Supplemental Materials – 529 Plans
Presented At The Pennsylvania Bar Institute Estate
by David M. Frees III
There are significant benefits to using a 529 plan to save for college.
Here is a list of the top five benefits and a few links for more advice
and information about the various types of 529 plans.
1) Continued Control By The Creator of the 529 Account
Ordinarily, once you have made a gift, you can no longer control
that gift or it will be brought back into your estate for estate tax
However, in the case of a 529 plan, the donor can retain control of
the account. With only a few exceptions, the beneficiary has no rights
to the funds and can even be removed as the beneficiary. As the
creator of the account, you can maintain control of the assets and
when and to whom distributions are made. In fact, most plans even
allow the donor to reclaim the funds although there are income and
estate tax consequences to this including a 10% penalty.
2) Income Tax Benefits
All types of 529 plans offer numerous income tax benefits and,
you may even get a state income tax benefit as well. While 529
contributions are not deductible on your federal tax return, your
investment will grow federal income tax-deferred, and distributions
to pay for the beneficiary's college costs come out federally tax-free.
Your home state may also offer some tax breaks as well. However,
this ordinarily requires that you use a plan approved in your state and
you should be sure to review these rules. More information can be found on
this excellent site just click here.
3) Simplified Tax Structure and Low Account Maintenance
Since the accounts are not subject to income tax until there is a withdrawal,
you won't receive a Form 1099 or report taxable or nontaxable earnings until
the year you start to make withdrawals. Furthermore, 529s are a set it and
forget it type of investment device.
The ongoing investment of your account is handled by the plan and are
professionally managed either by the state treasurer's office or by an outside
investment company hired by each state's program as the program manager.
4) Such Plans Are Highly Flexible Within The Plan
Structure and Often From Plan To Plan
For example, every year, most plans allow you to restructure your investments
within the plan or to roll it over to another state's plan. Be aware, however, that
each 529 plan will have different rules that may impact the number of changes
you can make, so to compare the features of individual state plans click here.
5) Substantial Up Front Gifting And Large Deposits Are Permitted
All permanent residents and citizens are eligible to create a 529 plan, and the
amounts you can put in are substantial (over $300,000 per beneficiary in many
state plans). You can also gift up to $65,000.00 (by using five years -in advance -
of annual gift tax exclusion).
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