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Section 529 Plan
Saving for Higher Education
Section 529 provide taxpayers with income tax benefits and estate planning benefits while
allowing grantors (owner of the plan) more control in comparison to other higher
education saving plans. Here is some facts about the 529 plan.
The 529 Plan in a nutshell:
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The plan is subject to “Sunset” provision, and must be re-enacted before
2011 for qualified withdrawals to remain tax-free
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The plan is to be established by individual states:
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The state
selects a plan manager to invest assets (in mutual fund)
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Each state sets its own maximum amount of contribution (plan limit)
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Taxpayers can participate in ANY state plan, or in a multiple plans up to the maximum limits
of any one plan (no residency restriction)
The amount of
contribution is limited by the plan’s limits
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Texas current Plan limit is $257,460 (Texas
Tomorrow Fund)
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Anyone can establish a plan for anybody (child, grandchild, neighbor, etc.) including self.
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Owner or anyone-else can contribute the entire amount in one single year
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Single taxpayer may ADVANCE GIFT for five-years by depositing $55,000 in one year as a
gift in advance for 5-years at the current rate of $11,000 per year. (Husband and wife can contribute up to $110,000)
Gift will
require filing a Gift Tax Return – Form 709
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Withdrawals
for post-secondary education are tax free and can be made for:
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Tuition,
books, fees, and required supplies and equipment in eligible institutions
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Room and board
(if student is enrolled at-least part time)
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Withdrawals
must be made by the owner of the plan (the contributor)
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Owners must
keep records of tuition paid to support withdrawals which are reported to the
IRS on Form 1099-Q
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Non-qualified withdrawals are taxed at taxpayer rate
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Non-qualified withdrawals will incurs 10% penalty, except for:
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Death,
disability, or scholarship (up to the scholarship amount)
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Rollover to another 529 plan within 60-days
The plan is a valuable estate planning tool, and allow owner more control over beneficiary, as
it
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Allows owner to control the assets; while excluding the plan’s asset from being included in the
estate
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Owners controls withdrawals, and select a successor to control withdrawals upon his/her
death
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Owner can have multiple plans
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Owner can change investment selection
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Owner can
change beneficiary
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Owner is NOT obligated to pay beneficiary
Gift Tax Implications
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Gift to family members same or higher generation incurs no gift tax
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Gift to family
member of lower generation is subject to “Gift Tax Exclusion”
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Excess
contribution reduce the amount of lifetime gift tax credit
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Example:
Grandmother contributes $100,000 to “Little Johnny” 529 plan in one year. The
first $55,000 is an accelerated annual gift tax for 5-years ($11,000 x 5 year),
the reminder $45,000 will reduce the Grandma’s lifetime credit from $1 million
to $955,000
Download Information about Texas 529 Plan
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