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Legislative Changes

Setting Every Community Upwards for Retirement Enhancement (SECURE) Act (2019) made some important changes to 529 plans.

• It allows 529 programme distributions of up to $ten,000 to repay qualified student loans of the beneficiary. An additional $ten,000 can be used for the qualified student loans of each of the casher's siblings. The $10,000 cap is a lifetime – non annual – limit.
• Information technology allows 529 plan distributions to pay for registered apprenticeship programs.

The SEC'due south Office of Investor Education and Advocacy is issuing this Investor Message to provide investors with background information on 529 plans. Please as well see our companion Bulletin for a few questions to consider before opening a 529 plan business relationship .

What is a 529 plan?

A 529 plan is a taxation-advantaged savings program designed to encourage saving for future education costs. 529 plans, legally known as "qualified tuition plans," are sponsored by states, country agencies, or educational institutions and are authorized by Section 529 of the Internal Acquirement Code.

There are two types of 529 plans: prepaid tuition plans and pedagogy savings plans . All fifty states and the District of Columbia sponsor at least ane type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition program.

What are the differences between prepaid tuition plans and education savings plans?

Prepaid Tuition Plans . Prepaid tuition plans let a saver or business relationship holder buy units or credits at participating colleges and universities (usually public and in-state) for futurity tuition and mandatory fees at electric current prices for the beneficiary . Prepaid tuition plans unremarkably cannot be used to pay for future room and lath at colleges and universities and do non let y'all to prepay for tuition for elementary and secondary schools.

Most prepaid tuition plans are sponsored by country governments and accept residency requirements for the saver and/or beneficiary. Prepaid plans are non guaranteed by the federal authorities. Some land governments guarantee the coin paid into the prepaid tuition plans that they sponsor, simply some do not. If your prepaid tuition payments aren't guaranteed, you may lose some or all of your money in the plan if the program's sponsor has a financial shortfall. In improver, if a casher doesn't attend a participating college or university, the prepaid tuition plan may pay less than if the beneficiary attended a participating college or university. It may simply pay a small return on the original investment.

Teaching Savings Plans . Education savings plans permit a saver open an investment account to save for the beneficiary'southward time to come qualified college education expenses – tuition, mandatory fees and room and board. Withdrawals from education savings plan accounts can generally be used at any college or university, including sometimes at not-U.South. colleges and universities. Educational activity savings plans can too be used to pay up to $ten,000 per year per beneficiary for tuition at any public, private or religious elementary or secondary schoolhouse.

A saver may typically choose among a range of investment portfolio options, which frequently include various mutual fund and exchange-traded fund (ETF) portfolios and a chief-protected bank product. These portfolios also may include static fund portfolios and age-based portfolios (sometimes called target-appointment portfolios). Typically age-based portfolios automatically shift toward more conservative investments equally the beneficiary gets closer to college age. If y'all are using a 529 account to pay for uncomplicated or secondary school tuition, yous may have a shorter time horizon for your money to abound. You lot also may not feel comfortable taking on riskier or more volatile investments if you plan on withdrawing the money soon. Because of these things, you may consider different investment options depending on when you plan to use the money that is invested.

All didactics savings plans are sponsored by land governments, merely only a few take residency requirements for the saver and/or beneficiary. State governments do non guarantee investments in didactics savings plans. Educational activity savings programme investments in mutual funds and ETFs are not federally guaranteed, but investments in some primary-protected depository financial institution products may be insured by the FDIC. As with most investments, investments in education savings plans may not brand whatever money and could lose some or all of the money invested.

What fees and expenses will I pay if I invest in a 529 plan?

It is of import to understand the fees and expenses associated with 529 plans because they lower your returns. Fees and expenses will vary based on the type of 529 plan (education savings program or prepaid tuition program), whether it is a banker- or direct-sold plan, the program itself and the underlying investments. You lot should carefully review the programme'south offering circular to sympathise what fees are charged for the plan and each investment option.

Prepaid Tuition Plans . Prepaid tuition plans may charge an enrollment/application fee and ongoing authoritative fees.

Teaching Savings Plans . Education savings plans may charge an enrollment/application fee, annual account maintenance fees, ongoing program management fees, and ongoing asset management fees. Some of these fees are collected past the state sponsor of the plan and some are collected by the plan director . The asset direction fees will depend on the investment option you select. Investors that purchase an education savings plan from a banker are typically discipline to additional fees, such as sales loads or charges at the time of investment or redemption and ongoing distribution fees.

Fee Saving Tips . Many states offering direct-sold education savings plans in which savers can invest without paying additional broker-charged fees. In addition, some instruction savings plans will waive or reduce the administrative or maintenance fees if y'all maintain a large business relationship balance, participate in an automatic contribution plan, or are a resident of the state sponsoring the 529 programme. Some 529 plans also offer fee waivers if the saver accepts electronic-but commitment of documents or enrolls online.

How does investing in a 529 program impact federal and state income taxes?

Investing in a 529 programme may offer savers special taxation benefits. These benefits vary depending on the state and the 529 plan. In addition, country and federal laws that affect 529 plans could modify. You should brand sure you understand the tax implications of investing in a 529 programme and consider whether to consult a tax adviser.

Contributions . Many states offering tax benefits for contributions to a 529 plan. These benefits may include deducting contributions from state income tax or matching grants but may have various restrictions or requirements. In add-on, savers may only exist eligible for these benefits if yous invest in a 529 program sponsored past your country of residence.

Withdrawals . If you use 529 account withdrawals for qualified higher education expenses or tuition for uncomplicated or secondary schools, earnings in the 529 account are not subject to federal income tax and, in many cases, land income tax. Notwithstanding, if 529 account withdrawals are not used for qualified higher education expenses or tuition for elementary or secondary schools, they will be subject to state and federal income taxes and an additional 10% federal tax penalization on earnings.

One of the benefits of 529 plans is the revenue enhancement-free earnings that abound over a period of time. The longer your money is invested, the more time it has to grow and the greater your tax benefits. You lot volition lose some of these potential benefits if you withdraw money from a 529 program account inside a short period of time later on information technology is contributed.

What restrictions apply to an investment in a 529 program?

In that location volition likely exist restrictions on any 529 programme you may be because. Before y'all invest in a 529 program, you should read the plan'southward offering circular to make sure that you understand and are comfortable with any programme restrictions.

Investments . Education savings plans have certain pre-prepare investment options. Information technology is non permitted to switch freely amongst the options. Under current tax law, an account holder is only permitted to change his or her investment pick twice per year or when there is a change in the beneficiary.

Withdrawals . With express exceptions, yous tin only withdraw coin that you invest in an pedagogy savings program for qualified higher education expenses or tuition for elementary or secondary schools without incurring taxes and penalties. Beneficiaries of prepaid tuition plans may only use their purchased credits or units at participating colleges or universities.  If a casher doesn't attend a participating college or university, the prepaid tuition plan may pay less than if the beneficiary attended a participating college or university. Information technology may only pay a small return on the original investment.

Does investing in a 529 plan impact fiscal assistance eligibility?

While each educational institution may treat avails held in a 529 account differently, investing in a 529 plan will generally impact a student'southward eligibility to receive need-based fiscal aid for college. You lot may besides need to consider how having money in your 529 business relationship for future qualified higher education expenses might affect financial aid for your pupil's elementary or secondary school tuition. For many families, the larger part of a financial aid package may exist in loans. So, the more y'all tin can salvage for school, the less debt you or your student may accept to incur.

Where can I find more information?

Offering Circulars for 529 Plans . Yous can find out more than about a detail 529 plan by reading its offering round. The National Clan of Country Treasurers created the College Savings Plan Network (link is external) , which provides links to about 529 plan websites.

529 Expense Analyzer. 529 educational activity savings plans have fees and expenses that can vary widely from programme to programme.  The Financial Industry Regulatory Dominance (FINRA) has developed a tool to assist yous compare how these fees and expenses tin reduce returns.

Underlying Common Funds or Exchange-Traded Funds . Boosted data about a mutual fund or ETF that is an investment option in an education savings plan is available in its prospectus , argument of additional information, and semiannual and annual shareholder reports . Y'all can obtain these documents from the plan manager for no charge. You can as well review these documents on the SEC's EDGAR database .

Fees and Expenses. Yous tin read virtually the impact fees and expenses have on your investment portfolios in the SEC'due south Office of Investor Education and Advocacy's Investor Bulletin:  How Fees and Expenses Impact Your Investment Portfolio .

Brokers or Investment Advisers. Many education savings plans' program managers are registered investment directorate. You can search for an investment adviser and view its Grade ADV on Investor.gov . You lot can also search for any disciplinary sanctions against a broker who may sell a 529 savings programme product, every bit well as information about his or her professional background and registration and licensing status, on Investor.gov .

Financial Assist .  You can read more about federal fiscal help at the U.S. Section of Education's Federal Student Aid website .

Other Online Resources. You can acquire more than most 529 plans and other education saving options on FINRA's Saving for Higher website (link is external) . The website contains links to other sites, including the College Savings Programme Network (link is external) and the Internal Revenue Service'south Publication 970 (Tax Benefits for Higher Educational activity) . You lot tin can as well detect educational information nigh 529 plans on the Municipal Securities Rulemaking Board'due south education center website .

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Source: https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html

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