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Filling the Gap

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Filling the Gap. 529 Plans. 2005 NYSFAAA Guidance Counselor Workshop. What is a 529 plan? ... 529 plans, legally known as 'qualified tuition plans,' are ... – PowerPoint PPT presentation

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Title: Filling the Gap


1
Filling the Gap
  • 529 Plans

2005 NYSFAAA Guidance Counselor Workshop
2
What is a 529 plan?
  • A 529 plan is a tax-advantaged savings plan
    designed to encourage saving for future college
    costs. 529 plans, legally known as qualified
    tuition plans, are sponsored by states, state
    agencies, or educational institutions and are
    authorized by Section 529 of the Internal Revenue
    Code hence the name.
  • There are two types of 529 plans pre-paid
    tuition plans and college savings plans. All
    fifty states and the District of Columbia sponsor
    at least one type of 529 plan. In addition, a
    group of private colleges and universities
    sponsor a pre-paid tuition plan called the
    Independent 529 Plan.

3
Pre-paid tuition plans
  • Pre-paid tuition plans are currently offered in
    13 states. New York is not one of them.
  • These plans generally allow college savers to try
    and to lock in future costs of colleges by
    purchasing units of future expenses at
    participating colleges and universities.
  • Many state governments guarantee investments in
    pre-paid tuition plans that they sponsor.
  • Residency in the state is often required

4
The Pre-paid downside
  • Prepaid contract programs are the less popular
    option.
  • The purchaser has limited options on where their
    money can be spent.
  • The purchaser also limits the potential gains
    their investment might have.
  • Some states, like Texas, have stopped accepting
    new enrollments all together. Rising tuition
    rates have put a burden on the guaranteed nature
    of the funds.
  • Expect pre-paid tuition 529 plans to close in the
    future as they dont make as much financial sense
    for familys in most cases. For the ones that
    do, they are costing states too much money to
    continue.

5
College savings plans
  • College savings plans generally permit a college
    saver to establish an account for a beneficiary
    for the purpose of paying the beneficiarys
    eligible college expenses.
  • An account holder may typically choose among
    several investment options for his or her
    contributions, which the college savings plan
    invests on behalf of the account holder.
  • Investment options often include stock mutual
    funds, bond mutual funds, and money market funds,
    as well as, age-based portfolios that
    automatically shift toward more conservative
    investments as the beneficiary gets closer to
    college age.
  • Withdrawals from college savings plans can
    generally be used at any college or university.
  • Investments in college savings plans that invest
    in mutual funds are not guaranteed by state
    governments and are not federally insured.

6
More details
  • Savings programs are offered by every state.
  • There are usually tax benefits for residents.
  • Some plans have residency requirements, some
    dont. Ones that are limited to residents might
    do something special like match a certain level
    of contribution based upon income and dependency
    age.
  • Plans can be sold directly to the investor or
    through a broker. Be aware that brokers
    sometimes steer clients towards more expensive
    options since they make a commission on the sale.

7
What does NY State do?
  • New York Saves Website www.nysaves.com
  • In New York State, individuals can deduct up to
    5,000 from their state return 10,000 for joint
    return.
  • New York offers fifteen investment options
    managed by Vanguard. Three are age based and 12
    are varied based on investment strategy and risk
    tolerance of the account holder.
  • There is a maximum contribution limit of 235,000
    for a single beneficiary.
  • Minimum contributions are 25 or 15 with payroll
    deduction.
  • No fees to enroll or maintain an account. Only
    .58 fee for management.
  • Easy link to Upromise (www.upromise.com).
    Upromise is a cash back program that invests a
    percentage of certain purchases you make directly
    into your 529 Plan.

8
On the horizon
  • Sunset clause all these great tax benefits may
    expire in 2011. It will be very unpopular
    politically though, so dont be surprised to see
    these changes made permanent.
  • Potential tax changes were just recommended by
    Presidents Advisory Panel on Federal Tax Reform
    may impact 529 plans
  • 529s would be combined with other tax favored
    plans and replaced by Save for Family Accounts.
    These all in one accounts would have a 10,000
    annual limit and could cover education, medical,
    home and retirement needs.

9
How does investing in a 529 plan impact financial
aid?
  • Each educational institution may treat assets
    held in a 529 plan differently.
  • Generally, investing in a 529 plan will reduce to
    some degree a students eligibility for need
    based financial aid.

10
More pre-paid downside
  • Assets held in pre-paid tuition plans are
    generally treated differently for financial aid
    purposes than assets held in college savings
    plans.
  • Assets held in pre-paid tuition plans typically
    reduce need-based financial aid on a dollar for
    dollar basis.
  • If you expect your beneficiary to receive a
    significant amount of need-based financial aid,
    it is probably best not to invest in a pre-paid
    tuition plan if you have an option.

11
College savings plan advantage
  • Assets held in college savings plans generally
    receive more favorable financial aid treatment
    than pre-paid tuition plans.
  • Financial aid treatment for college savings plans
    depends on whether the assets held in the plan
    are considered to be assets of the parent or the
    student.

12
Where you save matters
  • According to Federal Methodology, about 6 of
    parental assets, in contrast to 35 of student
    assets, are expected to be contributed toward the
    students college expenses for each academic
    year.
  • According to Institutional Methodology, 25 of
    student assets are expected to be contributed
    towards a students college expenses each year

13
An example
  • Marys parents saved 40,000 for her in an UGMA
    account through a one time gift from her
    grandparents estate. When she applies for
    need-based aid, her student contribution from
    assets is between 10,000 and 14,000 depending
    on what formula is used.
  • Bills parents also received 40,000 but opened
    up a 529 savings plan in their name with Bill as
    the beneficiary. When he applies to college, his
    student contribution from assets is 0. His
    parents contribution from assets increases by
    approximately 1,600 to 2,400, depending on
    which formula is used.
  • The net difference is at least 8,400 in
    financial aid for the family.

14
Control of the money
  • In the previous example, the money from Marys
    UGMA account is considered a student asset
    because thats exactly what it is Marys asset.
    Instead of going to college, Mary could also
    choose to spend that money on a new BMW and a
    shot at Hollywood!
  • Bill however, does not own any assets. He is the
    beneficiary. If Bill leaves school to join the
    circus, his parents can designate another sibling
    to receive the money, or they can choose to take
    the money for themselves and pay taxes on it. No
    BMW for junior!

15
Another wrinkle
  • Since 529 plans are considered to be the property
    of the account owner, and not the beneficiary,
    anyone can own one.
  • This means that grandparents and friends of the
    family could start accounts for a student who is
    not their child.
  • Under current financial aid rules, this
    information is not collected, and is therefore
    invisible to a financial aid office when
    determining the family contribution.
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