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Are Financial Aid Calculations Hurt by a 529 Plan?

Posted on May 31, 2012 with No comments

May 31, 2012

When families want to save for their child's future college education they often set up 529 plans with their child as the beneficiary. Money put into these accounts grows tax-free and can be used to pay education expenses later. But having a 529 does reduce how much financial aid a student receives, only the benefit of tax-free interest will supersede the drawbacks most of the time.

Everyone wanting financial aid must start with the Free Application for Federal Student Aid (FAFSA). According to the information given about student and parent income and assets, the government calculates the Estimated Family Contribution (EFC). If the EFC is less than the price of attending college, the student can obtain need-based financial aid, such as grants, scholarships and loans. The lower the EFC, the more financial need a student has. Students also can get unsubsidized loans even if they do not qualify for need-based aid.

When one of the student's parents is the owner of a 529 plan, it is reported as a non-retirement parent asset on the FAFSA. The EFC calculation includes no more than 5.64 percent of the parents' assets each year. Depending on the value of the parents' assets, they might not count at all toward the EFC. Therefore, the 529 could slightly affect the student's aid eligibility. For example, if the 529 account has $30,000, it will increase the EFC by no more than $1,692.

A 529 plan that lists the student as the beneficiary but has an owner other than the student's parents does not get listed on the FAFSA at all. However, distributions from the 529 plan for the benefit of the student each year will appear on the FAFSA the following year as student income. The EFC formula usually includes 50 percent of student income, so 529 distributions will have a significant effect. For example, if a grandparent gives a student $6,000 from a 529 plan one year, this will add about $3,000 to the student's EFC the following year. One way to avoid this problem is to wait until the last year of college to take any distributions.

Institutions other than the federal government set their own rules on how to consider 529 plans when awarding state or college-based financial aid. For example, many private schools require students to submit a CSS Profile, which asks for a list of all 529 plans on which the student is the beneficiary, even if the parent is not the owner. Therefore, the school might reduce a student's eligibility for institutional grants if the student has a lot of money available in 529 plans.

What College Expenses Do 529 Plans Cover and Not Cover?

Posted on May 27, 2012 with 32 comments

May 27, 2012

For the last 18 years you have invested in a 529 Plan every month. Now that your college student is about to enter college for the first time you will be accessing that 529 account. There are so many different things you need to pay for this coming school term and you are not sure what your 529 plan is allowed to pay for. The following is a list of what is covered and what's not covered under a 529 plan.

Here are a few guidelines, based on information in Publication 970 from the IRS, which gives detailed guidance on qualified expenses.

What's Covered

  • Tuition and required fees are covered in full.
  • Room and board, if the student is enrolled at least half time. However, such expenses must be not more than the greater of: 1) the allowance for room and board, as determined by the school, that was included in the cost of attendance; or 2) the actual amount charged if the student is residing in housing owned or operated by the school.
  • Food: If you spend a certain amount for a meal plan, that entire amount can be deducted, even if used for coffee or ice cream and not a full meal. Weekend meals can also be included if the dining halls are not open.
  • Books and supplies: Any fees associated with purchasing school textbooks are considered qualified, as are required equipment or supplies such as notebooks and writing tools.
  • Computers/laptops, but only if required by the school. If required, Internet fees and PDAs or “smartphones” may also qualify. The Savings Enhancement for Education in College Act (H.R. 529), currently under consideration by Congress, would expand this definition to apply to all computer technology used by the student.
  • Special needs services required by special-needs students that are incurred in connection with enrollment or attendance at school.

What's Not Covered 

  • Student loans: Interest on or repayment of student loans is not considered a qualified expense by the IRS.
  • Insurance, sports or club activity fees, and many other types of fees that may be charged to students but are not required as a condition of enrollment.
  • Transportation to and from school.
  • Concert tickets or other entertainment costs, unless attendance is required for a course or curriculum.

Note that expenses must apply to a qualified college, university or vocational school for post secondary educational expenses. Withdrawals used for qualified expenses are generally free from federal income tax. Tax treatment at the state level may vary, and may depend on your residency status in that state.

Check before you spend funds from a 529 plan. Taxes and a possible 10 percent penalty apply to all distributions that are not considered

Updated Benefits

Congress Approves Computers as a Qualified Higher Education Expense for 529 Plans - See more at Here

How to Compare 529 Plans

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Saving for college isn't easy. College rates at public and private schools are constantly increasing. 529 education plans give quality options for parents and students trying to get ready for the future. The plans come in 2 forms: prepaid tuition and special savings account. Both accounts have specific rules. Knowing these rules will put you closer to reaching your educational goals

529 plans come in two forms: savings account and prepaid tuition. If you use prepaid tuition,you purchase units that can be turned into credit hours at a public college. Prepaid plans are appropriate for parents who don't like risk. With a savings account, you would invest money into a mutual fund. The account would fluctuate with market conditions---a good option for those who can stick with the investment markets.

Pick your state. You're not forced to open a 529 account in the state where you live. You may fund an account where you live or in another state miles away. However, you will be eligible for a tax deduction if you open a plan in your home state. Approximately 32 states, and the District of Columbia, allow deductions for 529 contributions. Pennsylvania, Arizona, Maine and Kansas allow you to claim a deduction even if you are not a resident.

You need to know the rules. Only 13 states operate prepaid tuition plans. Funds must be used at public institutions. However, independent 529 plans are available in select states if you're interested in private universities. Prepaid tuition plans protect you from future tuition increases. Savings accounts are generally more flexible. You are allowed to use the funds at a private or public university of your choice. Both plans are subject to strict penalties on unqualified withdrawals. Both plans are tax deferred, meaning you contributions are not subject to state and federal taxes. Nevertheless, you'll pay income taxes plus a 10 percent penalty if funds are used for non-educational expenses.

Look for the lowest fees. Check all the fees associated with opening and maintaining your account. Savings plans sold by brokers may be subject to a load fee---paid to broker for selling the plan. They also charge distribution fees that can amount to 1 percent of your initial investment. Direct sold savings plans allow you to avoid load fees.

There are other things to consider. Both accounts will reduce your student's financial aid package. Prepaid tuition and savings account are counted as parental assets and can only reduce need-based federal aid by 5.64 percent.


Coverdell Education Vs. 529 Plans - What is the Difference?

Posted on May 26, 2012 with 1 comment

May 26, 2012

Everyone who is looking to save money for a child's education expenses often face a choice between Coverdell ESA and 529 plans, the two most common available. The 2 plans have many similarities but a few distinguishable differences too. Those exploring education savings program choices had better consider the advantages and disadvantages of both

The Coverdell ESA has many of the same features of an Individual Retirement Plan (IRA). That's why it's called the Education IRA. Both plans allow you to contribute a certain amount of money each year, grow the money tax free and withdraw the money at a particular time. The yearly contribution limit for the Coverdell ESA plan is $2,000, and the deadline to contribute to the plan is the end of the tax filing year. The plan has income requirements individuals must conform to to setup an account. To meet eligibility requirements, single taxpayers must have income levels between $95,000 and $110,000. Married taxpayers, filing jointly must have adjusted gross incomes between $190,000 and $220,000.

Coverdell Advantages & Disadvantages

Among the primary advantages of the Coverdell ESA is that individuals could use the funds towards elementary and secondary education expenses, as well as college. Another advantage is that contributed funds grow tax free and the withdrawals are tax-exempt if they don't exceed the beneficiary's education cost. A disadvantage is that the money in the account is considered as income and brings down the amount of federal financial aid a student can receive. Also against it are the penalties the plan incurs if the beneficiary doesn't make withdrawals prior to 30 days after turning 30.

529 Plan Features

The 529 plan doesn't have a contribution limit and does not have income eligibility guidelines. The beneficiary of the 529 plan doesn't have to use the funds by a certain age. The 529 plan only pays the education expenses at accredited colleges and universities. Students and parents don't have to use the funds in the state the account was opened. Nevertheless, a few states offer extra benefits to individuals that use the money for college expenses in their state.

529 Pros and Cons

An advantage of the 529 plan is that everybody is qualified to take part. Similar to the Coverdell plan, the money in a 529 account grows tax free and doesn't suffer tax penalties when money is withdrawn. The disadvantage of the 529 plan is that money contributed is invested in the stock market, so if the stock market is doing poorly the plan performs poorly as well. Another disadvantage is that parents are expected to pay at least 5.64 percent of the student's education expenses. So, the 5.6 percent is counted in the expected family contribution (EFC) amount when applying for federal financial aid.


What Are The Benefits to Investing in My State's 529 plan?

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Your state may provide state income tax deductions, credits, or exemptions on contributions to its 529 plan.

A few states even offer matching contributions and creditor protection of 529 assets if you declare bankruptcy. Such benefits are just one factor to consider when deciding which plan to use.

You may find another state's plan is more appropriate for you even though you won't get a break on state income tax. Or you may find that a plan's high costs would offset any tax or other benefits you'd receive.

What is the Most Money I Can Put Into a 529 Plan?

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A 529 college savings plan is an investment account that lets you to save your child's college. The maximum contribution amounts differ between the two varieties of 529 plans

There is a prepaid tuition 529 plan which allows you to fund future college credits at the current price, according to the Securities and Exchange Commission. A college savings 529 plan, also known as an investment plan, doesn't "freeze" existing tuition prices, but allows you to invest a definite amount of money into a savings account that earns money over time.

Though you must pay normal income taxes on the dollar amount of your 529 investment plan contribution, any additional investment earnings are not taxed, according to the Marketwatch. However, because prepaid plans cannot earn money, they don't have this advantage.

A college savings 529 plan had a maximum contribution amount of more than $200,000 as of September 2010. Although no limit for a prepaid plan exists, you contribute funds into the account in a lump sum and installment format, based on the current age of the beneficiary and the number of years of college that you want to purchase.

What are Qualified Expenses for 529 Plans?

Posted on May 24, 2012 with No comments

May 24, 2012

The Internal Revenue Service (IRS) states very clearly that a 529 plan is to be used to invest money as a way to pay for future education. The 529 plan main benefit is that you would not be able to save the same dollars else where and they be non-taxable. When it comes time to use the money you have saved in a 529, only certain expenses can be paid with that money.

Tuition and Expenses

You can pay for tuition and expenses related to an eligible college with money that you saved in your 529 plan. The Internal Revenue Service specifies an eligible school as just about any accredited public, nonprofit, and private post-secondary institution. Qualified disbursements are books, supplies or equipment essential to enroll or go to the institution.


As of 2010, computer technology is an expense that can to be paid for with 529 plan funds. This was added to the list of eligible expenses under the American Recovery and Reinvestment Act of 2009. Computer technology includes any computer and related equipment including a scanner or printer. These eligible expenses do not include software or entertainment devices.

Students with Special Needs and Expenses

If the individual using the 529 plan has special needs or needs special services to go to school, those expenses are eligible, according the the Internal Revenue Service. The special needs must be related to being enrolled at an eligible educational institution. An example of an eligible expense would be the cost associated with making a room handicapped-accessible for a student living in a dorm, if the school hasn't already adequately done so. Also electronic or services that allow the student to perform their studies better.

Housing and Living expenses

The Internal Revenue Service permits you to spend the money saved and earned in a 529 plan to pay for room and board as long as the student is enrolled at least half-time. Notwithstanding, there are some limitations. The amount spent on room and board must be no greater than the amount determined by the institution as the allowance for room and board, or the actual amount charged for room and board by the institution for institution-owned housing. Otherwise, the expenses may not be eligible.

How to Set Up a 529 Plan for Your Child

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A 529 college plan is a way for you to save for your child's education in a tax efficient way. You save your after tax money and it grows tax-deferred. You withdraw the money as you need it when your child enters college. When you withdraw the money for college expenses the amount the money has grown over the years is tax free.

1. You need to establish how much money your child will need for college and determine how much per month you have to save to meet that goal.

2. Contact your states 529 savings plan for information concerning plans, costs, and other requirements. You do not have to use your states college savings plan. You can use other states plans or private brokerage plans.

3. Fill out the appropriate applications for the state 529 plan or the brokerage 529 plan.

4. Have money sent to the plan on a monthly basis or have it withdrawn automatically from your checking account.

5. Choose investments in the plan that are appropriate for your child's age because as the child gets older adjustments to the investments need to be made. Normally more safer and less risky to preserve principle.
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What is a 529 Plan?

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If you are already saving for college, you have probably looked into 529 plans. 529 plans are revolutionizing the way parents and grandparents save for college, similar to the method 401(k) programs inspired retirement savings. Americans are putting billions of dollars into 529 plans, and contributions are expected to grow dramatically in the coming decade. Where did these plans come from, and what makes them so appealing?

The history of 529 plans

Congress created Section 529 plans in 1996 in a piece of legislation that had little to do with saving for college–the Small Business Job Protection Act. The law on 529 plans was later refined in 1997 by the Taxpayer Relief Act, in 2001 by the Economic Growth and Tax Relief Reconciliation Act, and in 2006 by the Pension Protection Act. In this short period, 529 plans have been seen as one of the best ways to save for college.

Section 529 plans are officially known as qualified tuition programs under federal law. The reason “529 plan” is commonly used is because 529 is the section of the Internal Revenue Code that governs their operation.

What exactly is a 529 plan?

A 529 plan is a college savings vehicle that has federal tax advantages. There are two types of 529 plans: college savings plans and prepaid tuition plans. Though college savings plans and prepaid tuition plans share the same federal tax advantages, there are important differences between them.

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