory, 529 Plans provide protection from creditors. Because 529 Plans are sponsored at the state level, the protection they afford is state-specific with many states providing some level of protection. That level of creditor protection is not the same from Plan to Plan, and some states have more explicit protection language. As an example, some Plans may provide protection for the account beneficiary but not explicitly for the account owner as well. If creditor protection is an important issue, using one of the Plans with strong creditor protection language may be necessary. The truth is, creditor protection for 529 Plans has not been upheld or struck down in the courts at this time, so it is still a grey area.
Please contact us if you would like to discuss any of this information in greater detail. Article will be posted on www.marcusfinancialadvisors.com for future reference.
