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Frequently Asked Questions About 529 College Savings Plans

Do you have questions about 529 Plans and how they work? Check out this list of frequently asked questions—or feel free to give me a call to discuss!

Who can contribute to a 529 College Savings Plan?

Anyone can contribute to a 529 plan ... parents, grandparents, aunts, uncles, godparents, and even the beneficiary. There are no age or income requirements. (Hint: A check for college makes a great gift for birthdays, bar/bat mitzvahs, Christmas, Hanukkah, or any other gift-giving occasion!)

How much can I contribute each year to a 529 Plan?

An individual can contribute up to $14,000, and a married couple can contribute up to $28,000 to a beneficiary in a single year without incurring federal gift tax. Alternatively, a one-time gift of $70,000 (for individuals) or $140,000 (for couples) can be made once every five years to a beneficiary.

Who controls the funds in a 529 Plan?

The account owner controls the funds in the plan, even after the beneficiary turns 18!

Are contributions to a 529 Plan deductible?

Contributions to a 529 are not deductible on your federal income taxes, but some states offer a state tax deduction to residents of that state who enroll in their home-state plan.

What college-related costs can be covered by 529 savings?

Funds in a 529 Plan can be used for "qualified higher education expenses," which include tuition, fees, books, supplies, and equipment needed to attend post-secondary school. Room and board is also included if the student is enrolled at least half-time.

Do I pay taxes when I take distributions from my 529 Plan?

No federal taxes will be incurred if the withdrawn funds are being used by the beneficiary for the "qualified higher education expenses" described in the previous question. In many states, there is also no state tax on qualified withdrawals. This is one of the great benefits of a 529 Plan that differentiates it from other savings vehicles. (Note: In the event of a "non-qualified" withdrawal, taxes plus a 10% penalty will be due on any earnings over the life of the account.)

What are the gift tax and estate planning benefits of 529 plans?

Grandparents, take note ... Whether you are contributing to a 529 Plan you own or writing a check to a 529 Plan owned by someone else, your contributions are considered completed gifts will not be included in your taxable estate should something happen to you. (Note: before contributing to a 529, you should familiarize yourself with your state's gift tax and inheritance tax rules).

Does my child have to go to an in-state school to use the 529 funds we've saved?

No. Some states do offer "pre-paid college plans," which allow you to pre-pay your child's future college tuition at an in-state school in today's dollars. However, most states also offer other college savings plans, the funds from which can be used at any accredited university or college—both in the United States and abroad. You can look up eligible institutions on the Education Department's school code search page.

Will my child's ability to receive financial aid be hurt by having a 529 Plan?

Yes and no. 529 funds are factored into the financial aid equation—but to a lesser degree than money kept in other savings vehicles because a 529 Plan is considered the parents' asset rather than the child's. And here's something good to know ... If the 529 Plan is owned by a grandparent, none of the assets are factored into the financial aid equation.

Can I change the beneficiary in my 529 Plan?

Yes. All or part of the funds in a 529 Plan can be transferred to another beneficiary without restriction or penalty, so long as the "new" beneficiary is related to the "old" beneficiary and of the same generation (i.e., a sibling or cousin). Transfers can be made to members of the beneficiary's family that do not fulfill these requirements, but other taxes may apply.

What if my child receives a scholarship, becomes disabled or dies-and doesn't need the funds?

If you child receives a scholarship—congratulations to you both! 529 rules allow you to withdraw funds equal to the amount of the scholarship without the standard 10% penalty on earnings for non-qualified withdrawals. In the event of disability or death, the entire account may be withdrawn without penalty. In all cases, any earnings accrued over the life of the account would be taxable at the recipient's tax rate.

NOTE: Rules and laws governing 529 plans are varied and subject to change. There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Before investing, it is important to consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Investors should consult a tax advisor about any state tax considerations of an investment in a 529 plan before investing.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Estes Wealth Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions in this newsletter are those of Estes Wealth Strategies and John Estes and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

The information provided does not purport to be a comprehensive description of securities, markets, or other developments. This information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information provided is not a complete summary or statement of all available data necessary for making an investment decision, nor does it constitute a recommendation. 

Individual investor's results will vary. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation.

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