Five Questions We Hear About 529 College Savings Plans

news image
July 1, 2015 | Wealth Management Topics
  • Lyman D. Howard, CFA CFP®, Portfolio Manager

State operated college savings vehicles known as 529 plans have become the vehicle of choice for family members planning for future college tuition. Because new parents are often dealing with college savings for the first time and many other options exist (custodial UTMA accounts, Roth IRA, Series EE Savings Bonds to name just a few) there are often questions. Here are five we are hearing:

1. Why do I need to fund this account with cash instead of gifting appreciated assets?

The 529 programs are administered in each state by one or two financial services companies, generally large mutual fund providers. Available investments are standardized stock/bond mutual funds. There is no provision for customized investment strategies, as you might have with a custodial account for a minor, for example.

2.Will the child’s eligibility for financial aid be diminished?

When calculating Federal Financial Aid, a 529 plan owned by a parent would reduce potential aid by 5.64% of the 529 account balance each year. If owned by the grandparent, no such calculation is made, but after receiving the 529 plan support in year one, Federal Aid calculations would raise the Expected Family Contribution of the grandchild in year two to reflect ongoing payments from the 529, potentially reducing year two aid eligibility. In any case, you are still better off actually having the 529 money available for college.

3. If I change my mind or the child changes his or her mind about attending college, what happens?

The account owner, whether parent or other relative, has the ability to reassign the account’s beneficiary to different family members, or even to use it for his/her own post-secondary education. If nobody is available, the account can be passed to the descendants of the beneficiary or the account can even be liquidated. So called “unqualified distributions” trigger income tax on the accumulated earnings plus a Federal and possibly State level penalty on those earnings.

4. How would contributing affect our taxable estate?

Making a contribution is making a gift to the beneficiary and therefore removing the assets from the donor’s taxable estate. A unique feature of 529 plans is that a donor who is the account owner still retains control over withdrawals and can change the beneficiary even after making the completed gift. The annual gift exclusion of $14,000 applies, plus a special feature allows for a five year acceleration. In other words, a donor can “prepay” five years of gifting in year one (5 x $14,000 = $70,000 per person, $140,000 per couple) without reducing his or her lifetime unified estate/gift allowance. A donor exercising acceleration will have to file a gift return with their taxes next year.

5. Which state’s program should I select?

Shop around for a U.S. State that offers a well-run plan operated by a company you are familiar with. Your own state might throw in an extra income tax deduction for contributions made by its residents (California does not). Otherwise choose based on low expenses and multiple investment options available. Don’t feel trapped if plan features change later. You can move your account to a different state’s plan or even own multiple accounts. It doesn’t matter where the student attends college.

For more details and a state comparison tool visit or get in contact with your wealth management team.