How do I set up an account?

Who can be a beneficiary?
You can set up an Account for your child, your grandchild, your spouse, another relative, yourself, or even someone not related to you. The beneficiary may be of any age. However, the beneficiary must be an individual person; the beneficiary cannot be a trust or other entity.

Who can change the beneficiary?
The Account owner is the only person who can change the beneficiary. If you change the beneficiary, the new beneficiary must be a “member of the family” of the previous beneficiary, as defined by federal tax law.

Can my spouse and I set up a joint account?
No. Each Account must be established by one person, the Account owner. Only the Account owner can give instructions to distribute money from the Account, whether to pay for the beneficiary’s higher education expenses or for any other reason. However, you and your spouse may each establish separate Accounts for the same beneficiary or for different beneficiaries.

Can I change the investment options for the assets in my account? 
Each time you contribute to your Account, you can elect how such contribution should be allocated among the investment options. However, you cannot change the investment options applicable to a contribution after the contribution is made (unless you make a "Rollover Distribution" to a new Account with a new beneficiary who is a member of the family of the previous beneficiary). You can elect to

1. add new investment options, and change allocations among investment options for new contributions;
2. stop contributions to an investment option that you previously selected; or
3. increase or decrease future contributions to an investment option that you previously selected. 

You also must notify the fund company in writing if you are using an automatic contribution plan and you wish to add an investment option, stop your contributions to an investment option or increase or decrease the amount of future contributions to any investment option.

Can I put my own stocks, bonds, or property in my account?
No. Federal tax law requires that all investments be made “in cash.” Checks are considered cash for this purpose and will be accepted.

Can anyone else contribute to my account once it is established?
Yes. Anyone else may contribute to your Account in the same manner as you make contributions. Contributors should direct how to invest his or her contributions when they are made. However, a contributor will not retain any control over, or rights to, their contribution after the contribution is made. Nor will the contributor receive any statements or other information with respect to the contribution or the Account.

Can I choose the mutual funds for my account?
No. Federal law requires that you may not direct the investment of the assets in your Account, directly or indirectly. Although the program enables contributors to select among Investment Options at the time a contribution is made to your Account, you (or any other contributor) may not otherwise direct the manner in which the assets in your Account are invested. Your Account will be invested in accordance with the Investment Policy for the Investment Option(s) you select.

What are the federal income tax advantages of the program?
Currently, there are two main federal income tax advantages to the program:

First, any earnings on the money you invest in your Account will not be subject to federal income taxes until they are distributed.

Second, there is special federal income tax treatment for money that is used to pay for “qualified higher education expenses” as defined in the Internal Revenue Code. Any earnings in the Account that are used to pay for the Beneficiary’s qualified higher education expenses are taxed upon withdrawal from the Account as income to the Beneficiary, not to you. This can result in significant tax savings if you are in a higher tax bracket than the Beneficiary. In general, tuition, fees, room and board, books and equipment necessary to attend an institution of higher education are considered “qualified higher education expenses.”

There is one potential federal income tax disadvantage to the program. Any earnings on your Account will be taxed as ordinary income when they are withdrawn, rather than capital gains. Under current tax law, the tax rates on ordinary income for taxpayers in the higher tax brackets are greater than the tax rates on capital gains.

However, the new enhancements to Section 529 granted under the new Economic Growth & Tax Relief Reconciliation Act of 2001 are:

1. Tax-free distributions!
   Distributions for qualified educational expenses made after December 31, 2001, are now tax-free. 
2. Simplified and flexible rollover between 529 plans!
   Direct transfers form one 529 plan to another will be allowed for the same beneficiary. A limit if one rollover per 12-month period will apply to amounts distributed from a 529 plan and later re-contributed within 60 days.
3. Expansion of room and board expenses!
   For students enrolled at least half time, qualified room and board expenses have increased form $2,500, for those living off campus, and $1,500, for those living at home, to the full room and board cost set by each institution. Specifically, tax-free distribution will be the full invoiced amount calculated as part of the “cost of attendance” for federal financial aid purposes.
4. Expansion of family members to include cousins!
   For the purpose of tax-free rollovers and changes of designated beneficiaries, “a member of the family” will include first cousins of the original beneficiary.
   Source: Alliance Capital

What about state taxes?
State tax treatment may differ based in the state or states in which you pay income taxes. You should consult your tax advisor about state and local taxes.

Can I invest in the program and in an Educational IRA?
Under the new Tax Relief Act, anyone meeting the income and annual contribution limits may contribute to an Educational IRA in the same year a contribution is made for the same beneficiary in a 529 plan. This is effective January 1, 2002; otherwise, a 6% excise tax will apply for overpayment in 2001.

What are the gift tax advantages of an Account?
Normally, a gift of more than $10,000 to a single person in one year is subject to federal gift tax. With the 529 plan, an individual can make a gift of up to $50,000 in one year (or spouses can make a joint gift of up to $100,000 in one year) without triggering the tax. To do this the contributor must elect to treat the entire gift as a series of five equal annual gifts. Lesser gifts in excess of the $10,000 annual exclusion may also be pro-rated over the five years. The five-year pro-rating is elected by filing a gift tax return for the year in which the gift is made.

How much can I invest in an Account?
Federal income tax law requires each fund company and supporting state to place limits on contribution limits. The maximum contribution limits range from $100,000 to $246,000 depending on the state. Each state may adjust the limits each year based on the current average cost of educational institutions and the rate of inflation.

Can I use my account to pay for any college? 
Yes. You get the full benefits from the program if your beneficiary attends any accredited institution of higher education in the United States that is eligible to participate in certain federal student aid programs. This might be a college or graduate school, or a post-secondary vocational or trade school. You should be certain that the school is accredited. If you use the money to pay for costs associated with a non-accredited institution, you will not qualify for favorable tax treatment, and your distribution will be subject to a penalty of 10% of the earnings distributed.

How do I use my account to pay for college? 
To make a withdrawal to pay for qualified higher education expenses, you must notify the program Administrator of the amount to be withdrawn and submit documentation showing that the expense has been incurred, such as a bill from the beneficiary’s college, or a certification that the expense will be incurred within a reasonable time after the distribution. The program Administrator will follow procedures required by federal tax law in connection with the distribution. Payment may be made directly to the college, university or other higher educational institution, by joint check payable to the institution and the beneficiary, or, in certain circumstances, to you or your beneficiary. If you do not provide appropriate documentation at the time of the withdrawal, an amount equal to 10% of the investment earnings withdrawn from the Account will be withheld from your withdrawal. Such amount will be released to you or your beneficiary if you submit the necessary documentation within 30 days of the withdrawal (or such other period as the program Administrator determines is permitted under federal tax law); otherwise, such withheld amount will be treated as a penalty for a non-qualified withdrawal and will be deducted from your Account.

What if my beneficiary does not go to college?
If the beneficiary you named does not go to college as anticipated, you have three options:

1. you can leave the money in the Account in case the beneficiary subsequently decides to attend college;
2. you can withdraw the money from the Account, subject to the assessment of the penalty of 10% of earnings and the payment of income taxes on the investment earnings withdrawn; or
3. you can leave the money in the Account and select a new beneficiary. You can name another member of the beneficiary’s family as the new beneficiary of the Account without any negative income tax consequences (naming a beneficiary who is not a member of the family of the previous beneficiary will be treated as a taxable distribution of the amounts in the Account, subject to the 10% penalty on earnings.) The new beneficiary may be the original beneficiary’s brother, sister, parent, child, spouse, or other family member who qualifies as a "member of the family" under federal tax law. However, if the new beneficiary is a member of a younger generation in the family than the original beneficiary, a federal gift tax may apply for the year in which the beneficiary change is made. If there are already other Accounts open for the benefit of the new beneficiary, you may be limited in how much of your Account can be used for the new beneficiary.

What if the Beneficiary or I need the money before my Beneficiary goes to college?
You can take the money from your Account, or direct that money to be paid to the Beneficiary, at any time. However, if the money is not used to pay for qualified higher education expenses, a penalty equal to 10% of the earnings distributed will apply. If the money is distributed to you, you will also pay federal income tax, at your tax rate, on the amount of earnings distributed to you. If the money is distributed to your Beneficiary, your Beneficiary will pay federal income tax, at the Beneficiary’s tax rate, on the amount of earnings distributed to the Beneficiary.

Are there any exceptions to the 10% penalty?
Yes. If the Beneficiary receives a scholarship or tuition waiver and you don’t need all the money in your Account to pay qualified higher education expenses there is no penalty, so long as the amount of the scholarship or tuition waiver is more than the amount of the distribution. There is also no penalty in the event that the Beneficiary dies or becomes disabled.

May I use a portion of a withdrawal to pay taxes due?
 Yes. However, that portion will not be treated as an amount used to pay for qualified higher education expenses. Accordingly, a penalty equal to 10% of the earnings portion of the withdrawal used to pay taxes will apply.

How much do I need to open an account?

Putnam Investments:
The minimum amount of the initial investment is $25.00 unless you contribute by an automatic contribution plan, in which the minimum contribution is $15.00.

Alliance Capital:
The minimum amount required to open an Account is $250.00, and the subsequent contribution minimum is $50.00.

Can I borrow against the Account?
No. A Federal tax law prohibits pledging, assigning, or otherwise using your Account as collateral for a loan.

How will an investment in the program affect eligibility for financial aid?
Being the Account owner or beneficiary of an Account may affect eligibility for financial aid. The program has not sought guidance from the U.S. Department of Education on the impact of the program on eligibility for financial aid. However, the U.S. Department of Education has advised each state that assets in tuition savings Accounts are assets of the parent if the parent is the owner of the Account. It also advised that assets in a tuition savings Account, not owned by a parent, would not be considered in the student’s need analysis except to the extent that the student receives the proceeds of a tuition savings Account. Some educational institutions have also indicated that they will consider the balances in tuition savings Accounts when determining eligibility for financial aid. You should consult your financial aid advisor for further information.

What are the principal risks of the program?
Amounts invested in the program are subject to the investment risks of investing in a professional managed mutual fund, depending on the investment option(s) chosen. The value of the Account will vary with the investment return generated under the investment option(s) you select.  The performance of the Account and the asset allocation models will affect the value of the Account. There is no assurance that any option will have any particular level of returns or will not suffer losses. The value of the Account will fluctuate according to market conditions, so that your investment, when it is withdrawn, may be worth more or less than its original cost.