Busey Bank | The ABCs of 529 Plans

As a tax-advantaged education savings vehicle, 529 plans are one of the most popular ways to save for education today. Much like the way 401(k) plans revolutionized the world of retirement savings a few decades ago, 529 plans have changed the world of education savings.

An overview of 529 plans

Congress created 529 plans in 1996 in a piece of legislation that had little to do with college—the Small Business Job Protection Act. Known officially as qualified tuition programs (QTPs) under federal law, 529 plans get their more common name from section 529 of the Internal Revenue Code, which governs their existence. Over the years, the plans have been modified by various pieces of legislation.

Governed by federal law, 529 plans are run by states through designated financial institutions who manage and administer specific plans. There are actually two types of 529 plans—savings plans and prepaid tuition plans. The tax advantages of each are the same, but the account features are very different. A 529 savings plan is far more common.

529 savings plans

A 529 savings plan is an individual investment account, similar to a 401(k) plan, where you contribute money for college or K-12 tuition. To open an account, you fill out an application, choose a beneficiary and select one or more of the plan's investment options. Then you decide when, and how much, to contribute.

529 savings plans offer a unique combination of features that no other education savings vehicle can match, including but not limited to:

• Federal tax advantages | Contributions to a 529 account accumulate tax deferred and earnings are tax free if the money is used to pay the beneficiary's qualified education expenses. The earnings portion of any withdrawal not used for qualified education expenses is taxed at the recipient's rate and subject to a 10% penalty. This is the same tax treatment as Coverdell education savings accounts (ESAs).
• State tax advantages | States are free to offer their own tax benefits to state residents. For example, some states offer a tax deduction for your contributions.
• High contribution limits | Most plans have lifetime contribution limits of $350,000 and up (limits vary by state).
• Professional money management | 529 savings plans are managed by designated financial companies who are responsible for managing the plan's underlying investment portfolios.
• Beneficiary changes and rollovers | Under federal rules, you are entitled to make certain changes, including the beneficiary of the account to a qualified family member, as well as roll over (transfer) the money in the account to a different 529 plan.
• Accelerated gifting | 529 savings plans offer an estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren's education while paring down their own estate, or a way for parents to contribute a large lump sum.

529 prepaid tuition plans

A 529 prepaid tuition plan lets you save money for college, too. But it works quite differently than a 529 savings plan. Prepaid tuition plans are generally sponsored by states on behalf of in-state public colleges. For state-sponsored prepaid tuition plans, you are limited to the plan offered by your state.

A prepaid tuition plan lets you prepay tuition expenses now at participating colleges, typically in-state public colleges, for use in the future. This in effect locks in the amount you may pay if the beneficiary attends a participating college.

What are the drawbacks of 529 plans?

Some things to consider about the plans include:

• Investment guarantees | 529 savings plans don't guarantee your investment return. You can lose some or all of the money you have contributed. Even though 529 prepaid tuition plans typically lock in what you would pay to participating colleges, plans may announce modifications to the benefits they'll pay out due to projected actuarial deficits.
• Investment flexibility | With a 529 savings plan, while you can choose among a variety of investment portfolios, you can't direct the portfolio's underlying investments. If you're unhappy with the investment performance of the portfolios you've chosen, you have limited annual opportunities to make changes. With a 529 prepaid tuition plan, you don't select any investments—the plan's money manager is responsible for investing your contributions.
• Nonqualified withdrawals | If you use the money in your 529 plan for something other than a qualified education expense, it'll cost you. With a 529 savings plan, there is a 10% federal penalty on the earnings portion of any nonqualified withdrawal, and income taxes on the earnings, too (state income tax and a penalty may also apply). With a 529 prepaid plan, you must either cancel your contract to get a refund or take whatever predetermined amount the plan will give you.
• Fees and expenses | There are typically fees and expenses associated with 529 plans. Savings plans may charge an annual maintenance fee, administrative fees and an investment fee based on a percentage of your account's total value. Prepaid tuition plans may charge an enrollment fee and various administrative fees.

Before investing in a 529 plan, carefully consider the investment objectives, risks, charges and expenses carefully. A financial advisor, like those with Busey Wealth Management, can help you determine if a 529 plan is right for you. To find an advisor near you, visit busey.com/wealth-management.

This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.

Investment products and services through Busey Wealth Management are:
Not FDIC INSURED | May lose value | No bank guarantee