About 529 College Savings Plans

A. A Section 529 college savings plan is a tax-advantaged state-administered investment program that is authorized under Internal Revenue Code Section 529. These plans allow investors to save money in an account in which the earnings will grow free from federal income tax and, when used to pay for “qualified higher education expenses”, may be withdrawn federal income tax-free. In many states, a participant can receive special state incentives, including state tax treatment that mirrors the federal tax treatment, tax deductions/credits and/or other state tax benefits, based on participation in their state’s program(s).

A. When it comes to financial aid, ANY assets that you or the beneficiary own (not just 529 plan assets) can affect your eligibility for need-based financial aid. With 529 plans, your account is considered to be an asset of the account owner. Assuming the account owner is the parent, this means that, on average, about 5.6 percent of the value of the account is considered in determining the Expected Family Contributions (EFC). The EFC is the amount the family of the beneficiary is expected to pay toward that beneficiary’s higher education. With many other savings vehicles, such as a custodial accounts or assets that are in the name of the student, 20 percent of the value of the assets is considered in determining the EFC. 

Remember, the majority of need-based financial aid is in the form of student loans, so whatever savings you accumulate for college expenses may help reduce the parent’s or student’s future debt load. 

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Choosing Which 529 Options Are Right For You

A. Generally, anyone can be named the beneficiary of a 529 account regardless of their relationship to the person who establishes the account. You can even establish an account with yourself as the named beneficiary. The only requirement is that the beneficiary must be a US citizen or a resident alien, and must have a social security number or federal tax identification number. Be aware that maximum contribution per beneficiary varies between different 529 plans.

A. Yes. Since only one account owner can be named per account, family members may choose to open their own account for the same beneficiary. Be aware that a 529 plan’s impact on financial aid calculations can vary depending on the relationship of the account owner to the student beneficiary.

A. A 529 account can be opened by anyone. Grandparents, other relatives or family friends can all be account owners, or simply choose to contribute to an existing account. In most states, a trust, corporation, non-profit or government entity can also open an account.

A. Generally, anyone can make a contribution to an account for any beneficiary. However, you should contact the 529 plan of your choice to determine any restrictions that may apply. You may find that you will only be eligible for specific state tax incentives by being recognized as the account owner.

A. Yes. The account owner can choose to move funds from one state’s 529 plan to another states’ plan one time within a 12-month period for the same beneficiary.

A. An individual may contribute up to $14,000 annually ($28,000 for married couples filing jointly) without paying gift taxes or filing a gift tax return (assuming no other gifts are made to the beneficiary in the same year). You also may accelerate up to five years’ worth of the annual exclusion amount and reduce the value of your estate by contributing up to $70,000 ($140,000 for married couples filing jointly) per beneficiary (this amount is subject to “add-back” in the event of the participant’s death within five years and also assumes no other gifts are made to the same beneficiary during the same period).

A. Earnings in a 529 plan grow tax-deferred and are free of federal income tax when used for qualified higher education expenses under Internal Revenue Code Section 529 (26 U.S.C. 529). Qualified higher education expenses include tuition, mandatory fees, books, supplies, and equipment required for enrollment or attendance. Room and board expenses are also eligible for students enrolled half-time or more based on the current allowance for room and board determined by the eligible educational institution for federal financial aid purposes, or actual invoice amount charged by the institution to the beneficiary, if greater. In addition, qualified higher education expenses also include expenses of a special needs beneficiary that are necessary in connection with his or her enrollment or attendance at an eligible educational institution. 

Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Additionally, most states allow tax-deferred earnings and tax-free withdrawals for qualified higher education expenses, and some states allow families to deduct the full or a partial amount of their contribution from their state income taxes. 

A. No. Your child will still be required to meet entry requirements as determined by individual colleges or universities.

A. You have several options available if the beneficiary decides not to go to college: 

  • Change the beneficiary to a member of the beneficiary’s family. 
  • Defer the use of your savings and leave contributions invested in the account. 
  • Withdraw the assets in your account for a “non-qualified” distribution (a distribution not used for qualified higher education expenses). Earnings (but not contribution amounts) would be subject to state and federal tax plus a 10% federal tax penalty on the earnings. Some plans may charge additional fees or penalties on non-qualified distributions. 

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Opening The Account

A. The State of Nevada offers many plans and options for saving for college.  To learn more about a particular 529 plan and to open an account, please visit http://www.nevadatreasurer.gov/CollegeSavings/CSP_Home/

A. It is never too late to save for higher education. You may open an account for an individual of any age, and the account may be used immediately. Note that some prepaid tuition plans may need a longer timeline to see a significant return on investment, so be sure to check with plan administrators.

A. Each 529 plan can provide the forms necessary for changing the beneficiary on an account. Contact your 529 plan to determine the specific requirements and forms necessary to complete this procedure. Depending on the relationship of the new and old beneficiaries, changing the beneficiary of an account may trigger a taxable event, which could also include a penalty, gift tax or both.

A. A qualifying family member includes: 

  • Natural or legally adopted children 
  • Parents or ancestors of parents 
  • Siblings or stepsiblings 
  • Stepchildren 
  • Stepparents 
  • First cousins 
  • Nieces or nephews 
  • Aunts or uncles 

In addition, the spouse of the beneficiary or the spouse of any of those listed above also qualifies as a family member of the beneficiary.

A. Anyone can participate in a 529 plan regardless of income of the account owner and in most states, regardless of the age of the beneficiary.

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Choosing Investment Options

A. Many states contract with an investment manager to work with the state to develop investment portfolios and options that will help investors meet their college savings needs. Federal law prohibits the investor from having direct control over the selection of specific investments; therefore the state and the investment manager typically offer multiple savings options for the investor to choose from when they open an account. The account owner may change investment options subject to certain federal tax law limitations.

A. The most common investment option is the age-based allocation strategy in which the age of the beneficiary determines the specific mix of investments. As the child ages, the investment mix is automatically reallocated and becomes more conservative as the beneficiary approaches college. There are many other options available, including 100% equity funds, fixed income funds, stable value funds, as well as a variety of equity and fixed income options within many plans. Some states offer guaranteed or principal protected options, as well as FDIC insured bank options.

A. You may transfer all or any portion of the funds already invested in a particular investment option to another investment option twice per calendar year or upon a change of the beneficiary of your Savings Trust Account to a family member of the beneficiary. However, each time a new contribution is made to an account, the investor can select a different investment option for the new contribution into the plan.

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Withdrawing Funds

A. No. Funds can be used at any eligible educational institution in the country to pay for qualified higher education expenses. “Eligible educational institutions” are accredited post-secondary educational institutions offering credit toward a bachelor’s degree, an associate degree, a graduate level or professional degree, or another recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational institutions and certain institutions located in foreign countries are also eligible educational institutions. To be an eligible educational institution, the institution must be eligible to participate in U.S. Department of Education student aid programs.

A. You can use your funds to pay for expenses not covered by the scholarship, such as room and board, books and other required supplies. If you withdraw funds and do not use them for qualified expenses, the earnings portion of your withdrawal may be taxed at the scholarship recipient’s tax rate, but will not be subject to the 10% additional federal tax penalty.

A. As long as the withdrawal is used to pay “qualified higher education expenses”, it is exempt from federal income tax.

A. Qualified higher education expenses include tuition, mandatory fees, books, supplies, and equipment required for enrollment or attendance. Room and board expenses are also eligible for students enrolled half-time or more based on the current allowance for room and board determined by the eligible educational institution for federal financial aid purposes, or actual invoice amount charged by the institution to the beneficiary, if greater. 

In addition, qualified higher education expenses also include expenses of a special needs beneficiary that are necessary in connection with his or her enrollment or attendance at an eligible educational institution. However, qualified higher education expenses are reduced to the extent that such expenses are taken into account in claiming the Hope Scholarship Credit or Lifetime Learning credit. 

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