Basics on 529 Plans

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Ameriprise Financial
Greg Younger, CRPC®
14755 N. Outer
Chesterfield, MO 63017
636.534.2092
gregory.d.younger@ampf.com
529 College Savings Plans
529 college savings that's accredited by the Department of Education and,
plans are tax-advantaged depending on the individual plan, for graduate school.
college savings vehicles
• Accelerated gifting: 529 plans offer an excellent estate
and one of the most
planning advantage in the form of accelerated gifting. This
popular ways to save for
can be a favorable way for
college today. Much like
grandparents to contribute A brief history
the way 401(k) plans
to their grandchildren's edu-
revolutionized the world
529 plans were
cation. Specifically, indi-
of retirement savings a
first authorized by
viduals can make a lump-
few decades ago, 529
Congress in 1996.
sum gift to a 529 plan in
college savings plans are revolutionizing the world of college
Known officially as
2009 of up to $65,000
savings. By 2011, assets in 529 plans (college savings plans
quot;qualified tuition
($130,000 for married cou-
and prepaid tuition plans) are expected to grow to $257 billion.
programs,quot; 529 plans
ples) and avoid gift tax,
(Source: Financial Research Corporation)
are so named because
provided the gift is treated
they are governed by
Tax advantages and more as having been made in
section 529 of the
equal installments over a
529 college savings plans offer a unique combination of Internal Revenue
five-year period and no
features that no other college savings vehicle can match: Code.
other gifts are made to that
beneficiary during the five
• Federal tax advantages: Contributions to your account
years.
grow tax deferred and earnings are tax free if the money
is used to pay the beneficiary's qualified education
Choosing a college savings plan
expenses. (The earnings portion of any withdrawal not
used for college expenses is taxed at the recipient's rate Although 529 college savings plans are a creature of federal
and subject to a 10% penalty.) law, their implementation is left to the states. Currently, there
are over 50 different college savings plans available because
• State tax advantages: Many states offer income tax incen- many states offer more
tives for state residents, such as a tax deduction for than one plan.
contributions or a tax exemption for qualified withdrawals.
You can join any state's
• High contribution limits: Most college savings plans let you 529 college savings
contribute over $300,000 over the life of the plan. plan, but this variety
may create confusion
• Unlimited participation: Anyone can open a 529 college
when it comes time to
savings plan account, regardless of income level.
select a plan. To make
• Professional money management: College savings plans the process easier, it
are offered by states, but they are managed by helps to consider a few
designated financial companies who are responsible for key features:
managing the plan's underlying investment portfolios.
• Your state's tax benefits: A majority of states offer some
• Flexibility: Under federal rules, you are entitled to change type of income tax break for 529 college savings plan
the beneficiary of your account to a qualified family mem- participants, such as a deduction for contributions or tax-
ber at any time as well as rollover the money in your 529 free earnings on qualified withdrawals. However, some
states limit their tax deduction to contributions made to the
plan account to a different 529 plan once per year without
in-state 529 plan only. So make sure to find out the exact
income tax or penalty implications.
scope of the tax breaks, if any, your state offers.
• Wide use of funds: Money in a 529 college savings plan
can be used at any college in the United States or abroad
See disclaimer on final page May 10, 2009

2. Page 2 of 2
Ameriprise Financial
• systematically invest your contributions. You'll also be able to
Investment options: 529 plans vary in the investment
change the beneficiary of your account to a qualified family
options they offer. Ideally, you'll want to find a plan with a
member (e.g., siblings, stepsiblings, parents, nieces, nephews,
wide variety of investment options that range from conser-
aunts, uncles, first cousins) with no income tax or penalty im-
vative to more growth-oriented to match your risk toler-
plications. Most plans will also allow you to change your in-
ance. To take the guesswork out of picking investments
vestment portfolios (either for your future or current contribu-
appropriate for your child's age, most plans offer aged-
tions) if you're unhappy with their investment performance.
based portfolios that automatically adjust to more conser-
vative holdings as your child approaches college age.
529 prepaid tuition plans--a distant cousin
Caution: Remember, though, that any investment
There are actually two types of 529 plans--college savings
involves risk, and past performance is no guarantee of
plans and prepaid tuition plans. The tax advantages are the
how an investment will perform in the future.
same, but the account features are very different. A prepaid
tuition plan lets you prepay tuition at participating colleges at
• Fees and expenses: Fees and expenses can vary widely
today's prices for use by the beneficiary in the future. The
among plans, and high fees can take a bigger bite out of
following chart describes the main differences:
your savings. Typical fees include annual maintenance
fees, administration and management fees (usually called
the quot;expense ratioquot;), and underlying fund expenses. College savings plans Prepaid tuition plans
• Reputation of financial institution: Make sure that the Offered by states Offered by states and
financial institution managing the plan is reputable and private colleges
that you can reach customer service with any questions.
You can join any state's State-run plans require you to
With so many plans available, it may be helpful to consult an plan be a state resident
experienced financial professional who can help you select a
plan and pick your plan investments, giving you peace of mind. Contributions are invested Contributions are pooled with
in your individual account the contributions of others and
In fact, some 529 college savings plans
in the investment portfolios invested exclusively by the plan
are advisor-sold only, meaning that
you have selected
you're required to go through a desig-
nated financial advisor to open an ac- Returns are not guaranteed; Generally a certain rate of
count. Always carefully read the 529 your account may gain or lose return is guaranteed
plan issuer's official materials before value, depending on how the
investing. underlying investments
perform
Account mechanics
Funds can be used at any Funds can only be used at
Once you've selected a plan, opening accredited college in the U.S. participating colleges, typically
an account is easy. You'll need to fill out or abroad state universities
an application, where you'll name a
beneficiary and select one or more of the plan's investment
Note: Investors should consider the investment objectives,
portfolios to which your contributions will be allocated. Also,
risks, charges, and expenses associated with 529 plans before
you'll typically be required to make an initial minimum contribu-
investing. More information about specific 529 plans is avail-
tion, which must be made in cash or a cash equivalent.
able in each issuer's official statement, which should be read
carefully before investing. Also, before investing, consider
Thereafter, most plans will allow you to contribute as often as
whether your state offers a 529 plan that provides residents
you like. This gives you the flexibility to tailor the frequency of
with favorable state tax benefits.
your contributions to your own needs and budget, as well as to
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The information contained in this material is being provided for general education purposes and with the understanding that it is not intended to be
used or interpreted as specific legal, tax or investment advice. It does not address or account for your individual investor circumstances. Investment
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Prepared by Forefield Inc, Copyright 2009.
May 10, 2009