Definition of 529 College Savings Plan
A college savings plan is a type of qualified tuition program under Section 529 of the Internal Revenue Code that allows you to save money for a beneficiary’s college and graduate school expenses in a federally tax-advantaged individual investment account. Contributions to the account grow income tax deferred, and earnings are income tax free at the federal level if used to pay the beneficiary’s qualified education expenses.
Prerequisites
- An individual to name as beneficiary
- The required minimum contribution to open an account
Key Strengths
- Federal and state tax-deferred growth
- Earnings free from federal income tax if withdrawals are used for the beneficiary’s qualified education expenses
- Favorable federal gift and estate tax treatment
- Possible state tax advantages
- Available to all income levels
- High lifetime contribution limits
- Professional money management
- Trend toward more flexibility in investment options
- Variety of college savings plans to choose from
Key Tradeoffs
- Returns are not guaranteed
- Earnings portion of withdrawals not used for the beneficiary’s qualified education expenses are taxed and subject to a 10 percent federal penalty
- Plan’s investment portfolios are managed exclusively by the plan’s money manager
- Fees and expenses are typically associated with opening and/or maintaining a college savings plan account (e.g., annual maintenance fee, administration fees, and investment expenses based on a percentage of your total account value)
Variations from state to state
- College savings plans vary by state (though all must follow the guidelines set forth in Section 529 of the Internal Revenue Code)
How is it implemented?
- Choose a specific college savings plan
- Complete an application
- Name a beneficiary
- Make the required minimum cash contribution to open the account
- Select one or more of the plan’s investment portfolios in which your contributions will be invested
From the desk of Adrienne Horen, Vice President/Investments, Janney Montgomery Scott LLC
Adrienne Horen is a Vice President and Financial Advisor with Janney Montgomery Scott LLC. Ms. Horen helps her clients develop investment portfolios with an emphasis on risk management and wealth preservation. She also has extensive experience in accessing the investment objectives of not-for-profit organizations, trade and professional organizations, and qualified ERISA plan accounts.