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529 College Savings Plan

529 College Savings Plans provide many benefits to their users. However, still there is a general confusion about the exact nature and purposes of these plans. Some of the misconceptions regarding 529 College Savings Plans include:

  • In-state tax breaks are always provided to the 529 Plans held by the state's residents.

    This is not true in many cases. Even though there are some states that do provide tax breaks to investors in 529 College Savings plans, not all of them do so. Therefore, you should consider tax benefits and other factors, such as investment choice and flexibility, when evaluating a particular 529 Plan. Since this plan has some tax implications, consult your tax advisor for the local regulations.

  • The student's opportunities for financial aid can be negatively influenced by a 529 Plan.

    In the estimation of the level of financial aid for which a student is eligible, most formulas take into account approximately 5% of the parents' assets and 35% of the child's assets. As it can be seen the impact of a 529 Plan is relatively small since it represents a parent's asset, which is of a little share in the formula.

    Grandparents have also the possibility of opening a 529 Plan on behalf of their grandchildren. Since financial aid estimations don't take into account the assets of grandparents, it may be e good idea for the account to be opened by the grandparent.  

  • The existence of a Uniform Gift to Minors Act (UGMA) account deprives students from a 529 Plan account opening.

    On the contrary. The opening of a UGMA account in addition to a 529 Plan account is recommended since a combination of different investment vehicles leads to the growth of the assets not disturbed by any taxation implications.

    On the other hand, when the beneficiary reaches maturity age, the money from a UGMA/UTMA 529 Plan can be used for whatever purposes s/he considers appropriate.

  • 529 Plans are deprived of flexibility as regards to other investment options.

    529 Plans are not deprived of the investment flexibility offered by any other investment tools. You can choose from:

    • Age-based portfolios
    • Static portfolios
    • Individual portfolios

    Different 529 Plan providers offer different number of options to be included in the plan. Additionally, you may be allowed to select any age-based portfolio no matter what the age of the beneficiary is. 529 Plans allow you to adjust investment allocation at any point you consider appropriate. However, you are allowed to reallocate previously invested contributions and earnings among the different portfolios only one time per calendar year.

  • Accelerating gifting can be split over two years.

    The amount up to which you are allowed to make a gift without incurring any federal taxes under a 529 Plan is $55,000 or $110,000 for spouses who execute gift split. The gift should be split over a five-year period on equal portions. During the five years no further gifts are allowed. In order to avoid federal gift tax, you can contribute the difference between the annual gift limit and the amount you have gifted in the current year.

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