529 Savings Plans


These state-sponsored plans offer flexible, tax-deferred ways to save.

Benefits

• 529 savings plans offer several advantages over other savings plans.
• States may allow contribution deductions from state income taxes.
• Earnings are free from federal taxes if used for qualified higher education expenses.
• In most states, earnings are free from state taxes if used for qualified higher education expenses.
• You – rather than your child – remain in control of the funds.
• There is no age limit for the beneficiary, and funds can be used for undergraduate and graduate school as well as specialized training, such as medical school or law school.
• Generous contribution limits exist, regardless of income level.
• You choose the investment strategy that is right for you and your student.
• You can contribute to a 529 savings plan and a Coverdell Education Savings Account during the same year.
• Your child may choose any accredited college, university or vocational school.
• Unused portions of the account may be transferred to another family member.
• Contributions are typically excluded from your taxable estate and may not be subject to gift taxes.

Other Considerations

While 529 savings plans offer many benefits, there are potential drawbacks.

• Earnings are taxed and subject to a 10% penalty when withdrawn for uses other than qualified higher education expenses.
• The portfolio allocations may only be changed once per year or upon a change in beneficiary.
• Important: Recent IRS guidelines allow an account owner to change investments twice in calendar year 2009 and upon a change in the beneficiary of the account.

Frequently Asked Questions

How can 529 funds be used?
To pay for the beneficiary's qualified higher education expenses. Earnings withdrawn for any use other than qualified higher education expenses are subject to federal income tax and a 10% federal tax penalty. However, a withdrawal on account of the beneficiary's death, disability or receipt of a scholarship (to the extent of the scholarship award) is subject to federal income tax but no federal tax penalty.

Can 529 assets be used to pay for private elementary or high school tuition?
529 Plans are designed to pay higher education expenses. A withdrawal used for tuition at an elementary or high school would be subject to federal income tax and a 10% federal tax penalty on earnings.

What are qualified higher education expenses?
Qualified higher education expenses are expenses allowed under Section 529, including:

• tuition, all mandatory fees and the costs of required textbooks, supplies and equipment required for the enrollment or attendance of a beneficiary at an eligible educational institution (To find out if a school is eligible, go to the Department of Education).
• the costs of room and board of a beneficiary during any academic period during which the beneficiary is enrolled at least half-time in a degree, certificate or other program that leads to a recognized educational credential awarded by an eligible educational institution

Existing school loans are not considered qualified higher education expenses.

What effect does a 529 account have on federal financial aid?
529 accounts may affect a beneficiary's ability to qualify for federal financial aid. Federal law states that a 529 account is regarded as an asset of the account owner for federal financial aid purposes, unless the account owner is a dependent student. Effective July 1, 2009, a 529 account will be regarded as an asset of the student if the student is an independent student. If the student is a dependent student, the account will be regarded as an asset of the parent. 



Can the beneficiary be changed?
Yes. The account owner can change the beneficiary of a 529 account at any time. To avoid federal income tax and a 10% federal tax penalty on earnings, the new beneficiary must be a member of the family of the previous beneficiary.

Who qualifies as a member of the family?
Generally, a member of the family includes the beneficiary's immediate family. The following individuals are considered to be members of the family:

• 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 brother or sister of the father or mother
• a son or daughter of a brother or sister
• a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
• the spouse of the beneficiary or the spouse of any individuals described above
• a first cousin of the beneficiary

A legally adopted child is treated as the child of the adoptive parent as if by blood. The terms "brother" and "sister" include half brothers and half sisters.

529 Prepaid Plans

These plans allow you to purchase a certain percentage of tuition over time that is guaranteed to be equivalent to the same percentage of tuition in the future. We can assist you in determining if a 529 prepaid plan is available in your state.

Benefits

• With tuition rates rising, these plans may be appropriate for some families.
• States may allow contribution deductions from state income taxes.
• Earnings are free from federal taxes if used for qualified higher education expenses.
• Returns are tied to state school tuition increases.
• Funds are not subject to market volatility.
• Other Considerations.
• Consider these plans carefully since there are limitations.
• Earnings are taxed and typically penalties will apply if the funds are not used for higher education.
• Your child may have limited school choices.

For more information on 529s and tax treatment, please check the current IRS guidelines and/or speak with your account. Please be sure to verify current tax law before making any transactions related to a 529 account.

Investors should carefully consider the investment objectives, risks, charges and expenses associated with mutual fund securities before investing. More information about mutual fund securities is available in the fund's prospectus, which should be read carefully before investing.