Opening Your Account
Q1: What is a College 529 Plan?
College 529 Plans are specifically designed to help families of any income level save for higher education expenses. Qualified withdrawals are completely federal tax-free. When you withdraw funds to pay for qualified higher education expenses, there is no federal tax on the contribution or earnings portion of your withdrawal. Depending on the state, the earnings portion of these withdrawals may or may not be subject to state tax.
Q2: Who can open an account?
Anyone of legal age with a valid social security number or federal taxpayer identification number who is a U.S. citizen or resident alien can open an account. Certain states have residency requirements applicable to either the owner or the beneficiary.
Q3: Do I need to open separate accounts for each of my children?
Yes. Each account may have only one beneficiary, but you can open accounts for as many beneficiaries as you would like.
Q4: Who can be a beneficiary?
Any individual with a valid social security number or federal taxpayer identification who is a U.S. citizen or resident alien qualifies as a beneficiary.
Q5: Can I change the beneficiary? Who can I select as my new beneficiary?
The account holder can change the beneficiary at any time. If you do make a change, the new beneficiary must be a member of the family of the previous beneficiary, as defined by federal tax law in order to prevent a non-qualified distribution. For purposes of changing the designated beneficiary, a “Member of the Family” includes an individual who is related to the designated beneficiary as described below:
- Father or mother, or an ancestor of either
- Brother or sister of the father or mother
- Brother, sister, son, daughter
- Son or daughter of a brother or sister
- Descendant of either father-in-law, or mother-in-law
- Brother-in-law, sister-in-law, son-in-law, daughter-in-law
- Stepfather or stepmother
- Stepbrother, stepsister, stepson, stepdaughter
- Spouse of the designated beneficiary or any of the above individuals
- First cousins
Q6: What happens if I change the beneficiary?
A beneficiary change to a “member of the family” (as defined by the IRS) of the previous beneficiary who is within the same generation (e.g., a sibling of the prior beneficiary) has no tax impact. But a change in beneficiary to a person who is in a lower generation (e.g., the prior beneficiary's child) is treated differently. The tax rules provide that such a change in beneficiary will result in a new gift from the previous beneficiary to the new beneficiary. Thus, a participant apparently could reduce the original beneficiary's unified credit amount, or create a gift-taxable event, by changing the beneficiary to a person in a younger generation. However, by adhering to the five-year lump sum gifting provision, it would be possible to make such a beneficiary change without incurring any gift tax consequences, as is explained below.
If the intended new beneficiary is in a lower generation than the old beneficiary, and the account balance is more than $11,000, the participant may wish to consider transferring no more than $55,000 ($110,000 if the previous beneficiary is married) to a 529 Plan account for the new beneficiary every five calendar years. The old beneficiary therefore could elect to treat the transferred amount as having been gifted ratably over a five-year period to avoid triggering any gift-tax consequences. Because such a move requires careful planning, the participant and beneficiary should consult a knowledgeable estate and gift tax professional.
Q7: What happens if I change the beneficiary to someone that is not a member of the family?
This would be considered a non-qualified distribution taxable to the account owner.
Q8: Does the account owner have to be related to the beneficiary?
No. In addition to opening an account for your child, a stepchild, niece or nephew, you may open an account for a friend or anyone who meets the eligible requirements under Q4 above.
Q9: How will a 529 account affect my Beneficiary's chance of obtaining financial aid?
A 529 account is considered an asset belonging to the account owner, not the beneficiary. This is significant, because when determining financial aid, the government will assume that 35% of the student's assets will be treated as expected family contributions, or EFC, to be used to pay college expenses the following year. In this same calculation, they will assume that at most only 5.6% of the parent's assets will be treated as EFC. Assuming that one of the student's parents is the account owner of the account, assets in a 529 account will be treated more beneficially than the same amount of assets held in a custodial UGMA/UTMA account, which is considered an asset of the student for the calculation of EFC. In addition, if the account owner is the student's grandparent or anyone else, the assets within the account will not be considered as part of the family's EFC for the following year. One must note though, that the earnings portion of any qualified withdrawal will be treated as income to the student in that year, and will be assessed at a 50% rate as part of the family's EFC.
Q10: Who controls the money?
The account owner or purchaser maintains control over all of the money invested in the College 529 Plan. The beneficiary does not have any control over the account.
Q11: Can I rollover assets from another state's 529 Plan?
Yes. You can rollover balances from another state's 529 Plan tax-free. You will need to complete a new Account Application along with a Rollover Request form. The designated beneficiary on the new account must be the same or a member of the same generation of the family of the former designated beneficiary. The designated beneficiary may be the same person on both accounts or a member of the family of the former designated beneficiary.
Q12: Can I open and contribute to an account for myself?
Yes. You may name yourself as both the account owner and the beneficiary.
Q13: Can my spouse and I set up a joint account?
No. Each account must be owned by one individual or entity. But you and your spouse may each establish separate accounts for the same beneficiary or for different beneficiaries. You will also be able to name a successor owner if the original account owner dies.