529 Plan Specifics

How much can I contribute into a 529 plan?

In 2006 a 529 plan lets you contribute up to $12,000 per year for each beneficiary's account and $24,000 if you have a spouse. Federal rules allow you to contribute up to $60,000 per beneficiary in one year and $120,000 if you have a spouse. Avoiding the gift tax is conditional upon not making further contributions to this beneficiary for 5 years. This can be very appealing for high-net worth individuals looking for a way to transfer wealth. Also, you keep control of the 529 since you are still the owner and can change the beneficiary if you choose.*

Is there an overall maximum that I can contribute in 529 plan?

Each state has their own rules but many 529 plans accept contributions until account balances reach over $200,000.**

Who is eligible to contribute to a 529 plan?

Anyone who is a US citizen or legal US resident can establish a 529 plan.  The individual making the contribution into the 529 plan  remains  the owner of the account until withdrawals are made. The owner may change the beneficiary provided the new beneficiary is a family member of the original beneficiary.

What expenses are eligible for qualified educational expenses?

When a student goes to college, money can be withdrawn from the 529 plan to pay for the costs of tuition, fees, books, supplies, and equipment such as a computer required by the educational institution for attendance. In general, educational institutions that would qualify under a 529 would include any accredited private college, public university, graduate school,  two-year community college and any vocational program approved for federal financial aid. For these expenses, money could be withdrawn from the 529 federal tax-free and state tax-free in most states.

Qualified withdrawals for education expenses:

Any 529 plan withdrawals that are not used for qualified education expenses will face a 10% penalty but you may withdraw funds without a penalty if:

1. Your beneficiary receives a scholarship, and the withdrawal is not more than the amount of the scholarship.
    
2. You withdraw any or all of the funds because of the death or disability of the beneficiary.
    
3. You transfer the 529 account to a new beneficiary who is a family member of the original beneficiary.

The 3 above withdrawals avoid the 10% penalty. However withdrawals not used for qualified educational expenses are subject to federal and state income taxes. Transferring a 529 account to another to another family member in the above manner would not be taxable. See the Plan Description and Participation Agreement for a definition of family member.

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Disclosures:

* If the account owner dies within five years of the funding date, the portion of the contribution allocable to the years remaining in the five-year period (beginning with the year after the account owner’s death) would be included in the account owner’s estate for federal estate tax purposes. Clients should consult with their tax advisors for more specific information.

** All assets, including earnings, under all 529 plan accounts established for the benefit of a particular beneficiary must be aggregated when applying limits. New contributions will not be allowed once certain limits are reached. Earnings, however, will continue to accrue. Consult your tax advisor for how 529 tax treatment would apply to your particular situation.