College Savings Plans: Section 529

A 529 plan is a state-sponsored education savings program that allows an individual to save in a tax-deferred account to pay for a beneficiary's post-secondary education at any accredited school in the United States. Unlike Coverdell Education Savings Accounts, which excludes joint filers with adjusted gross incomes (AGIs) above $220,000 and single filers with AGIs above $110,000, there are no income restrictions on those contributing to the plan.

529 plans come in two categories: Prepaid Tuition Plans and College Savings Plans.  Listed below are some of the features of a College Savings Plan.

Taxation of Withdrawals

529 plan withdrawals are federal income tax-free as long as the money is spent on tuition, room, board, books, or other qualified expenses.   Non-qualified withdrawals will require a 10% penalty on investment gains and will be taxed as ordinary income at the owner's rate.1

Contributions

Unlike Coverdell Education Savings Accounts where annual contributions are limited to $2,000 annually, contributions to 529 College Savings Plans are essentially unlimited. Many states, however, do tend to limit contributions once plan assets have reached a defined maximum (typically $200,000 - $250,000).

Further, individuals can give up to $11,000 annually  (or $55,000 under a special 5-year provision2) per beneficiary without incurring the federal gift tax.

Flexibility and Control

Plan assets can be used to pay for qualified higher education expenses at accredited colleges and universities nationwide that are eligible to participate in certain federal student aid programs. These include public and private colleges and universities, graduate schools, two-year community colleges, and vocational-technical schools.

The donor retains control over the account.  Unlike custodial accounts, under the Uniform Gifts to Minors Act, the money in a Section 529 College Savings Plan does not automatically become property of the child at age 18. The donor also may change beneficiary as long as it is within the same family.

Minimum Investment

Many plans have low initial minimums of $500 or $1,000 and can usually be arranged for automatic investments of as little as $50 or $100 a month.

Summary

You have many choices when saving for a child or grandchild's college education.  Be sure to consider the newly enacted Section 529: College Savings Plans when making your decision.

 

Life Insurance

Although life insurance cannot ever fully replace the value of a key employee, it can indemnify the business for the financial setbacks that can occur.  Life insurance can provide the business with needed funds to keep the business running, to assure creditors that their loans will be repaid, to assure customers that business will continue operations, to cover the special expenses of finding, hiring, and training a replacement.

How It Works

There is no particular form of agreement or special contract needed by the business to obtain key employee insurance on an executive or owner.  However, the board of directors should authorize the maintenance and payment of the policy.

The applicant is the business.  The application is signed by an officer of the business other than the insured.  Generally, the premiums will be paid by the business on an after-tax basis and are not deductible as a business expense.  The business will be designated as the beneficiary and the insurance proceeds received upon the death of a key executive are not subject to federal income tax.

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Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.