529 Plans FAQ
A 529 college savings plan is an investment account opened by an adult for use toward qualified higher education expenses, usually for a child. The person opening the account can place their assets into a variety of investment portfolios made up of underlying mutual funds.
Portfolios range from highly aggressive investment strategies to very conservative, giving account owners the flexibility to not only adjust strategies based on market performance of the underlying funds, but to also adapt the education savings to fit their own financial needs. If invested in a plan sponsored by the state in which the owner files taxes, contributions to the accounts may be state tax deductible. Actual deduction amounts depend on the particular state and the rules set forth by their treasury.
For more information, see the Future Scholar 529 Plan available through Columbia Threadneedle Investments.
Refer to your client’s particular state's program description or consult a tax advisor for more information on federal and state tax treatment.
If a withdrawal from a client’s 529 account is not used for qualified higher education expenses, the earnings will be taxable at the account owner's current tax rate. The IRS will impose an additional 10% penalty on the earnings.
However, these assets can be transferred to another qualified family member without penalty. The account owner may also use the assets for their own qualified higher education expenses.
For more information on federal and state tax treatment, refer to your client’s particular state's program description or consult a tax advisor.
A 529 plan may be transferred to another beneficiary as long as the new beneficiary is another qualified family member, such as a sibling or parent or even the account owner themselves. The account owner must qualify until the funds are exhausted.
It is important to note that the funds still must be used for that individual's higher education expenses for the earnings to be considered tax-free. If the beneficiary is changed to someone other than a qualified family member, the change would be considered non-qualified and subject to taxes on earnings, as well as a 10% penalty.
To transfer a Future Scholar 529 plan to another beneficiary, download the appropriate Designated Beneficiary Change Form under Forms and Applications in the Resources section. For more information, refer to your client’s 529 plan's program description or consult a tax advisor.
Distributions from a 529 plan must be spent on qualified higher education expenses in order to avoid taxes and IRS penalties. Under the current 529 plan guidelines, qualified higher education expenses include:
- Tuition and fees
- Room and board costs incurred while attending an eligible educational institution at least half-time
- Books, supplies and equipment (including computers) required for enrollment in or attendance at an eligible higher education institution.
- Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible post-secondary school.
- Effective January 1, 2018, families may withdraw up to an aggregate of $10,000 a year per beneficiary tax free to cover K-12 tuition at public, private or religious elementary or secondary schools. Account Owners are responsible for monitoring, and complying with, the $10,000 aggregate limit for such expenses
- Effective January 1, 2019, expenses for fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act.
- Effective January 1, 2019, the definition of qualified higher education expenses for 529 plans is expanded to include amounts paid as principal or interest on any qualified education loan of a 529 plan designated beneficiary or a sibling of the designated beneficiary, subject to a lifetime limit of $10,000. A sibling includes a brother, sister, stepbrother, or stepsister.
In advisor plans, any withdrawal could be subject to contingent deferred sales charges depending on the selected share class of the investment option.
529 plans only allow for one account owner at a time, with a successor account owner listed to take over in the event the initial account owner becomes incapacitated.
There can only be one beneficiary designated for each account. However, account owners have the option to change the beneficiary on the account as many times as desired until the funds are exhausted.
There are no yearly contribution limits. However, there are overall account maximum contribution limits determined by the 529 plan's sponsoring state treasury. In other words, contributions can only be made up to a certain amount over the life of the plan.
The minimum investment amount for the Future Scholar 529 plan is $25 per contribution, but each state treasury determines these amounts as well.
If the account owner intends to set up automatic contributions from their bank account, there is no minimum for subsequent contributions for the Future Scholar 529 plan.
In most states, anyone is allowed to contribute to a 529 plan for a designated beneficiary. However, certain states require contributions to come from only the account owner. Review the client’s state program description for specifics.
Contributors other than the account owner are eligible for the deduction at the state level, provided they are contributing to a plan sponsored by the state in which they file taxes. Proof of contribution provided to the IRS or a tax advisor is required to remain eligible for the deduction.
Use our State Tax Deduction Calculator to find out if the client’s state offers a deduction.
As with any other type of investment, 529 plans involve a certain amount of risk in each investment strategy, and no strategy guarantees the return of principle. Because the stock market, which makes up the core of these investment accounts, is volatile, no guarantee of principle or return can be provided. Unlike a guaranteed principle account with specific percentage of earnings, 529 plans earning figures fluctuate on a daily basis in correspondence with the performance of the underlying mutual funds in the portfolio.
Your clients should consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. Download a copy of the Program Description under Forms and Applications in the Resources section, which provides this and other important information about the Future Scholar 529 College Savings Plan. The program description should be read carefully before investing.
Your clients should also consider, before investing, whether their or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.
Columbia Management Investment Distributors, Inc., member FINRA, is the distributor and underwriter for the Future Scholar 529 College Savings Plan Financial Advisor Program.