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7 Questions about 529 College Saving Accounts

7 Questions about 529 College Saving Accounts

May 20, 2019

Q: What is a 529 plan?

A: Named after Section 529 of the Internal Revenue Code, 529 plans are investment accounts used to pay for a beneficiary’s education expenses. 529 plans are sponsored by states (just about every state has one) and managed by mutual fund companies. You can save in any state’s plan no matter where you live and you can use your savings to pay for school expenses in any state (even internationally).

Q: What about Maine's 529 Plan?

A: Maine's 529 Plan is administered through FAME and Merrill Lynch and can be opened directly or through our office. If the account owner (adult) is a resident of the state of Maine you would be eligible for the below 2019 Next Gen 529 grants

  • Open an account and either receive the $500 Alfond Grant for Maine residents (babies born in Maine) or contribute $25 and receive a $200 grant for babies that are born out of state but the account owner is a Maine Resident (Ex. Grandparent lives in Maine but grandchild is born elsewhere).  

  • Add $600 to the account annually: Receive $300 match per a year

  • Make it easy by setting up automatic contributions from your payroll or bank account and get a $100 automated funding grant

Q: What is the difference between a 529 plan and UTMA/UGMA?

A: If saving for college is the goal, a 529 provides the tax-free growth and withdrawals as long as the funds are used for qualified education expenses. By comparison, there's no special tax benefit for spending money from a UTMA account on education. Regardless of how the UTMA beneficiary chooses to spend the funds within the account, they will be subject to income taxes. 

The only big difference is control of the account. With a UTMA, the money is considered the child’s asset, but with the 529, the money is considered an asset of the adult account owner.  Upon the minor turning age 21, assets in an UTMA are irrevocably transferred from the donor to the minor. A 529 plan allows the parents (assuming they are designated as owners) to transfer accounts to other, related beneficiaries (such as siblings) if there are additional funds available that are no longer needed by the child for college.   

Another consideration is the investment options. 529 plans are generally offered at the individual state level and each state’s plan limits the investment choices, typically to a few "model portfolios," such as aggressive growth, moderate growth, moderate, moderately conservative and conservative. Although these include both stock market and fixed income investments they are still limited to the number of pre-set choices. UTMAs, on the other hand, are completely open to investments of all different kinds, similar to a typical brokerage account or IRA. 

Q: What is the maximum I can contribute to a 529 in a single tax year without incurring a gift tax?

A: In 2019, you can contribute up to $15,000 and qualify for the annual federal gift tax exclusion. If you are so inclined, you can "front-load" the gifting contribution up to $75,000 ($150,000 for joint gifts) to a 529 account in a single year, as long as you make a special election to spread the lump-sum gift over five years while giving no other gifts to that beneficiary in that same time period.

Q: What happens to the 529 if my child gets a scholarship?

A: The 10 percent penalty on account earnings for non-qualified distributions from a 529 does not apply if the withdrawal is due to the beneficiary receiving a scholarship, death or disability, or if the beneficiary decides to attend a U.S. Military Academy. There’s also the option of renaming the beneficiary to other children or grandchildren. 

Q: How much should I save?

A: Average one-year college costs for 2018-19 are $21,370 for public colleges (in-state) and $48,510 for private non-profit colleges (tuition, fees, and room and board) according to the College Board’s Trends in College Pricing. Average four-year college costs are likely to total about $90,000 for public colleges and about $200,000 for private non-profit colleges.

Let your income dictate savings over time. The key is to start early and save every month, and make smart investment decisions within the account. And remember, friends and relatives can contribute as well. Take advantage of this on special occasions when asked for gift ideas for your little one.

How much do I need to Save for college?

(use the above calculator from Putnam and estimate how much you should save each month )

Q: Why a 529 plan makes sense?

A: Studies show that money saved specifically for education is more likely to be used for education. If you're faced with the costs of college and would like to know more about 529 plans or would like to review your current 529 plans investments and contributions, please contact us or schedule a call. 

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Consult a financial, tax or legal professional for specific information related to your own situation.

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