FAQ On College Savings Plans

Are prepaid tuition plans and college savings plans different?
Yes. With a prepaid tuition plan, parents, grandparents, and others essentially "lock in" today's tuition rates, and the program will pay out future college tuition at any of the state's eligible colleges or universities (or a payment to private and out-of-state institutions). A college savings plan is an investment program that allows participants to invest in a special account designated for qualified higher education expenses. In general, college savings plans offer a rate of return that depends on the performance of the plan's investments. As such, the value of a college savings plan account may increase or decrease over time.

How much can be contributed to a 529 plan?
Each state sets its own contribution limit under federal regulations. For a prepaid tuition plan, the maximum contribution is the amount necessary to prepay the number of years or units of tuition offered by the state. This amount will vary from state to state. A majority of states with college savings plans have maximum contribution limits of more than $200,000. These limits also may be adjusted annually for inflation. In 2007, individuals can contribute up to $60,000 in one year for each beneficiary - or $120,000 from married couples - without incurring federal gift taxes, as long as no further gifts to or for that individual are made during the next five years.

Who can contribute to 529 plans?
Generally an account holder can open an account on behalf of any student or potential student. For example, grandparents can save on behalf of grandchildren. Even someone who is not a family member can open a 529 plan account for an unrelated child or adult.

Can I open more than one account in the name of the same student?
Yes. You can open multiple accounts for the same student, and more than one person can contribute to a college savings plan for the same beneficiary. However, a state's maximum contribution limit would limit the total amount that may be invested for a single beneficiary under that state's program, regardless of how many accounts are held in the beneficiary's name.

Do 529 plans vary from state to state?
Yes. Each state with an existing plan offers various investment options specifically designed to save for education expenses. Determining which plan to invest in will depend on individual circumstances, taking into account several factors associated with the programs, such as fees, expenses, investment options, and performance. In addition, investing in the plan offered by an individual's own state might lower that individual's state income tax burden, depending on the laws of the state. Participants may transfer 529 assets from one state's plan to another, tax-free, once every 12 months, or more often if there is also a change to the account's beneficiary.

Can I have more than one student in a single account?
No. When you invest in a college savings plan or prepaid plan you are investing on behalf of a designated individual beneficiary. You can transfer your account to any member of the beneficiary's family, as defined by the Internal Revenue Service, without incurring any taxes or penalties.

When can a 529 plan be opened?
The answer depends on the type of 529 plan being opened. A college savings plan generally can be opened anytime after a child is born. Most prepaid tuition plans, however, have a set enrollment period established by the state during which new accounts may be opened and have age limits for the beneficiary.

Where can 529 college savings plan withdrawals be used?
Withdrawals from 529 savings plans can be used to pay for qualified higher education expenses at any college, university, vocational school, or other accredited postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. This includes virtually all accredited public, nonprofit, and privately owned profit-making postsecondary institutions.

What expenses can 529 plan withdrawals be used for?
Withdrawals from 529 savings plans can be used penalty-free only to pay for qualified higher education expenses, such as tuition and fees; the cost of books, supplies, and other equipment; and in some situations the cost of room and board. (The cost of room and board may be a qualified higher education expense if the designated beneficiary is enrolled at least half time at an eligible educational institution.) Section 529 prepaid tuition plans typically cover tuition and required fees. Unlike the Independent 529 Plan, some states' prepaid plans may also cover room and board.

What if my child does not pursue a postsecondary education?
You may request a refund, and the account will be refunded according to the policy of your specific 529 plan. For 529 savings plans, the refund would include any earnings in the account. Under federal law, there may be income tax consequences including a refund penalty of 10 percent, except in the case of the student's death, disability, or receipt of a scholarship. In lieu of requesting a refund, you may choose either to hold the 529 plan investment until a later date when the student may decide to attend college, or transfer the benefits to another member of the student's family.

Will 529 savings plans affect a student's chance to qualify for financial aid?
Financial aid treatment of investments changes through the years so it is impossible to know how assets will be treated in the future. Typically, however, any investment may impact a student's eligibility for need-based financial aid. In addition, it is uncertain as to how much or what types of financial aid will be available to families in the future. You should contact the financial aid office of your local college or university for specific information on its financial aid treatment of 529 accounts.

What happens if I move from one state to another?
You have a choice of leaving your money in the existing plan or rolling it over into the plan of your new state. Assets of one 529 plan can be transferred tax-free to another 529 plan for the same beneficiary once during a 12-month period. There may, however, be state tax implications when you transfer from one 529 plan to another. Also, if you decide against changing plans after moving, you may lose any state tax deduction on future contributions and state tax exemptions on withdrawals made to the plan offered by your former home state. (The money invested will still grow tax-deferred.) Your new state also may offer favorable tax treatment for investments made in its plan. As a result, when moving, you should investigate the tax implications of each state's plans. An account owner does have the option of establishing accounts in more than one state for the same beneficiary.

Where can I find more information on 529 plans?
Many mutual fund company websites provide information on education savings programs they offer. Individuals seeking additional information on prepaid tuition plans and college savings plans may want to visit the website of the College Savings Plans Network, an affiliate of the National Association of State Treasurers, at www.collegesavings.org. Additional information about 529 plans and their regulation is available through the websites of the Municipal Securities Rulemaking Board (www.msrb.org), which regulates the offer and sale of such plans, and of the NASDR (www.nasdr.org), which regulates broker-dealers.

Source:  Securities and Exchange Commission