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Prior Law – Make $500 per year
non-deductible contributions
– Beneficiary must be younger than 18
– Funds
used to pay college education
costs tax free
– Contribution phase out between
$150,000 - $160,000 (joint)
– 10% penalties for misuse of
funds |
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No Tax on Earnings |
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No Tax on Distributions (used for higher
education) |
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Retain Control |
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Over Distributions |
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Change Beneficiaries |
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Reversion of Funds |
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Contribution of $50,000 per year |
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No Federal Income Tax |
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State Income Tax |
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Some States Do not Have an Income Tax |
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Some States: Income tied to the Federal AGI |
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A few States: Subject to State Income Tax |
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Taxed to the Distributee (most states, non
qualified distributions can only be made to the account owner) |
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Only Earnings Portion is Taxable (use Sec. 72
Annuity Rules) |
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10% Penalty on Earnings Portion (Exception for
death, disability or scholarship) |
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Higher Education: Any College or Graduate School
(eligible for federal aid) and most Vocational Schools |
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Expenses covered: tuition, books, fees, supplies
and room and board (limits for off campus) |
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Used in Same Tax Year |
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Completed Gift (even though owner may get the
funds back) |
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Front End Loaded (5 years of gifting in 1) |
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Gift Splitting Permitted ($100,000 for married
couples) |
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Excluded from Estate Tax of the Donor |
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Even though it may come back to the donor |
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Even though retain control over distributions |
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Exception: dies within 5 years, remaining
portion of gift comes back |
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State Sponsored Program |
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Only Cash Contributions |
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Cannot Direct Investments (other than select
among state options) |
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Cannot Pledge |
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Limited Contributions (States do vary) |
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Can Choose From Any State (do not need to be a
resident) |
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Fees |
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Options for Investments |
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Types of Plans (i.e. “Direct Investment” vs.
“Advisory Series”) |
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State Income Taxation |
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529 Plan is considered an asset of the Account
Owner; not the student |
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Less likely to disqualify the student for
financial aid |
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Most trusts and UTMA Accounts are considered
assets of the student |
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Dissatisfied with state program: rollover to
another |
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Dissatisfied with investment: change the
strategy |
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Student Doesn’t go to College: |
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Change beneficiary |
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Take funds back |
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Wait & See |
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Can get the funds back |
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Even with taxation & penalty, will still
out-perform most investments |
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Should use whenever college is likely |
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Limited income tax deduction may be allowed for
college tuition and fees paid during year |
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Many taxpayer friendly provisions in the 2001
Tax Act |
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Consult with your tax advisor to see which are
beneficial for you |
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Need for constant planning and monitoring |
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Uncertainty caused by sunset provision |
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Notes