529 plans were made possible by federal legislation but are implemented at the state or institution level. Nearly all states have approved and adopted these qualified tuition programs (QTPs). Most states let nonresidents participate in their plans, although the state tax benefits may be greater for residents than for nonresidents.
The beneficiary can use 529 plan account balances at any eligible postsecondary educational institution in the United States or certain schools abroad for qualified expenses. Qualified expenses include tuition, fees, books, computer equipment and technology, and supplies required for enrollment or attendance at the eligible institution. Room and board are qualifed expenses for students who are at least half time. The account owner retains control of the assets and can change beneficiaries within the designated beneficiary’s family at any time without penalty. Other key advantages of these plans are:
* Total yearly costs for in-state tuition, fees, books, room and board (transportation, and miscellaneous expenses not included). Base is 2016 – 2017 school year. Costs for all future years projected by Wells Fargo Advisors in November 2016 assuming a 2.4% national average increase per year for public and a 3.6% national average increase per year for private. Source: Trends in College Pricing. © 2016 collegeboard.org, Inc. Reprinted with permission. All rights reserved. collegeboard.org.
↑ Assumes no other gifts have been made for the year and a gift tax form 709 has been completed.
An investment in a 529 plan will fluctuate such that the shares when redeemed may be worth more or less than the original investment. There are no guarantees that an investment in a 529 plan will cover higher-education expenses. Investors should consult the plan’s offering document for the fees and expenses associated with that plan. You should consider a 529 plan’s investment objectives, risks, charges and expenses carefully before investing. The plan’s official statement, which contains this and other important information, should be read carefully before investing.
Can securities be contributed to a 529 plan? No. Contributions to 529 plans must be made in cash.
How will my contributions be invested? Typically your contribution is invested in a predetermined portfolio of stocks, bonds and cash. These portfolios are managed by the plan’s chosen investment firm. In general, owners designate a certain allocation model at the time of the original contribution and can change this investment model twice every calendar year and/or when they change the beneficiary.
Can I change the beneficiary after I’ve made a contribution? You may change your 529 savings plan account beneficiary to another qualified family member of the designated beneficiary without triggering income tax consequences. A qualified family member generally includes siblings, descendants, ancestors, aunts, uncles and first cousins (defined in IRS publication 970). If you change the beneficiary to a descendant of the designated beneficiary, you will trigger a gift equal to the value transferred from the 529 account. If the value is more than the annual exclusion (or five-year accelerated annual exclusion), you must report it as a “taxable gift.”
Can 529 distributions be used for vocational schools? Potentially. An “eligible” institution is any college, university, vocational school or other post secondary educational institution eligible to participate in the U.S. Department of Education student aid program.
What happens if the account balance is not used for qualified higher-education expenses? Every withdrawal from a 529 plan is separated into two components: an “earnings” portion and a “return of your investment” portion.The return of your investment in the 529 plan is never subject to federal income tax. On the other hand, if a withdrawal is not used for qualified higher-education expenses, the earnings portion of the withdrawal is subject to income tax and potentially a 10% IRS penalty. Some exceptions to the penalty may be available. For example, if the beneficiary dies, becomes disabled or receives a tax-free scholarship, you may take penalty-free nonqualified distributions from the 529 balance within that same tax year. See IRS publication 970 at irs.gov for more exceptions.
How will 529 plan investment balances affect eligibility for financial aid? Assets in a 529 account are included in the federal financial aid calculation as follows:
How does a 529 plan compare with more traditional college-savings vehicles, such as custodial accounts, ESAs, etc.? For a more complete discussion and comparison of these types of vehicles, ask your Financial Advisor for a copy of our education-planning brochure, “Saving for Soaring College Costs.”
Can I transfer existing Uniform Gift to Minors Act/Uniform Transfer to Minors Act (UGMA/UTMA) balances into a 529 plan? Yes, but 529 plan contributions must be made in cash, so if you choose to use UGMA/UTMA funds, your UGMA/UTMA assets must be liquidated (possibly triggering capital gains) before making your 529 contribution. You will need to transfer the funds into a custodial 529 plan account. Once there they will have the opportunity to grow tax-deferred, and qualified distributions may be federal income tax free, the same as a noncustodial 529 plan. Nonqualified withdrawals from either a custodial or noncustodial 529 plan account may trigger ordinary income taxes and a 10% penalty.
There are two important differences to be aware of when funding a 529 plan with UGMA/UTMA funds. First, you should be aware that you are not allowed to change the beneficiary on custodial 529 plan accounts. Second, the UGMA/UTMA assets you transfer into the account will continue to be governed by the control rules involving UGMA/UTMA assets. That is, the beneficiary may gain control of those assets when attaining the age upon which custodianship ends. You should also be aware that assets in a UGMA/UTMA account can be used for a variety of purposes without penalty. They are not restricted to educational expenses as with a custodial 529 plan. A better strategy may be to maintain the UGMA/UTMA assets for expenses not considered qualified by the 529 plan and direct new education savings into a 529 plan for qualified expenses.
Can I make a gift to a custodial account and a 529 plan in the same year? Yes, within certain limitations. A gift to a custodial account is limited to the annual gift-exclusion amount ($14,000 for individuals, $28,000 for married couples) without affecting your lifetime gift-tax-exclusion amount ($5.49 million in 2017). However, a gift to a 529 plan that is in excess of the annual gift-exclusion amount may be considered a five-year accelerated annual-exclusion gift if properly elected as such on a gift tax return.
For example, if you made a $35,000 contribution in one year to a 529 savings plan and elected the five-year accelerated annual exclusion gift on the gift tax return, your contribution would be treated as a $7,000 gift in the current year and each of the next four years. In that same year, you may gift an additional $7,000 to the same beneficiary in a custodial account (reaching your one-year total of $14,000, the annual gift-exclusion limit for 2017). If each spouse of a married couple gifted $35,000, the couple would be able to double these gifts.*
How can I maximize the 529 plan’s estate-planning benefits? Affluent families may want to contribute as much as possible into a 529 plan, both to fund college expenses for beneficiaries and to move assets out of a taxable estate. These families should consider making the maximum annual exclusion gift contribution ($70,000 for an individual or $140,000 for a married couple using the five-year lump-sum election) in a single year. Think twice if this is your goal and you are close to the end of the year. By maximizing that contribution this year, you use your annual-exclusion gift amount for that beneficiary for the next four years. That means four more years must pass before you can again contribute to that 529 plan account for that beneficiary without gift-tax consequences. If, instead, you make one year’s annual exclusion gift for a beneficiary before year end, ($14,000 for an individual or $28,000 for a married couple) and then maximize your 529 plan contribution in the new year, you can contribute up to $84,000 (individuals) or $168,000 (married couples) within a matter of months rather than over six years, as illustrated below:*
Maximizing the estate-planning benefits of a 529 plan
This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is made available with the understanding that Wells Fargo Advisors is not engaged in rendering legal, accounting or tax-preparation services. If tax or legal advice is required, the services of a competent professional should be sought. Wells Fargo Advisors’ view is that investment decisions should be based on investment merit, not solely on tax considerations. However, the effects of taxes are a critical factor in achieving a desired after-tax return on your investment.
The information provided is based on internal and external sources that are considered reliable; however, the accuracy of the information is not guaranteed. Specific questions on taxes as they relate to your situation should be directed to your tax advisor.
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The first-year college tuition bill in 2027 is projected to be $27,051* for an in-state average public education institution and $66,371* for an average private institution.
Building the assets you’ll need to fund a child’s or grandchild’s education is a challenge, but you may be able to meet it by contributing to a 529 plan.
529 plans can help parents, grandparents, aunts and uncles, and others provide significant benefits to their beneficiaries to help secure the type of education they deserve.
There are many 529 plan choices,and your Financial Advisor can help you choose the one that best fits your needs.
Whether college is years away or right around the corner, put time on your side. Discuss college-funding alternatives with your Financial Advisor today.