Monday, November 21, 2011


Q. When I was in for my pretax appointment, I mentioned the 529 Plan for college funding. You mentioned that you were not excited about the 529 Plan because of the fees charged and because the only real tax advantage is that the interest is not taxable. Do you have any more information on the plans? Thank you.

A. It was great to visit with you at your pretax appointment. Here is some more information about 529 Plans.

  • As I mentioned you don't get a federal income tax deduction for the contribution, but the earnings on the account aren't taxed while the funds are in the program. You can change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without income tax consequences.

  • Distributions from the program are tax-free if they don't exceed the student's qualified higher education expenses. These include tuition, fees, books, supplies, and required equipment. Reasonable room and board is also a qualified expense if the student is enrolled at least half-time.

  • There is some confusion about computer technology. For 2010 computer technology or equipment, or Internet access or related services, was a qualified expense. They changed that and those costs are not longer eligible.

  • Distributions in excess of qualified expenses are taxed to the beneficiary to the extent that they represent earnings on the account. A 10% penalty tax will also be imposed.

  • Eligible schools include colleges, universities, vocational schools, or other postsecondary schools eligible to participate in a student aid program of the Department of Education. This includes nearly all accredited public, nonprofit, and proprietary (for-profit) postsecondary institutions. A school should be able to tell you whether it qualifies.

  • The contributions you make to the qualified tuition program are treated as gifts to the student, but the contributions qualify for the annual gift tax exclusion, which is $13,000. If your contributions in a year exceed the exclusion amount, you can elect to take the contributions into account ratably over a five-year period starting with the year of the contributions. Thus, assuming you make no other gifts to that beneficiary, you could contribute up to $65,000 per beneficiary in 2011 without gift tax.

  • Depending on the plan, there may be some state benefits.

  • Check out the website which provides more information: 529 Plans