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Text Box: Paying for the higher education expenses of children or grandchildren is becoming an increasing concern for many parents and grandparents. Annual increases in the costs of higher education continue to outpace the growth in family income. Pennsylvania, like other states, has addressed this concern by sponsoring a higher education savings plan (called the Tuition Account Plan or “TAP”) that qualifies for the income and gift tax advantages available under Section 529 of the Internal Revenue Code. On July 17, 2002, Pennsylvania introduced its new Section 529 Investment Plan, which is being added to its previously established prepaid tuition plan (now called the Guaranteed Savings Plan). Residents of Pennsylvania can now choose one or both of the Pennsylvania plans, or may decide to use a plan sponsored by another state. How Does a Section 529 Investment Plan Work? An account owner creates a Section 529 investment plan by opening an account with the financial institution chosen to manage the particular state’s plan. The Pennsylvania Investment Plan has selected Delaware Investments, a Philadelphia-based asset management company and a member of Lincoln Financial Group, as its investment manager. Only cash can be contributed to the account. The owner selects an investment option for the funds, which can be an age- based approach under which the asset mix will change automatically from more aggressive to more conservative investments as the child nears college age. In the alternative, the owner may choose from among several mutual funds with fixed investment objectives. The investment options can be changed once every 12 months. The owner also names a beneficiary to receive the distributions. The owner retains the right to change the beneficiary at any time without penalty, as long as the new beneficiary is related to the former beneficiary. Since Section 529 plans are intended for the costs of higher education, they are not suitable vehicles for paying for elementary or secondary school education.

Can I Convert a PUTMA or PUGMA Custodial Account to a Section 529 Plan Account?

Many state Section 529 plans, including the Pennsylvania Investment Plan, allow an account to be funded from an existing PUTMA or PUGMA account. However, there are special rules governing such accounts, which are meant to preserve the rights of the minor under the existing PUTMA or PUGMA account.

Are Section 529 Accounts Still a Good Deal in a Bear Market?

Many families who are otherwise interested in saving for future college expenses may have been turned off to Section 529 plans in light of several recent media accounts describing the plight of families whose Section 529 investments have fallen sharply in value over the past several months. However, such investment risks are not inherent with Section 529 plans, and in fact can be avoided entirely. First, with an investment- type plan the owner can select a very conservative investment strategy that will greatly reduce the risk of losses caused by a bear market. Second, the owner can avoid investment risk altogether by opting for a prepaid tuition type of Section 529 plan, which guarantees that the contributions will produce a certain level of tuition credits in the future. With a prepaid tuition plan, all risk of investment performance is borne by the plan, not by the investor.

What Are The Advantages Of Using a Section 529 Plan?

Compared to other education savings techniques, a Section 529 plan offers a number of tax and non-tax advantages.

Income Tax Treatment While contributions to a Section 529 plan are not deductible to the contributor, they also are not taxable income to the designated beneficiary. Like a qualified retirement plan account, the earnings in a Section 529 account are allowed to build up tax-free. In addition, distributions from a Section 529 account

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Section 529 Accounts offer income and gift tax advantages, while allowing you to retain control over the funds.

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Copyright © 2008 Martin J. Hagan, One Gateway Center - 8 South; Pittsburgh, PA 15222-1435

Last Updated: 05/28/08