Funding for education expenses aided by 529 plans

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Timothy M. Reese is senior vice president of investments with A.G. Edwards & Sons Inc. |ret||ret||tab|

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Saving for your child's college education has always been a challenge, but now many parents and grandparents are turning to 529 plans as a savings tool. |ret||ret||tab|

While it is still necessary to start early and develop a consistent contribution schedule, 529 plans offer tax-advantaged ways to save, while offering you complete control over the funds. There are many benefits to these plans. Following is a list of some of the frequently asked questions.|ret||ret||tab|

What is a 529 plan?|ret||ret||tab|

It is a qualified state tuition program. With a 529 plan, you will have the ability to save money on a tax-deferred basis while helping your beneficiaries pay for higher education expenses at participating colleges and universities. Equally as important, you control how your money is invested and the withdrawals. The potential earnings then grow tax-deferred and, if used for qualified expenses, distributed tax-free.|ret||ret||tab|

How does it work?|ret||ret||tab|

Not all 529 plans are created the same. Each plan has its own set of investment portfolios, costs and fees. Before you make your final selection, you should shop around and then select a 529 plan that best fits your financial needs. |ret||ret||tab|

Who can contribute?|ret||ret||tab|

Any U.S. resident or resident alien with a Social Security number, can participate in any state's 529 plan and set up accounts for their children, grandchildren, friends, even themselves. There are no age, income or family restrictions in contributing or being a beneficiary of a 529. Unlike other savings plans, anyone at any income level can contribute to a 529 plan.|ret||ret||tab|

What is the maximum amount that can be contributed to a 529 plan for each beneficiary?|ret||ret||tab|

The maximum contribution varies by state, currently about $250,000. Contrib-utions can be made until the total value (contributions and earnings) equal the maximum.|ret||ret||tab|

What is considered a qualified withdrawal for tax purposes? |ret||ret||tab|

Qualified withdrawals include tuition, fees, books, supplies and room and board.|ret||ret||tab|

What are some of the tax benefits of 529 plans?|ret||ret||tab|

While your deposit is made with after-tax dollars, the potential earnings in your accounts grow tax-deferred. Qualified withdrawals are federal tax-free. Another benefit is that the value of the plans is not included in your taxable estate, yet you still control the money. Additionally, individuals can contribute up to $55,000 per beneficiary in a single year without federal gift tax consequences. The same holds true for couples, who can contribute up to $110,000 in a single year to a beneficiary through this plan without gift tax consequences, provided no additional gifts are made to that beneficiary for a five-year period.|ret||ret||tab|

Can an investor transfer assets from one state plan to another?|ret||ret||tab|

Assets can be transferred once a year from one state plan to another without changing the beneficiary. You should check to see if there are any penalties or withdrawal fees to exit your existing state plan.|ret||ret||tab|

What happens if the beneficiary does not attend college?|ret||ret||tab|

You can leave the assets for later use or change the beneficiary to a family member tax free. The owner also can withdraw the assets. If you withdraw the assets, you will owe income tax and have to pay a 10 percent penalty on the earnings.|ret||ret||tab|

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