529 Education Plans  

Purpose: The purpose of a 529 plan is to provide funds for a beneficiary's education.

How does it work? Up to $15,000 can be contributed each year to a 529 plan without having to file a gift tax return. Contributions can continue until the account reaches $250,000. If a gift tax return is filed, gifts of more than $15,000 may be made during a calendar year.

What are the tax benefits? Contributions are not tax deductible, but the income from the investments in the 529 plan are income tax free. When the funds are withdrawn and spent for educational purposes, the withdrawals are also income tax free.

What are the estate tax benefits? Funds contributed to a 529 plan are no longer included in the estate of the donor. If the donor has an estate that is subject to the federal estate tax, the amount contributed to the 529 plan would constitute a tax savings of 40 percent of the amount contributed.

What if the beneficiary decides not to use the 529 funds? The donor can change the beneficiary of the plan as often as is needed. However, the new beneficiary must be a member of the previous beneficiary's family, which includes children, grandchildren, brothers, sisters, spouses, nieces, nephews, aunts, uncles, cousins and in-laws.

What type of education is included? Elementary, high school, college, graduate education, and technical training. The expenses that can be paid include tuition, room and board, books, and supplies.

What if the funds have to be withdrawn from the 529 plan for an emergency? The principal that was originally transferred to the account can be withdrawn without penalty. The income that was earned is subject to income taxation and a 10 percent penalty.

How do I start a 529 plan? Talk to your financial advisor or type "529 plan" into your favorite search engine to learn about the hundreds of plans that are available.

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