![]() ![]() DISADVANTAGES OF SECTION 529 PLANS ➤ Lack of Investment Choice and Control In any event, the account owner can change the designated beneficiary without the beneficiary’s knowledge or permission. The account owner is given exclusive rights to direct the investment and distribution of funds. Generally, the beneficiary has no direct access to or control over the funds in the Section 529 Plan account. The scope of § 2503(e) is thus more narrow than a Section 529 Plan’s definition of “qualified higher education expense.” Thus, a good strategy for high net worth families may be to use § 2503(e) to pay for the student’s tuition on a current basis, and spend the assets in the Section 529 Plan to pay for other educational expenses, such as room and board, books, and supplies. IRC Section 2503(e) permits an unlimited gift tax exclusion for gifts paid directly to an educational institution on behalf of a student, to the extent that the purpose of the gift is limited to tuition. ➤ Funds Can Be Used for Education Costs Not Included Under IRC § 2503(e) The only way to change that result would be to transfer ownership of the account to a third party, but that would be treated as a gift, triggering Medicaid’s 60-month look back rule on gifts. The owner’s retained right to recover funds from the 529 account will make it a countable asset for Medicaid eligibility purposes. No advantage is provided to a Medicaid applicant by having assets held inside a 529 account. The earnings portion of any non-qualified withdrawal will be subject to both regular income tax and an additional 10% tax. While a contribution to a Section 529 Plan is treated as a completed gift for gift tax purposes, the owner nevertheless retains the right to recover the funds if the beneficiary does not attend college, the donor needs the funds, or for any other reason.īy contrast, a donor transferring assets to an UTMA account or other irrevocable arrangement has no right to the return of the assets.Īt the same time, the value of the account will be includable in the gross estate of the beneficiary, not the owner’s. Purely from an estate planning viewpoint, a Section 529 Plan offers unique advantages to a donor. (If the beneficiary is older, the relevant rules of a particular state’s program should be checked.) ➤ Donor Control Over Funds Thus even an adult seeking higher education later in life can be named as the designated beneficiary. Unlike the Coverdell Education Savings Account or a Uniform Transfers to Minors Act (“UTMA”) custodial account, which are discussed below, in many states there is no limit on the age of the designated beneficiary. The absence of an income limit on contributors clearly makes Section 529 Plans particularly attractive to higher income families, who also are likely to make above-average use of the savings plans. ![]() With Section 529 Plans there are no income caps on potential contributors, unlike the eligibility limits applicable to taxpayers who want to claim the higher education income tax deduction or Hope Scholarship and Lifetime Learning tax credits, or who want to use a Coverdell Education Savings Accounts. The details of each point are discussed in the following sections. Here in summary form are the major advantages and disadvantages of Section 529 Plans. The tax treatment of 529 Plans, and issues relating to their place in relation to other types of financial aid for higher education, are also discussed.ĬONTENTS ■ Summary of Section 529 Plans ■ Basic Requirements of All Section 529 Plans ■ Setting Up a 529 Account ■ Selecting a State’s 529 Plan ■ Tax Treatment Of Contributors and Designated Beneficiaries ■ Options When Account Not Used Up ■ Comparing 529 Plans to UTMA ■ Coordinating 529 with Coverdell ■ How Does a Section 529 Plan Affect Eligibility for Other Financial Aid? The sections below provide an explanation of Section 529 Plans generally, and in particular the 529 Plans as adopted by Pennsylvania. Starting in 2018, Section 529 Plans can also be used to pay for the tuition expense of a beneficiary’s elementary and secondary education, not to exceed $10,000 per year. For many families Section 529 Plans will become the preferred method of providing for their children’s and grandchildren’s higher education.Įlementary and Secondary Education. Responding to this situation, Congress added Section 529 to the Internal Revenue Code to grant tax-exempt status to three types of post-secondary education savings plans. Affording the costs of such education, however, will remain a challenge for families at almost all income levels, since the costs of higher education have consistently risen faster than inflation and family income. In the knowledge-based economy of the 21st century, pursuing some kind of post-secondary education, whether in a college setting or at a technical, business, or vocational school, will be essential.
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