Armanino Blog

14 Fast Facts About 529 Plans

by John Karls
July 28, 2017

Start studying college savings options and you'll soon see the term "Section 529 Plan." These programs are much better than they sound, allowing investment in stock and bond funds with no federal tax on gains used for tuition and other approved college costs. So, what's not to like?

Below is a simplified list of 529 plan basics.

  1. Must be established/maintained by a state/state agency/or educational institution.
  2. The “owner” creates the account, names the beneficiary and directs any distributions, either to the designated beneficiary or to the account owner him/herself. (Personally, I think “manager” would be a better term than owner).
  3. Income of the account is generally not taxed. No amount is included in gross income of any person unless there is a distribution not used for qualified higher education expenses (QHEE).
  4. QHEEs can include:
    1. Tuition, fees, books, supplies and equipment required for enrollment/attendance at a qualified higher educational institution.
    2. Room and board during a period in which the beneficiary is enrolled in a degree/certificate/other program at least half-time. Study abroad is okay if otherwise qualified.
    3. The purchase of computer or peripheral equipment, computer software, or internet access to be used primarily by the beneficiary during the period of enrollment.
  5. If a distribution is not for QHEE, then the income portion of the distribution (but not the principal amount) is reportable in the gross income of the recipient.
  6. In addition, there is a 10% penalty imposed on the amount included in gross income (again, but not on the principal amount itself).
  7. There is a contribution limit for a 529 plan – funds needed to cover five years of the most expensive undergraduate education possible – and each plan makes its own calculation of this limit.
  8. Only cash contributions are accepted into a 529 plan.
  9. Plan accounts cannot be pledged as security for borrowing.
  10. A contribution to a 529 plan account is treated as a completed gift to the beneficiary. The account value is not included in the donor’s estate at death. This is true even though the donor/account owner can order a distribution to himself! The value of the account would be included in the designated beneficiary’s estate if distributed to that person’s estate.
  11. The account owner can designate a new beneficiary for the account with no income tax consequences (since there has been no distribution).
  12. You can roll over funds from one 529 plan account to another for the same beneficiary once a year. You can do it as often as you like if you change the designated beneficiary each time.
  13. If the new beneficiary is a member of the family of the prior beneficiary and of the same generation (or higher) as the prior beneficiary, there are no gift tax consequences of the designation of the new beneficiary. “Family” means about who you would think it means. First cousins are included, which is nice for grandparents creating these accounts.
  14. If the new beneficiary is of a lower generation than the prior beneficiary, the prior beneficiary is treated as having made a gift to the new beneficiary. This is true even though the gift was effectuated by another party (the account owner), and the prior beneficiary might not even know about it.

Section 529 plans are an excellent college savings tool. For more guidance on how to use them, talk to your Armanino advisor.

July 28, 2017

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John Karls - Partner, Tax - Dallas TX | Armanino
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