QUALIFIED TUITION PROGRAMS "SECTION 529 PLANS" Congress recently changed the law to allow college savings on a tax advantaged basis. A "529 Plan" is an investment vehicle set up by each individual state to help families save for future college costs. The major advantages of these Plans are: Plan assets grow tax-free for as long as the money stays in the Plan. Withdrawals for qualified higher education expenses are entirely exempt from federal income taxes. The donor maintains control of the account with the ability to change beneficiaries and decide when to make withdrawals. There are no income or age restrictions. Therefore, a Plan could be set up for children, grandchildren, spouses, unrelated individuals or even yourself. Substantial amounts may be funded immediately. A donor may contribute up to $55,000 ($110,000 for a married couple) per beneficiary immediately without incurring any gift tax implications (however, this will count against the yearly gift tax exemption for five years). There are two types of 529 Plans. A prepaid tuition plan covers in state tuition and may allow the transfer of all or a portion of the value of the contract to private or out of state schools. A college savings plan allows an account that can be used at any accredited college in the country. These Plans should be viewed as a savings, investment and estate planning vehicle. Generally, money put in the Plan will appreciate outside of the donor's estate. Starting a Plan should be examined in coordination with a person's annual gifting programs. Although there are great advantages to placing a substantial amount in an account up front, most states allow small minimum contributions. Therefore, these accounts can be utilized by everyone. Many of the plans allow the transfer of funds from existing Uniform Gifts to Minors Accounts (UGMA). If this is done, however, there are similar restrictions on this account as there is on the UGMA account. If money is withdrawn for other than college expenses, then the income earned in the account on the portion withdrawn is taxed to the donor. Additionally, there is a 10% penalty on the earnings portion. However, the penalty is not charged if the account is terminated because of the death or disability of the beneficiary, or if the funds are not needed up to the amount of any scholarship money received by the beneficiary. The ability to change to other beneficiaries allows you to keep the account going to avoid or delay a withdrawal if the originally named beneficiary does not need the funds. Other aspects of these Plans are: Contributions may only be made in cash. You are not allowed to pledge any interest in the account as security for a loan. Qualified higher education expenses means tuition, fees, books, supplies, equipment and "reasonable" room and board costs. Every state either has, or is in the process of setting up, some type of 529 Plan. As of now, Florida does not have a savings plan in place, but they are in the process of implementing one. That, however, does not preclude Florida residents from participating in another state's plan. As each state has different rules and investment managers, it is important to find the Plan that is right for you. While you will be able to choose between investment alternatives, the assets are managed by professional money managers, and you will not control the assets to the degree you would if held in your brokerage account. Please contact us to discuss setting up a Plan that is most advantageous to you. © 2007, Mallah Furman. All Rights Reserved.   The CPA licensure designation is regulated by the State of Florida.   The CVA designation is regulated by the National Association of Certified Valuation Analysts.   Privacy Policy | Legal Disclaimer | Site Map