Q & A: Demystifying 529 Savings Plans

March 1, 2008

The basic premise is that anyone can contribute to a 529 plan, regardless of age or income. This includes an individual, a corporation, a partnership, a trust, a guardian, a committee, a trustee, an executor, an administrator or any person acting in a fiduciary capacity. Local governments and some nonprofit organizations may also participate.

Key Points

Q Can you please explain the way a 529 savings plan works? Is this benefit phased out for higher income earners?

A Perhaps the best way to answer your question is in a question-and-answer format. The basic premise is that anyone can contribute to a 529 plan, regardless of age or income. This includes an individual, a corporation, a partnership, a trust, a guardian, a committee, a trustee, an executor, an administrator or any person acting in a fiduciary capacity. Local governments and some nonprofit organizations may also participate. Each account has one account owner/participant and one named beneficiary. Contributions may be made by the account owner/participant or by another person; however, all contributions by another contributor become the property of the account owner/participant, regardless of the relationship or the identity of the contributor.

Q Can there be joint account owners? Can there be joint beneficiaries?

Q Can I transfer account assets or name someone else as the account owner?

A Many 529 programs allow for transfer of ownership, often within certain limitations, but others do not. Transfer of ownership is irrevocable and transfers all rights, title, interests in and powers of the account and is a non-taxable event.

Q Can the account owner or the beneficiary be a trust?

A The account owner may be a trust. The beneficiary must always be a person, which excludes a trust.

Q Can I open a 529 for myself?

A Yes. However, keep in mind that doing this does not remove the assets from your estate. Also, certain 529 programs allow this, while others do not.

Q Who can be a beneficiary?

A The beneficiary must be a person - your child, your grandchild, your spouse, yourself, or even someone not related to you.

Q Can I invest for one beneficiary in more than one state's 529 plan? Are there contribution limitations?

A Yes. A beneficiary can have as many accounts as desired. Contributions to all 529 accounts (including 529 prepaid accounts) for a beneficiary cannot exceed amounts deemed necessary to provide for a beneficiary's qualified higher education expenses. As a result, many 529 programs prohibit contributions to your account once the total of that account plus all other 529 accounts (including 529 prepaid accounts) reaches the lowest maximum contribution limit out of all the 529 savings programs in which that beneficiary is named.

Q What is the deadline for contributing to a 529?

A Since contributing to a 529 is considered gifting to the plan's beneficiary, the deadline to gift to a 529 for a tax year is Dec. 31 of that year.

Q What is the maximum amount that can be contributed to a 529 account?

A The maximum amount that can be contributed to a 529 account is established by that program's rules and may be changed each year to reflect the increasing cost of higher education. Once this limit, or often some lower "cutoff" limit, is reached, no additional contributions will be permitted. Currently, the highest maximum in the market place is about $300,000 and growing.

Q Can securities be contributed?

A No. Contributions must be made in cash only. Checks, money orders and bank transfers are considered "cash" for contribution purposes.