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SETTING UP A SECTION 529 ACCOUNT
A. EDUCATION SAVINGS PLAN
One type of Section 529 plan is the Education Savings Plan (perhaps more accurately called a "Higher Education" Savings Plan). This type of plan permits contributions to be made to an account established for the purpose of meeting the qualified higher education expenses of a designated beneficiary at an eligible educational institution. A contributor establishes an account under a particular state’s Education Savings Plan program, in which a designated beneficiary is named for future distributions. State residency requirements for both the account owner and beneficiary are typically less restrictive than with a state-sponsored Prepaid Tuition Plan. Donors can make one or more contributions to the account. The investment of an Education Savings Plan account's monies are generally managed by one or more private investment companies that have been selected by the particular state (e.g., mutual fund companies such as Vanguard, Fidelity, and American Funds, or firms such as Merrill ynch). Investment options with an Education Savings Plan account fall into two broad categories, which the contributor can choose:
As stated in a previous section, the earnings in the Education Savings Plan account will be exempt from income tax prior to distribution. A qualified distribution from the account will generally not be subject to federal income tax, but the earnings portion of a qualified distribution may be subject to state income tax, depending on the sponsoring state’s laws and whether the distributee is a resident of that state.
Education Savings Plans are also becoming increasingly popular as an employment-related benefit that companies can offer to their employees. Typically, the employer enters into a management contract with a mutual fund company, and employees' voluntary contributions are deducted from their paychecks. Another development demonstrating the popularity of the "saving for college" idea is companies such as Upromise entering into agreements with retailers that will rebate a percentage of purchases made by individuals who have signed up to be members of the company as education savings when they purchase certain grocery brands at supermarkets and drugstores. The rebates are then applied towards a designated beneficiary’s education costs. The accumulated rebates are then transferred into a particular state’s Education Savings Plan. For more information on this opportunity, go to www.upromise.com.
THE PENNSYLVANIA 529 INVESTMENT PLAN -- PENNSYLVANIA’S SECTION 529 EDUCATION SAVINGS PLAN In 2002 Pennsylvania first established what it now calls its "Pennsylvania 529 Investment Plan," which generically is a Section 529 Education Savings Plan. The Pennsylvania 529 Investment Plan offers investments from Vanguard, which is a low-cost Pennsylvania-based investment manager. The Pennsylvania 529 Investment Plan offers the following investment choices:
NOTE: A complete description of Pennsylvania's 529 Investment Plan program can be found on its web-site: http://www.makecollegepossible.com/
B. STATE-SPONSORED PREPAID TUITION PLANS
The second type of Section 529 Plan is a state-sponsored Prepaid Tuition Plan. This kind of Plan is available through a state-maintained program, through which a person can acquire tuition credits or certificates that will entitle the designated beneficiary of the account to the waiver or payment of qualified higher education expenses. The Prepaid Tuition Plan provides in effect a hedge against higher-education inflation by enabling a contributor, such as a parent or grandparent, to purchase at current prices a specified number of academic periods or course units for future use.
THE PENNSYLVANIA GUARANTEED SAVINGS PLAN – PENNSYLVANIA'S SECTION 529 PREPAID TUITION PLAN The Pennsylvania Guaranteed Savings Plan (formerly known as a "TAP account") is the name given to Pennsylvania's version of the Section 529 Prepaid Tuition Program. Contributions to accounts established under the Guaranteed Savings Plan are placed in a Fund that is managed by the Pennsylvania Treasury Department and Upromise Investment Advisors, LLC. The Guaranteed Savings Plan ensures that the funds placed in an account will grow as fast as the increase in college tuition at Pennsylvania’s public institutions of higher education and the average rate of tuition increases at private colleges. Because the investment success of the Guaranteed Savings Plan can be shared with account owners, the accounts may grow by more than tuition increases. The Guaranteed Savings Plan provides that its obligations to any account owner will be backed by the Guaranteed Savings Plan Fund. However, this assurance does not extend generally to the full faith and credit of the Commonwealth of Pennsylvania, in the event that the Guaranteed Savings Plan Fund itself cannot meet its obligations. To keep the Fund actuarially sound, at the end of each fiscal year (June 30), the Fund is analyzed by an independent actuary and investment advisor to determine if the Fund has assets greater than necessary to meet all of its future obligations and still maintain its fiscal soundness. Based on that analysis and other relevant circumstances, the Pennsylvania Treasury Department may distribute the excess (or any part of the excess) among all eligible accounts. To be eligible for this distribution, a Guaranteed Savings Plan account must be opened by June 30 and remain open through the date the Department determines to make a distribution. Likewise, the Treasurer has the ability to impose a surcharge (or premium) as needed to keep the Fund fiscally sound.
The following are some of the important features of the Pennsylvania Guaranteed Savings Plan:
1. RESIDENCY REQUIREMENT. Anyone at least 18 years old can open a Guaranteed Savings Plan account, as long as either the account owner or the designated beneficiary is a Pennsylvania resident.
2. CONTRIBUTIONS. Contributions to a Guaranteed Savings Plan ("GSP") account can be made at any time in any amount of $25.00 or more, but the total amount that can be contributed for one beneficiary is limited at present to $368,600.00. Payroll deductions and automatic bank deposit are also permitted. Contributions are placed in the Tuition Account Guaranteed Savings Program Fund, which is held by the Pennsylvania Treasury Department. The contributions of account owners are recorded in both dollar value and in "GSP Credits" at a tuition level chosen by the contributor. (For example, a contribution of $1,000 made at the average State System of Higher Education tuition level would be recorded both as $1,000 and as 5.13 GSP Credits, since typically 12 GSP Credits cover one semester's tuition.)
3. NO LIMITATION AS TO IN-STATE OR PUBLIC EDUCATIONAL INSTITUTIONS. Funds in a Guaranteed Savings Plan account can be used at any private or public eligible educational institution, regardless of whether it is located within or outside of Pennsylvania. While the account owner can choose from a variety of tuition levels at the time the account is opened, the account can be used regardless of such level. When the beneficiary is ready for higher education, the value of the account will be equal to the number of its CSP Credits multiplied by the actual per-credit tuition costs at the designated tuition level.
4. REFUNDS. The Guaranteed Savings Plan program allows a refund to be made at any time for any reason, with interest. An owner who makes a non-qualified withdrawal will receive either the value of the Plan credits or the pro rata share of the market value of the account, whichever is less. However, the fund will never be less than total amount contributed.
5. STATE TAXATION OF DISTRIBUTIONS. Earnings in the Guaranteed Savings Plan account when paid out are exempt from state and local income tax. The Guaranteed Savings Plan account is also exempt from Pennsylvania inheritance tax.
6. STATE INCOME TAX DEDUCTION As described more fully in the above section on the Tax Treatment of Contributors and Beneficiaries, a taxpayer can claim a deduction on his or her Pennsylvania income tax return for contributions made during the taxable year to his or her Guaranteed Savings Plan account, subject to a current limitation of $13,000 per beneficiary per year, or $26,000 if married filing jointly, provided that each spouse has taxable income of at least $13,000.
NOTE: A complete description of the Pennsylvania Guaranteed Savings Plan program can be found on its web-site: http://www.makecollegepossible.com/
C. THE INDEPENDENT PREPAID TUITION PLAN
The third type of Section 529 Plan is the Independent Prepaid Tuition Plan, which is sponsored by a consortium of private ("independent") colleges and universities. Accounts set up under the Independent Prepaid Tuition Plan will have the same federal tax treatment as a state-sponsored Section 529 Plan. The Independent Prepaid Tuition Plan maintains a web site at www.independent529plan.com. The Independent Prepaid Tuition Plan enables a contributor to lock in future tuition costs at prices that are even less than current tuition costs, due to the certificate discount feature discussed below. A contributor purchases tuition certificates that can be used to pay for future tuition costs at any private educational institution that is participating in the Plan. (Currently some 274 educational institutions are participants; that number should continue to increase.) A certificate will guarantee a different amount of tuition at each participating college. (For example, a certificate purchased for $10,000 might guarantee a full year’s worth of tuition at College A, but only one-half year’s tuition at College B.) When the student is later accepted at a member college, the certificate can be used to pay the percentage of tuition and mandatory fees that was pre-purchased. Certificate Discount. In addition to purchasing tuition certificates, the contributor is also credited with a certificate discount at each member college. Each college sets its own certificate discount rate, but it can never be less than 0.5%. The contributor locks in the certificate discount rate on any certificate bought during the current program year. The value of that certificate discount compounds every year from the year of purchase to the year it is redeemed. Independent Prepaid Tuition Plan certificates can be used only to pay for undergraduate tuition and mandatory fees. Room and board and other costs, as well as graduate school tuition and expenses, are not covered at this time. If the tuition certificates end up not being used by the beneficiary at a participating college or university, they can be transferred to another family member (described below), or the adjusted value of the certificates can be rolled over into another state-sponsored Section 529 Plan without penalty. Thus, a rollover could be used to pay for higher education expenses at non-member institutions without incurring federal income tax or penalties on any investment gains. TIAA-CREF is the administer of the Independent Prepaid Tuition Plan and manages its investments.
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