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New Savings Plan Encourages You to $ave

What are 529 Plans?

In 1996, legislation now known as Section 529 of the Internal Revenue Code, was passed by Congress to help encourage families to save for college during a time when education costs are rising so dramatically. States were given broad discretion in crafting their 529 programs, including the ability to sell their 529 programs to nonresidents. Tax cut legislation recently signed by President Bush has boosted the popularity of these previously little known plans. Since there are several different types of college savings plans and investments available, you should research your options and find a qualified financial planner to help you make the most of your savings for your children.

The purpose of the 529 program is to allow families to save today to meet the cost of a child’s education tomorrow. Until this recent legislation passed, these plans offered several tax benefits but were not entirely exempt from federal taxes.

What are some of the features, benefits and restrictions of the 529 Plan?

Tax-Deferred Savings. Earnings on investments in a 529 plan grows free from federal income tax. Many states offer the benefit of state tax deferral, including personalized plans and state-sponsored college saving plans. Connecticut’s plan is called the Connecticut Higher Education Trust or CHET.

Tax Exempt Withdrawals. Beginning in 2002, your beneficiary will no longer have to report income when he withdraws the money as long as it is used for qualifying college costs.

No Income Limits. All investors may participate regardless of their income or net worth.

Gift Tax Exclusions. Gifts to a 529 plan qualify for the $10,000 gift tax exclusion. Account owners may contribute up to $50,000 for each beneficiary in a single year ($100,000 for married couples). (The new legislation also raised the annual contribution limit on an Education IRA to $2,000 from $500).

Investor’s Maintain Ownership of Account. Contributed funds are generally excluded from the account owner’s taxable estate, even though the investor still maintains ownership of the account. The owner controls the funds rather than the child/beneficiary. The owner may change the beneficiary of the account to another family member of the original beneficiary at any time. For example, if one child decides to not go to college, the funds can be used for a sibling.

Liquidity. The owner may withdraw the funds at any time for non-higher education expenses but a 10% penalty on earnings will apply. The owner is the only person with the authority to direct withdrawals from the account.

Beneficiary Must Use Funds for Qualified Higher Education Purposes Only. All qualified withdrawals must be authorized by and paid to the account owner or directly to the institution.

Contribution Limits. Contributions can be made to a 529 plan account until the total value of contributions and earnings of all accounts for a particular beneficiary equals approximately $250,000, depending on the program. Thereafter earnings can continue to grow in excess of this limit without penalty.

Investment Options. The account owner, not the beneficiary, may choose among different investment portfolios, designed exclusively by the plan, when making initial contributions to the account. Most programs have low minimum investment requirement of $250.

No Guarantees. Similar to investing in stocks, mutual funds or bonds, a 529 plan is not guaranteed by the sponsoring state, any instrumentality, thereof, the federal government, the FDIC, the investment Management Company or any bank.

*If an account owner elects to treat contribution as having been made over a five-year period and dies before the end of the five-year period, the portion of the contribution allocable to the remaining years in the five-year period (not including the year in which the account owner died) would be included in computing the account owner's gross estate for federal estate tax purposes. Account owners may wish to consult their tax or estate planning counsel to ensure that they obtain the tax consequences they desire.

**Owners of Putnam Education IRAs retain control for the life of the account.

***Beneficiary must file and pay income tax. Earnings on non-qualified withdrawals are subject to income tax at owner's rate and a 10% penalty.

This information should not be considered tax or investment advice. Numerous recent changes in the tax law have made college savings plans more accessible and attractive to many people. You should consider the place of various education planning vehicles in the context of your overall financial plan with a financial and/or tax advisor. This guide, which is only a summary of various plan provisions, should not be treated as a substitute for such advice. Please review the offering statement for the program carefully before making any investment decisions. If you are not an Ohio resident, you may want to investigate whether your state offers a plan with alternative tax advantages for its residents.

Source: Putnam Investments

Dominic B. Schioppo, Jr., MBA, is a New England Securities Registered Representative who specializes in benefits, insurance, and financial planning at The Robinson Company in Waterbury. For more information on college savings plans contact Dominic at 203.759.5040.


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