The purpose of a 529 plan is to provide funds for a beneficiary's
college education. These plans are a result of the tax bill that was
enacted during 2001.
How does it work?
Up to $13,000 can be contributed each year to a 529 plan without having
to file a gift tax return. Contributions can continue until the account
reaches $250,000. If a gift tax return is filed, gifts of more than
$13,000 may be made during a calendar year.
What are the tax benefits?
Contributions are not tax deductible, but the income from the
investments in the 529 plan are income tax free. When the funds are
withdrawn and spent for educational purposes, the withdrawals are also
income tax free.
What are the estate tax benefits?
Funds contributed to a 529 plan are no longer included in the estate of
the donor. If the donor has an estate that is subject to the federal
estate tax, the amount contributed to the 529 plan would constitute a
tax savings of between 40 and 50 percent of the amount contributed.
What if the beneficiary decides
not to go to college? The donor can change the
beneficiary of the plan as often as is needed. However, the new
beneficiary must be a member of the previous beneficiary's family, which
includes children, grandchildren, brothers, sisters, spouses, nieces,
nephews, aunts, uncles, cousins and in-laws.
What type of education is
included? Post high school education, including
undergraduate education, graduate education, and technical training. The
expenses that can be paid include tuition, room and board, books, and
What if the funds have to be
withdrawn from the 529 plan for an emergency? The
principal that was originally transferred to the account can be
withdrawn without penalty. The income that was earned is subject to
income taxation and a 10 percent penalty.
How do I start a 529 plan?
Talk to your financial advisor or type "529 plan" into your favorite
search engine to learn about the hundreds of plans that are available.