529 College Plan

Slide background

College Planning

Slide background

529 College Plan

Slide background

IUL VS. 529 Plan

529 College Savings Plans

To find out what other options you have besides 529 Plans, click here.

Maryland Annuity Resource offers College Planning services in Maryland, Washington D.C. and Virginia.

However we do not like, or suggest the use of any version or company that provides 529 plans. We do not offer 529 plans. All of these accounts have the potential to loose value. We practice safe money strategies here and have met far too many clients that have seen losses in the child’s 529 plans.

However, since many of you will not listen, we thought we would put this page up to show the advantages and disadvantages of 529 plans in general. It is some what of a social experiment to see how many people call or email asking if they can start a 529 Plan. We will keep a tally in the section below just to prove that if everyone is doing it, there must be something wrong.

Congress created Section 529 plans in 1996 in a piece of legislation that had little to do with saving for college–the Small Business Job Protection Act. The law on 529 plans was later refined in 1997 by the Taxpayer Relief Act, in 2001 by the Economic Growth and Tax Relief Reconciliation Act, and in 2006 by the Pension Protection Act. In this short period, 529 plans have emerged as one of the top ways to save for college.

Section 529 plans are officially known as qualified tuition programs under federal law. The reason “529 plan” is commonly used is because 529 is the section of the Internal Revenue Code that governs their operation.

A 529 plan is a college savings vehicle that has federal tax advantages. There are two types of 529 plans: college savings plans and prepaid tuition plans. Though college savings plans and prepaid tuition plans share the same federal tax advantages, there are important differences between them.

We do not offer 529 plans due to the lack of control of individual investments. Maryland’s 529 plan is administered by a large brokerage house. If you need help setting up a 529 plan, please seek enrollment from another source.

Advantages and Disadvantages of 529 College Savings Plans

Advantages

  • People of all income levels are eligible to contribute to a 529 plan
  • 529 plans have high contribution limits (most plans have contribution limits of $300,000 and up)
  • College savings plans are open to residents of any state
  • Plan contributions grow income tax deferred
  • Withdrawals that are used to pay the beneficiary’s qualified education expenses are completely income tax free at the federal level
  • States may offer their own income tax incentives for residents of their state, such as a tax deduction for contributions or a tax exemption for withdrawals used to pay the beneficiary’s qualified education expenses. Before investing in a 529 plan outside your state of residency, find out what state tax benefits, if any, you might lose if you do so.
  • Plan contributions qualify for the $13,000 ($26,000 for joint gifts) annual gift tax exclusion, and a special election lets you contribute up to $65,000 ($130,000 for joint gifts) in a single year and avoid gift tax by treating the amount as a gift in equal installments over five years (no additional gifts can be made to the beneficiary during the five-year period without incurring a gift tax)
  • Plan contributions generally aren’t considered part of your estate for federal tax purposes, yet you still retain control of the account during your lifetime as the account owner
  • You can change the beneficiary without penalty if certain conditions are met
  • Once every 12 months you can roll over the beneficiary’s 529 account to a different 529 plan for the same beneficiary without tax or penalty implications
  • Some 529 college savings plans let you change your investment portfolio once each calendar year and/or anytime you change the beneficiary
  • A 529 account is treated as a parental asset for federal financial aid purposes (if parent is the account owner), and distributions aren’t counted as parent or student income
  • A 529 account owned by someone other than the parent (like a grandparent) is not considered an asset for financial aid purposes

Disadvantages

Your account can loose value which many have seen since the crisis of 2008

  • 529 plans charge various fees, expenses to cover investment expenses and the administration of your account
  • Withdrawals from a 529 plan that are not used for the beneficiary’s qualified education expenses are taxed and penalized (the earnings portion of the withdrawal is subject to a 10 percent federal penalty and is taxed at the income tax rate of the person who receives the withdrawal)
  • For college savings plans, your investment choices are limited to the pre-established investment portfolios offered by the plan; prepaid tuition plans give you no opportunity to choose your investments
  • You are generally limited to the prepaid tuition plan offered by your state of residence
  • Prepaid tuition plans are generally designed to pay the undergraduate tuition (but not room and board) costs at in-state public colleges, so the beneficiary won’t get the maximum benefits under the plan if he or she attends a private or out-of-state college
  • Prepaid tuition plans generally require that all tuition credits be used before the beneficiary reaches age 30, and all withdrawals completed within 10 years of the time the beneficiary starts college
  • College savings plans don’t guarantee your return and are subject to risk–you could lose some or all of the money you’ve contributed
  • College savings plans aren’t legally required to let you change the investment option on your existing contributions once per calendar year or allow you to choose a new investment option for any future contributions (though most plans do give you this flexibility)

To find out what other options you have besides 529 Plans, click here.