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529 FAQ's
Q. How do 529 plans impact financial aid calculations?
A. 529 savings accounts are treated as an asset of the parent or other account owner in determining eligibility for federal financial aid. Your expected contribution towards your child's college costs will include 5.6%, or less, of the value of your account for each academic year. There are many other considerations and be aware formulas vary by institution, state and year.
Q. What happens if my child doesn't go to college?
A. Federal law imposes a 10% penalty on earnings for non-qualified distributions beginning in 2002. This means that you will get back 100% of your principal and 90% of your earnings. The penalty is not assessed if you terminate the account because the beneficiary is disabled (the law isn't clear about what happens if the beneficiary dies), or if you withdraw funds not needed for college because the beneficiary has received a scholarship.
You can change the beneficiary at any time in order to continue the accounts and avoid (or at least delay) taking non-qualified withdrawals when the original beneficiary doesn't need those funds.
Q. Can I transfer my child's existing Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) account into a 529 plan?
A. Many (but not all) 529 plans accept funds coming from an existing program under the UTMA or UGMA. However, because these funds belong to the minor under a custodial arrangement, any withdrawals from the UTMA / 529 account must be for the benefit of that minor only. Program rules and state laws will generally prevent you from making any beneficiary changes to the UTMA / 529 accounts, and the minor will assume direct ownership of the account when the custodianship terminates at the age of majority. Parents who are nervous about a child getting their hands on money in an UTMA account, and who may be looking to "regain control" of the money by transferring the funds to a 529 account, may be disappointed to learn that they are not able to accomplish that objective without violating state laws (see your attorney). Still, the placement of UTMA funds in a 529 account can provide all the tax and investment benefits associated with 529 plans. Remember, however, that a 529 plan can only accept cash and so any appreciated securities in the UTMA would first have to be sold and capital gains would be reportable on the minor’s tax return.
Q. What are the estate and gift tax advantages of 529 plans?
A. Contributions to 529 plans are gifts to the named beneficiary for gift tax and generation skipping transfer tax purposes.
Your contribution qualifies for the $11,000 annual gift tax exclusion. If you contribute $11,001 - $55,000 for a beneficiary, you can treat the contribution as if it was made over a five calendar year period. The money (and the growth of your account) gets out of your state faster than if you made contributions each year.
Note that unlike some other gifting programs, money gifted to a 529 plan leaves your estate but doesn't leave your control. You can always change the beneficiary or even terminate the account subject to taxes and penalties.
Q. Can someone other than the account owner contribute to the 529 account?
A. Anyone can contribute to the account. However, only the account owner can make decisions regarding the account, including taking withdrawals from the account, changing the account's investments and changing the beneficiary.
Q. Does contributing to a 529 plan guarantee that my beneficiary will be admitted to his or her college of choice?
A. No. Having a 529 account does not guarantee admission to a college anywhere.
Q. Can I contribute to a 529 account and a Coverdell Education Savings Account in the same year?
A. Contributing to a 529 account does not affect your ability to invest in other education savings vehicles, such as a Coverdell Education Savings Account.
Q. Who can set up a 529 account?
A. Anyone who is a U.S. citizen or legal U.S. resident can establish a 529 plan. You do not have to be a resident of the state in which the account is opened. An account cannot be owned jointly.
Q. Can the account owner specify a successor account owner?
A. Yes. The account owner is required to designate a successor account owner. If the original account owner dies or is declared legally incompetent, the designated successor becomes the account owner. If there is no successor account owner, the estate of the deceased account owner becomes the new account owner. If the successor account owner is a minor, a parent or guardian must sign the account application.
Q. Who can be a beneficiary?
A. The account can be opened for the benefit of any U.S. citizen or legal U.S. resident, including the account owner. The beneficiary needs to be related to the account owner. There can only be one beneficiary per account, and there is no age limit to the beneficiary.
Q. Can I change the beneficiary on my 529 account?
A. 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.
Q. Who qualifies as a member of the family?
A. 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 descendent 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 individual 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 sisters.
Q. What if the beneficiary does not use the account for higher education expenses?
A. The account owner may select a new beneficiary who is a member of the family of the previous beneficiary without income tax or penalty. In the alternative, the account owner may withdraw the funds, but will have to pay federal tax and a 10% federal tax penalty on the earnings.
Q. What is considered a qualified higher education expense?
A. 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.
- 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 institution.
To be considered qualified higher education expenses, room and board costs may not exceed the following amounts:
- For students living on campus, account withdrawals may be used to pay up to the actual invoice amount for room and board at the institution.
- For students who live with a parent or guardian, account withdrawals may be used to pay up to the amount determined by the eligible educational institution for the room and board allowance for students who live with a parent or guardian in its cost of attendance for that academic term.
- For all other students living off campus, account withdrawals may be used to pay up to the amount determined by the eligible educational institution for the room and board allowance for students who live off campus in its cost of attendance for that academic year.
Existing school loans are not considered qualified higher education expenses.
Q. What is an eligible educational institution?
A. An eligible institution is one that is eligible to participate in a student financial aid program under Title IV of the Higher Education Act of 1965. Most community colleges, public and private colleges, universities and vocational schools in the United States are eligible educational institutions. Some foreign institutions are also eligible. You cannot use the account for a private elementary or high schools.
Q. Can I use my 529 account assets to pay for graduate school?
A. Yes. You can use the assets for undergraduate and graduate school as well as specialized training, such as medical school or law school.
Q. Is there a time limit for using the assets in a 529 account?
A. Yes. The account owner must use the assets in the account or designate a new beneficiary within 30 years after the beneficiary graduates from high school or within 30 years after opening the account, whichever comes later.
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