Understanding Financial Terms

Named after the tax code that created them, 529 College Savings Plans provide an interesting way to save for higher education expenses. The plans are state-sponsored, so the rules and opportunities vary depending upon the state in which you live. Because they offer investments that are managed by a professional financial services firm, must choose your plan as carefully as if you were selecting a mutual fund. (In many ways you are.) Read the rules, restrictions and investment objectives carefully. 529 plans share these basic characteristics

• The account grows tax-deferred. Earnings on qualified withdrawals are taxed at the beneficiary's (child's) rate.
• Each state gives you a choice of pre-established investment portfolios that were created for that plan. Some have fixed allocations, others let you change asset allocations based on the beneficiary's age or years before college.
• Contributions can be as low as $25 or as high as $150,000. Anyone can contribute to a 529 plan; there are no income restrictions.
• The account owner is the only person who can authorize a distribution from the account–so you know your savings will go toward education expenses.
• You can change the beneficiary if your child decides not to go to college, or won't need all the money. There are no taxes or penalties for changing the beneficiary as long as the new beneficiary is a member of your family.
• A relative can contribute up to $50,000 to the account free from federal gift taxes. (You can stretch the gift over a five year period.) Contributions also lower the giver's estate for tax considerations.
• 529 accounts do not affect eligibility for a Hope Scholarship or Lifetime Learning Credit.
• The account is considered to be an asset of the owner, not the beneficiary, so that it won't be evaluated as an asset of the child for financial aid purposes. (35 percent of a child's assets must be considered by colleges, versus 5 percent of the parent's assets.)