COLLEGE SAVINGS PLAN

 

529 College Savings Plan

A 529 College Savings Plan, is a specialized savings account that is used to save money for college. Each 529 plan account has an account owner, who controls the investments and selects the beneficiary, and one beneficiary. The account owner and beneficiary may be the same person. The money in a 529 plan may be used to pay for the college expenses and K-12 tuition for the beneficiary, tax-free.

Many families find that 529 plans work well, helping them achieve their college savings goals. 529 plans make it easier to save, with the option to schedule automatic investments as low as $15 or $25 a month transferred from a bank account or payroll check. 

Tax and financial aid benefits

Named after section 529 of the IRS tax code, which was added in 1996, 529 college savings plans provide families with several tax and financial aid advantages.

Contributions to a 529 plan, are made from after-tax dollars. Earnings accumulate in a 529 plan on a tax-deferred basis. Qualified distributions from a 529 plan are entirely tax-free.

Annual contributions to a 529 plan, more than the $15,000 annual gift tax exclusion ($30,000 for a couple giving together) are eligible for 5-year gift tax averaging, which treats the contributions as occurring proportionately over a 5-year period. This allows an individual to make a lump sum contribution to a 529 plan of up to $75,000 ($150,000 for a couple) without incurring gift taxes. 

If a 529 plan is owned by a dependent student or the dependent student’s parent, the 529 plan is reported as a parent asset on the free application for Federal Student Aid (FAFSA) and distributions are ignored. This yields a more favorable financial aid treatment than student assets. Student assets reduce eligibility for need-based aid by 20% of the asset value, compared with at most 5.64% of the asset value for parent assets. 529 plans that are owned by anybody else are not reported as assets on the FAFSA, but distributions count as untaxed income to the beneficiary, reducing eligibility for need-based aid by as much as half of the distribution amount. 

In addition to the tax and financial aid advantages, 529 plans offer several other key benefits:

• You can start a 529 plan at any time. There is no limit on the number 529 plans you can set up.

• The account owner controls the account, not the child. The child does not gain control over the account upon reaching the age of majority. The account owner can change the beneficiary if the child does not go to college. 

• Anyone can contribute to a 529 plan. There are no income phase-outs on contributions to a 529 plan. There is no age limit on contributions. 529 plans high aggregate contribution limits, which range from $235,000 to $520,000, depending on the state.

• There is no age limit for using the money in a 529 plan. There are no income phase-outs on distributions from a 529 plan. 529 plans can be used to pay for graduate school, medical school and law school, not just undergraduate school.

If you would like more 529 plan information, you have options: 

• Speak with an ECIA team member: (800) 624-8976 
• Request more information by completing the Contact Request form and one of our ECIA insurance specialist will contact you the same day, or worse case the following day.