Frequently Asked Questions
The Coverdell Education Savings Account (CESA) was formerly known as the Education IRA. In 2001, it was renamed the Coverdell Education Savings Account and along with a new name, came changes that made it a much more attractive vehicle for saving for a child's education. The major features currently include:
- a contribution limit of $2,000 per child per year
- income limits of $220,000 for married contributors who file joint tax returns
- contributions may come from income-qualified individuals, corporations, businesses, unions, foundations, tax-exempt organizations
- qualified expenses cover costs required for enrollment or attendance for years k-12 as well as higher education
- upon establishment of a new account, beneficiary must be under 18 years old and contributions may be made to the account until the beneficiary reaches 18. Funds in account must be used by the time beneficiary reaches age 30. There is a waiver of age restriction for certain special needs children.
The maximum aggregate contributions any one Designated Beneficiary can receive for one tax year cannot exceed $2,000.
A qualified expense is one that is required for the enrollment or attendance at an educational institution. Unlike the other popular education savings plans under Internal Revenue Code Section 529, distributions from CESA's can be used to pay qualified education expenses for elementary and secondary education (K-12) in addition to higher education.
These expenses may include:
- academic tutoring
- special needs services
- room and board
- educational computer technology/equipment
- Internet access
The answer to that question is “almost anyone.” Contributions are usually made by parents, grandparents or other close family members, though there is no requirement that the contributor bear any relationship to the beneficiary. Individual contributors must not exceed an income limit of $110,000 (if filing individually) or $220,000 (if filing jointly). In addition, contributions may be made by other entities, such as corporations, tax-exempt organizations, unions (there are no income limitations for other entities). If contributions are being made from multiple sources to benefit one child, it is important that contributions be coordinated, so that penalties are not incurred as a result of exceeding the contribution limit of $2,000.
Unlike IRA's, where there is only one person (IRA holder) involved, there are a number of different parties with a CESA. Lets look at these parties and their roles.
- Designated Beneficiary - The Designated Beneficiary is the child on whose behalf the CESA is established. The child is typically considered the owner of the CESA.
- Grantor/Depositor - This is the person who establishes the account for the benefit of the Designated Beneficiary. Typically this person is a grandparent, parent, or other family member. However, there is no requirement that the person has to have a relationship with the Designated Beneficiary.
- Responsible Individual - The Responsible Individual is generally a parent or legal guardian of the Designated Beneficiary. However, there are plan agreements (including the BISYS Simplifier) which allows someone other than the parent or legal guardian to serve as Responsible Individual. The Responsible Individual directs the investments of the CESA and authorizes distributions of the funds.
- Contributor - A Contributor can be anyone who wishes to contribute on behalf of the Designated Beneficiary. It does not necessarily have to be the Grantor/Depositor or Responsible Individual who is identified within the CESA document. Any individual or entity, whether named in the document or not, may contribute.
- Designated Death Beneficiary - The Designated Death Beneficiary is the individual intended to receive the funds upon the Designated Beneficiary's death.
- Successor Responsible Individual - The Successor Responsible Individual is the person who will become the Responsible Individual upon the Responsible Individual's death.
Yes, the person listed on the account as the “responsible individual” (usually a parent) may change the designated beneficiary (child). An example of why someone may wish to change the beneficiary is the current beneficiary has completed their education and there are funds remaining. The new beneficiary must be an eligible member of the original beneficiary's family.
No. One of the benefits of the Coverdell ESA is that the earnings are not taxed. Also, withdrawals are, tax-free, if the withdrawal does not exceed the designated beneficiary's qualified education expenses.
In the case of a rollover, a family member under that age of 30 may be renamed as current beneficiary of the account. It could be a sibling or stepsibling, aunt, uncle, cousin or even parent or stepparent of the designated beneficiary. But, regardless of relationship, contributions may be made only until the new beneficiary reaches the age of 18. If the new beneficiary has special needs, age restrictions do not apply.
Yes, funds may be rolled over from one Coverdell Education Savings Account to a new or existing one, provided the document that created the CESA does not prohibit such a rollover. The funds, however, must benefit an eligible member of the original beneficiary's family who is under the age of 30. A rollover contribution may exceed the annual contribution limit. Rollovers are limited to one per 12-month period.
In order to move CESA assets into a 529 plan, the Responsible Individual must first take a distribution or withdrawal from the CESA. Once the distribution is taken the assets would then be deposited in to the 529 College Savings Plan. Because a 529 plan contribution is considered a qualified educational expense, the end result would be the same, while technically this is not considered a roll over.
No. Only CESA funds can be deposited to a CESA.
The Internal Revenue Code Section 530 indicated that, “no contribution will be accepted after the date on which such beneficiary attains age 18.” Contributions to a CESA can generally be made up until the child's 18th birthday. Individuals with special needs may receive contributions beyond their 18th birthday.
Contributions must be made by the tax filing due date, not including extensions. For example, the deadline for making 2018 contributions is April 15, 2019.
All assets must be distributed from the CESA by the time the Designated Beneficiary attains age 30. Prior to that time they can be used to pay qualified education expenses or rolled over to another qualified family member.
The Grantor/Depositor of the CESA determines whether the Designated Beneficiary will gain control of the CESA assets at the time the account is established. When the opening documents are prepared there is an election which either grants control to the Designated Beneficiary or allows the Responsible Individual to retain control upon the Designated Beneficiary reaching the age of majority.
No, there is no earned income requirement for someone to contribute to the CESA. There is however a limitation if the depositor has income above the phase out range (currently $95,000 — $110,000 for single and $190,000 — $220,000 for married).
Typically if funds are removed from the CESA and not used for education expenses (nonqualified distribution) the earnings portion will be subject to ordinary income tax and a 10 percent IRS penalty.
Much like IRA's, excess contributions made to a CESA are subject to a 6 percent penalty if not corrected in a timely fashion. Unlike IRA's, timely means the excess contribution plus the net income attributable, must be removed before the first day of the sixth month following the taxable year (no later than May 31).
Beginning with 2003 reporting, trustee-to-trustee transfers (as well as rollovers) are reportable. The transfer distribution is reported on Form 1099-Q, and the transfer contribution is reported on the Form 5498-ESA.
The distributing financial organization must provide a statement to the receiving financial organization reporting the earnings portion of the transferred amount.
The deadline for providing this statement is the earlier of 30 days from the date of the distribution or January 10.
No. All of the various programs are available to a Designated Beneficiary of a CESA. However, you need to be careful that you do not use the same expenses to qualify for more than one of the available programs.
If the beneficiary receives a tax-free scholarship or fellowship, there would be no 10% penalty on the distribution from the CESA as long as the amount distributed is not more than the amount of the scholarship.
Contributions to the CESA are not tax deductible. However, the growth is tax deferred and qualified distributions are tax free.
A designated beneficiary with special needs:
- is eligible to receive annual contributions after attaining age 18
- is not required to have his or her Education Savings Account balance distributed within 30 days after attaining age 30
- is eligible to receive rollover contributions from qualified family members after attaining age 30
- is eligible to be named as a designated beneficiary to a qualified family member's Education Savings Account after attaining age 30
The 529 College Savings Plan is an investment plan created by Congress in 1996 designed to help families prepare for the expense of a college education. The name is derived from Section 529, the section in the Internal Revenue Code that defines/governs the plan. There are two types of Section 529 plans: prepaid tuition plan and 529 tuition savings plan. (The following questions and answers primarily refer to the 529 savings plans. For information on prepaid plans select the “Prepaid” category). Click here to check the type of plans available in your state (some states offer both types).
The federal tax code allows you to set up an account for anyone, of any age, including yourself. Specific state programs may be more restrictive, so this is an issue that you need to have clarified when you are comparing different plans. For example, a few programs place limitations on how long the money can be in the account. Most often an account is set up for a child or grandchild. A few states do limit how long an account can remain open. Generally the beneficiary cannot be a trust, an estate, a corporation, or entity other than an individual.
As the account owner you have several choices: you may leave the money in the account for the original beneficiary to use in case he/she decides to pursue college at a later time; OR you may change the beneficiary to another person as long as the new beneficiary is a member of the family of the original beneficiary; OR you may withdraw funds from the account, understanding that there will be a penalty and that earnings will be taxed at your tax rate.
All contributions made to a 529 account must be made in cash. In order to use your current stocks, the stocks must first be sold, and the cash proceeds placed in a 529 account. There may be tax issues to consider in liquidating any investment. The sale of the stock may trigger a reportable capital gain or ordinary income to the owner of the stock.
A 529 account can be used at most private colleges, public universities, graduate schools, two-year community colleges, and vocational-technical schools in the United States, and even some foreign institutions. There are approximately 500 foreign institutions listed as eligible institutions for the 2018-2019 school year. The U.S. Department of Education has a list of foreign and US eligible institutions at http://fafsa.ed.gov. The 2017 tax reform package expanded 529 plan benefits to include federal tax-free withdrawals for private, public or religious elementary, middle and high school tuition up to a limit of $10,000 in tuition.
No. The federal tax law forbids “any interest in the program or any portion thereof to be used as security for a loan”.
The amount needed to cover future college expenses depends on the age of the child, the type of school the child plans to attend, the number of years the child will spend in college, the inflation rate of college costs, the rate of return you earn on your savings, and the interests of the child that could bring along additional expenses. Refer to the College Savings Planner for the current cost of over 3,500 colleges.
For most families it will be a combination of savings, scholarships, and loans/grants that come together to pay the total college bills. Very few students actually pay the “sticker price” for college. Grants/loans or other awards are extended as an inducement to attend a specific college. For planning purposes, it is risky to assume that scholarships and grants will be forthcoming and that family contributions will not be required. One of the first steps to good planning is to make an educated determination of the family's eligibility for financial aid and then plan your savings goals accordingly. Refer to the Financial Aid Estimator for help with financial aid eligibility information.
A prepaid tuition plan is one of the two types of 529 plans; the college savings plan is the other. Many states offer both types of plans. Prepaid plans may also be sponsored by a college or group of colleges. There is currently one prepaid plan operating that is sponsored by a group of independent colleges. Prepaid tuition plans allow parents (or other “contributors”) to lock in future tuition expenses at present prices. Costs of these plans will vary according to the age of the benefactor and how close he/she is the date of matriculation. Through the plan you are purchasing a contract for a number of semesters of tuition and fees or the contract may provide for a percentage of tuition and fees. Expenses covered will vary by plan - room and board are generally not covered. Payments can be made over time or in a single lump sum.
- May be guaranteed by the state
- Low-risk - contract specifies what is being purchased
- Specific payment purchases specific future benefit
- Contributions may provide a state income tax deduction
- Burden of investment return and financial ability to deliver contract benefits are shifted to the state or college
- Frequently restricted to state residents
- Fees to change plans
- Some plans may charge a premium
- Conservative investment
- Usually covers tuition and fees only, not computer, room-and-board, or books
- Withdrawals not used for qualifying educational expenses may forfeit a significant portion of earnings
Each plan will have a specific procedure for withdrawing funds to pay qualified educational expenses. Some plans may require the program administrator to make payment directly to the college or university after receiving a bill or statement of expenses. Other plans may allow reimbursement for qualified out-of-pocket expenses, such as books, equipment, etc., with sufficient documentation. The program administrator will provide specific details on withdrawal procedures.
Yes. In general, funds in the 529 Plan may be applied to the costs of tuition, fees, books, supplies, room-and-board, computers and related equipment and services if they are used primarily by the beneficiary during the years that the beneficiary is enrolled at an “eligible higher education institution.”
There is no penalty for withdrawal of money up to the amount of the scholarship. The remainder can be left in the account for costs not covered by the scholarship. Or you may change the beneficiary to another member of the original beneficiary's family, including a cousin. If the beneficiary becomes disabled or dies, there is no penalty for withdrawal of funds. Withdrawals that are not used for a “qualified” education expense will be regarded as regular income. Since the money going into the 529 plan has been taxed, only the gain is taxed when a non-qualified withdrawal is taken.
As the account owner, you have three primary options:
- You may leave the money in the account to be used by the student for additional studies.
- You may transfer the funds to another family member of the original beneficiary (that could include yourself). This could be as simple as changing the named beneficiary and leaving the funds in the same plan.
- You may withdraw the money. If there are no qualifying expenses you pay the 10% penalty on the gain and also recognize the gain as ordinary income and the funds are yours to use as you wish.
- An important element with all of these options is that the account owner has 100% control of the account.
The minimum holding period varies from plan to plan. Most state plans do not have a minimum holding period, though a few require the account be held for one year before money is withdrawn.
Yes. There are state and federal benefits. Types of tax benefits include 1) Income; 2) Gift; 3) Generations-skipping transfer; and 4) Estate. Earnings on contributions grow federally tax-deferred for all plans. Withdrawals to pay for "qualified higher education expenses" are exempt from federal income tax. All states defer earnings on 529 accounts from state income taxes and many states treat distributions paying for qualified higher education expenses as tax-free for their home state sponsored plan as well as out-of-state plans. Some states offer favorable tax treatment (such as a state income tax deduction or state tax credit) or other benefits to their residents only if the resident invests in their own state's plan. State tax benefits may not apply to K-12 tuition. People should check the state where they pay state income tax — even if another state sponsors their 529 plan. Consulting a tax advisor for further guidance may be advisable.
A lump-sum contribution of up to $75,000 per beneficiary (or $150,000 if married filing jointly) can be made in the first year of a five-year period without exceeding the annual federal gift tax exclusion. Contributions to a 529 plan are regarded as a completed gift and the value in the account is not includable in the account owner's estate, even though the owner is in control of the asset.
The favorable income tax-free treatment for qualified distributions is one of the key benefits credited with the interest and growth of 529 accounts. 529 accounts are complex and each taxpayer's situation can be unique. Please consult a professional tax advisor with details of your specific situation.
Control, tax treatment, and impact on financial aid are key advantages. You may intend for the monies that you have placed in a UGMA account be used for higher education, but the control of this account transfers to the beneficiary when that child reaches legal age. If he/she wishes to use those monies to follow a surfboard's summons into the sunset, you have no legal control - the funds are then controlled by the would-be student, now a legal adult. With a 529 account the ownership does not automatically change and the owner is always in control.
Contributions to a 529 may be deductible for state income tax purposes. Account earnings in 529 Plans grow tax-free and may be withdrawn free of federal and state income tax treatment when used for qualified higher education expenses. UGMA accounts do not receive that favorable tax treatment. There is no possible deduction against state income tax liability for contributions to an UGMA and withdrawals aren't tax-free. Investment income above $1,050 within an UGMA is taxable.
Funds in a 529 account are currently considered a parental asset when owned by either the parent or student. Assets in an UGMA are counted as an asset of the student. Monies in an existing UGMA can be rolled into a 529 account and receive the positive treatment for tax and financial aid considerations going forward. However, the new 529 account must retain an UGMA ownership registration and the account will become fully controlled by the beneficiary when they reach legal age. Capital gains taxes may be incurred when selling UGMA assets to fund the 529 account. All 529 programs do not permit an UGMA 529 ownership registration. UGMA/UTMA accounts are governed by state statutes.
UGMAs have a few pros over 529 accounts. The range of investments that can be held in UGMA accounts is very wide and there is no limit on the frequency with which investment changes may be made. Withdrawals not used for college do not incur a penalty. All assets in UGMA accounts belong to the minor for which they are being held and must be used for that minor's benefit.
Programs differ on whom they report as receiving the income. Some programs will report the tax liability to the person to whom they wrote the check. The reporting procedure used by most programs is to report all distributions in the name of the owner and thus the owner will have the tax responsibility.
This issue has not specifically been addressed by Congress or in Treasury Regulations. Some tax professionals argue that the loss can be claimed as a miscellaneous itemized deduction on your tax return. However, that means it is only deductible to the extent it (and other miscellaneous itemized deductions) exceed 2% of your adjusted gross income.
Yes, but your twelve year old will be the owner of the account. In addition, you may not want to pay tax on the IRA in one lump sum. Why not just take minimum distributions (which would likely be small enough to be tax free or taxed at a very low rate) and reinvest those in a 529 plan each year? As an alternative, the IRA assets themselves can be used for qualified higher education expenses with no penalty. This would postpone any taxes paid until the child actually used the account for college.
The IRS's Publication 970 offers a good explanation of the federal tax treatment for Coverdell Education Savings Accounts and 529 Plans (also known as Qualified Tuition Programs, or “QTP's”), as well as tax treatment for student loans, scholarships, and other tax benefits related to paying for higher education.
When it comes to how eligibility for financial aid is evaluated, in some cases having a grandparent as the owner of a 529 account could have a small advantage in the amount of aid your child is offered over having the account owned by a parent. A 529 account owned by a grandparent (or an aunt or uncle, or anyone other than the student and the student's parents) is not included as part of the asset information currently requested to evaluate federal financial aid awards. Keep in mind that individual institutions may develop their own guidelines for evaluating eligibility for non-federal aid. The evaluation of a student's financial need is largely based on information submitted on the U.S. Department of Education's Free Application for Federal Student Aid (FAFSA). The value of assets owned by a grandparent (or other non-parent) is not reportable on the FAFSA form. Only parents' and students' financial information is reflected in the FAFSA documentation.
The question of how distributions from an account owned by a grandparent impact the financial aid calculation should be considered. Withdrawals from the account to pay for qualified expenses are tax-free without regard to who owns the account. The issue is how the distribution is treated on the FAFSA forms when funds come from an account not owned by the student or the parent. While qualified withdrawals from 529 accounts owned by the student or parent do not get recognized as income on the FAFSA form, qualified distributions from a non-parental owned 529 plan may count as untaxed income to the beneficiary two years later on the FAFSA form. The financial aid formula counts student income relatively heavily in the needs-analysis process.
In some cases it may be a planning consideration to periodically rollover assets from an account owned by grandparents to a 529 account controlled by the student from which distributions are made to pay for college expenses. Waiting until the beneficiary's junior or senior year in college to take a distribution from the 529 plan owned by the grandparent is another planning strategy to consider.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provides protection in federal bankruptcy proceedings for many 529 accounts. Your account is protected if the beneficiary is your child, stepchild, grandchild, or step grandchild (including the children of the same relationship by adoption or foster care). Contributions made before a federal bankruptcy to all 529 accounts for the same beneficiary are subject to the following limitations:
|Length of time the 529 account is established prior to federal bankruptcy||Maximum $ Amount Protected|
|At least 720 days||All funds are completely protected|
|More than 365 days, but less than 720 days||Up to $5,000|
|Less than 365 days||None|
Many states have provisions intended to protect 529 accounts from the claim of creditors of the account owner or the beneficiary. 529 programs and the state laws dealing with creditor protection of 529 accounts are relatively new. Because of this “newness” there are not many court interpretations on issues relating to 529 accounts and creditor protection. In many states there have been few or no court rulings or interpretations of the state's creditor protection for 529 accounts. Consult with an attorney regarding your specific situation.
There isn't a short answer and this isn't a complete answer to understanding financial aid and 529 plans, but here are the basics. Under current rules, 529 accounts receive very favorable treatment in federal need-based financial aid calculations. Financial aid starts out as a simple formula. A family's financial need is defined as the cost of attendance (COA) at a specific college minus the student's expected family contribution (EFC) based on their family's financial picture. [Need equals COA minus EFC].
Financial aid comes from three primary sources: 1) Federal; 2) State; and 3) Institutional. Most colleges require the annual submission of the U.S. Department of Education's Free Application for Federal Student Aid (FAFSA) as the basis for assessing the student's financial situation. There are two basic methods used for evaluating the student's financial need: 1) the federal financial aid methodology and 2) institutional or other methodology. The federal methodology is uniformly applied across the country for public institution and for federal aid; however, private institutions may use a variety of methods. The methodologies differ in what assets and income sources are considered from which individuals (parents vs. student) and how each source is weighted.
States may establish special factors for evaluating the student's eligibility for state sponsored aid. Some states, by statute or by policy, establish that they do not include assets held in their own state's 529 plan when determining a student's eligibility for state sponsored financial aid. Federal aid is the most frequently used aid by the largest number of students.
Here is a general overview of what assets and incomes are considered in the Federal Methodology (for a dependent student) to establish the Expected Family Contribution (EFC) for school year 2018-2019:
50% of adjusted gross income over $6,570
22% to 47% of adjusted gross income
(Adjustments are made for several factors including taxes, number of people in the household, the age of the oldest parent, whether there are two parents, ages of children, and the number that are in college at the same time.)
20% of assets owned by student
0% - 5.64% of assets owned by parents
|Excluded Assets & Income||
* Assets in 529 plans held by a dependent student are considered parental assets, not student assets.
The Department of Education is responsible for issuing guidelines under which the statues are administered. Because of the many variables regarding financial aid and individual students' facts will vary greatly, students should contact a financial aid officer at institutions they are considering attending to confirm the school's specific policy regarding treatment of 529 plans for financial aid purposes.
Most states have chosen to have their state's plan assets managed and/or administered by mutual fund companies. The account owner chooses one or more specific fund portfolios offered by the program manager. The account owner decides how to allocate assets among the available funds or portfolios based on his/her investment objectives. The portfolio investment decisions are made by the investment manager.
The range of investment choices is very wide when considering the offerings from all plans. However, the specific options available within any single plan may be more narrow. Across all plans, investments include: actively and passively managed funds; individual funds reflecting market capitalization (large, mid, small, and blend); traditional style categories (growth, value, blend); individual funds vs. multiple-fund portfolios; single fund managers vs. multi-fund manager offerings; geographic concentration (international, global, domestic); and in some cases, even some specific sector options may be available (REITS would be an example). Fixed income offerings can be located to reflect issuer (government and commercial); maturity (long-term, short-term, and money market); and guaranteed offerings where the principal and/or interest crediting rate is guaranteed by the FDIC or an insurance company (examples - CDs, stable value accounts).
Available portfolios include age-based, static portfolios, and individual funds.
Like accounts in any mutual fund, investments that are equity based are subject to market and other risks and are not guaranteed. Some states offer a “guaranteed” option. Those guaranteed options may range from a stable value account paying a stated interest for a stated time period to a bank issued, FDIC guaranteed savings account or CD. Examples of a few states offering a bank CD investment option are Ohio, Illinois, and Arizona).
One appeal of 529 programs is that substantial amounts of money may be contributed to an account and low minimum contributions can start a plan. For calendar year 2018, federal tax law allows a maximum contribution of $75,000 in the first year of a five-year period without exceeding the annual federal gift tax exclusion. Each state sets the overall total maximum amount that can be invested in their program. There is no maximum limit on the value to which an account may grow. Currently some programs allow contributions of over $500,000 per beneficiary. The maximum contribution limits are usually adjusted annually by each state to reflect inflation of college cost in their state. Minimum monthly contributions to start a plan vary with each state's program. A few programs do not have a minimum and will open an account for as little as a $1.00. An automatic monthly contribution of $25 to $50 is the norm to start for most programs. If you are starting your account without automatic monthly contributions, the required opening balance may range from $250 to several thousand dollars.
In the original Federal legislation establishing the 529 program, there was a prohibition against the account owner being able to “direct” the investment. This prohibition has been modified. Now there are two provisions for an account owner to change investments without tax or penalty being imposed at the Federal level: 1) Twice a calendar year, funds may be moved for any reason; 2) Changing the named beneficiary triggers another opportunity to change allocations within an existing account. The twice-a-year provision includes moving from one 529 plan sponsor to another (called a rollover) or changing the investment election within an existing plan. Some 529 plans may charge an administrative fee for terminating an account and rolling the assets to another plan. Most plans do not charge for a change in investment direction within their plan. The limitations for investment changes within the same plan or rollovers are keyed to the named beneficiary. The investment direction change and rollover may be made only twice every year per beneficiary.
Your money can stay in the original plan, or you can roll your account over into a different plan. If your current contributions are eligible for a state income tax deduction or other benefit, based on participating in your “home state's plan,” those deductions against state income tax calculations would not continue since you would be a resident of a different state. The investment in your existing plan will continue to grow tax-free regardless of where you live. There is a process for rolling the investment over into a plan from another state. A rollover is regarded as a change of investment and you are limited to only two investment changes per calendar year.
Federal tax law does not set a specific dollar limit on the maximum amount that can be invested in an account. The § 529 legislation requires that there be “safeguards to prevent contributions… in excess of those necessary to provide for the qualified higher education expenses of the beneficiary.” A maximum contribution amount is established by each state in order to comply with the federal legislation. The formula used is unique to each state. An example of one state's definition is:“…the lesser of:
- 7 times the average one-years' undergraduate tuition, fees, room-and-board at the ten independent four-year eligible education institutions as measured and last published by the College Board Independent 500 College Index that have the largest total direct charges.
- The cost in current dollars of qualifying higher education expenses the account holder reasonably anticipates the beneficiary to incur.”
The maximum amount is adjusted periodically based on the state's formula or established guidelines.
There are several dozen points that could be factors in a comparison. These six general areas give a good basis for comparing or narrowing you selection:
- Pay attention to the program manager and the underlying investment manager(s) and their reputations. Is the managing firm well established? Is the investment manager or managers, if there are multiple managers, firms that you know or have had experience with?
- The state tax and other benefits can be a significant benefit to a resident vs. a non-resident. Some states offer favorable tax treatment (such as a state income tax deduction or state tax credit) or other benefits to their residents only if the resident invests in their own state's plan. Find out if your state plan offers any matching funds (available in some states for families who meet income criteria).
- The fees and expenses will vary among plans. There can be annual administrative fees, enrollment fees, investment management fees for the underlying assets, and sales expenses if you are working with an advisor. Understand what the fees are and evaluate whether the fees represent value to you and/or if they reasonable by industry comparisons.
- The types of investment choices (age-based, static, individual funds) and the number and range of investment options can go from less than four to over twenty. Investment management style will range from active to passive using 100% index funds, and anywhere in between.
- Investment results should not be overlooked. Some programs are beginning to have enough years of experience for the investment results to be worthy of evaluation. Understanding the asset allocation principles that guide decisions about how the portfolios are managed is likely to be a great benefit in comparing plans.
How the plan can be purchased will be a key comparison for many investors. Do you have a preference to work with an advisor or is there a strong preference to “do-it-yourself” and consider only direct-sold plans? Advisor-sold plans have a sales charge that isn't present with direct-sold plans.
All states (except Washington) plus DC now offer a state sponsored 529 Savings Plan (Wyoming participates with Colorado). The plan(s) offered by the state in which you live may or may not meet your needs or preferences. You may select a plan from any state that does not require you or the beneficiary to be a resident to open the account. The residency requirements only apply at the time the account is opened. Once it is established you may continue to invest in the plan regardless of where you live. A tuition savings plan enables the account value to be used to pay qualified expenses at over 4,000 educational institutions across the US. It is safe to say your child may go to school in any state and have expenses paid from a 529 program that is not sponsored by the state where the child is a student and also the plan not be sponsored by the state where you live. In simple terms - it is your money and it can be used at any higher education institution that is approved to participate in Title IV Federal Student Aid Programs - and there aren't many U.S. based colleges that don't participate.
Usually the sponsoring state gives responsibility for establishing the rules for plan implementation and operation to a state agency or board. If that state has a prepaid tuition plan, the contributor will, in most cases, be dealing with that state agency in setting up the account. However, with a savings plan, in many cases the contributor will deal with a mutual fund company or a broker representing a fund company. A small number of states (Utah, Florida, and Virginia are examples) provide services for the direct-sold savings program through a state agency. All advisor-sold plans use the services of a licensed representative to establish and help service their plans.
The Code is clear in its definition of a beneficiary's immediate family by providing the following list:
- A son or daughter, or a descendant of either;
- A stepson or stepdaughter;
- A brother, sister, stepbrother, or stepsister;
- A father or mother or an ancestor of either;
- A stepfather or stepmother;
- A son or daughter of a brother or sister;
- A brother or sister of the father or mother;
- A son-in-law, daughter-in-law, mother-in-law, father-in-law, brother-in-law, or sister-in-law;
- The spouse of the named beneficiary or the spouse of an individual described above; or
- A first cousin of the beneficiary.
The Code further defines that a legally adopted child of an individual shall be treated as the child of such an individual by blood for the purpose of determining who is a “Member of the Family.” The terms “brother” and “sister” include half-brothers and half-sisters.
Any individual qualifies as a beneficiary. For most 529 plans the beneficiary can be any age. There generally is no requirement for the account owner to be related to the beneficiary.
Yes, the same individual can be a beneficiary on several 529 accounts. For example, a parent and grandparent can open an account for the same child or a parent can open multiple accounts for the same child. There isn't a limit on the number of accounts that can be in place for a single child. The state's limitation on the maximum contribution applies to the beneficiary. If two accounts are held in two different state plans, the two states are not required to consider balances in the two accounts when computing maximum contributions, though some states have begun to do this.