![]() ![]() ![]() A beneficiary can be changed at any time, as long as the new beneficiary is a member of the original beneficiary’s family. You would really have to trust the child to take only the funds that would allow him or her to qualify for tax-free treatment and not to abuse the account rules. There are downsides to having one person be both the account owner and the beneficiary: the parent loses control of the money, account ownership counts against the child in financial aid formulas, the person who owns the account gets to take the state-tax deduction, and most plans require the owner to be at least 18 years old to open an account. The second is when the plan allows the custodian to bestow authority on the beneficiary through something similar to a power of attorney on the account. The first is when the beneficiary is also the account owner. The beneficiary has no managerial authority over the account, except under two exceptions. The beneficiary is the person whose future education expenses may be paid from the account. There are two parties involved with a 529 account – a beneficiary and a custodian (not to be confused with the custodial parent). To fund a college savings plan, after-tax contributions are placed in mutual-fund-type investments and then increased or decreased, based on the performance of the funds. A college savings plans work much like a Roth 401(k) or Roth IRA. If a private or out-of-state school is later attended, these funds may be converted to a dollar value and then used. The fund increases based on post-secondary college increases for the in-school rate you choose. A prepaid tuition plan allows in-state public college education to be prepaid, partially or completely, with after-tax contributions. Setting Up A 529 Plan AccountĪ 529 account can be set up as either a prepaid tuition or college savings plan. Both of these Act’s changes to the definition will be discussed below. In addition, in December 2019 the Setting Every Community Up for Retirement (SECURE) Act made further changes to the definition. In December 2017 the Tax Cuts and Jobs Act (TCJA) expanded the qualified expenses allowable by the IRS under 529 plans. Today almost every state has a 529 plan, but not all states allow a tax deduction, and in most states that do allow the deduction, the contribution needs to be made by December 31. But it wasn’t until 2011, with the enactment of the Economic Growth and Tax Relief Reconciliation Act, which made earnings in 529 plans completely tax free when used for college, that these plans really started to become popular. Ten years later, in 1996, after the Michigan Education Prepaid Tuition Plan won a lawsuit against the IRS, Congress enacted Section 529 of the Internal Revenue Code, establishing federal tax rules for 529 plans. The first prepaid college savings fund was established by the State of Michigan in 1986. As many of you know, 529 plans, a tax-advantaged savings plan, were originally designed to be used for higher education expenses. ![]()
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