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529 College Savings Plans

June 11, 2020

529 savings plans are tax-advantaged educationsavings vehicles and one of the most popular ways tosave for college today. They can also be used to savefor K-12 tuition. Much like the way 401(k) planschanged the world of retirement savings a fewdecades ago, 529 savings plans have changed theworld of education savings.

Tax advantages and more529 savings plans offer a unique combination offeatures that no other education savings vehicle canmatch:

• Federal tax advantages: Contributions to a 529account accumulate tax deferred and earnings aretax free if the money is used to pay thebeneficiary's qualified education expenses. (Theearnings portion of any withdrawal not used forqualified education expenses is taxed at therecipient's rate and subject to a 10% penalty.)

• State tax advantages: States are free to offer theirown tax benefits to state residents, such as a taxdeduction for contributions.

• High contribution limits: Most plans have lifetimelimits of $350,000 and up (limits vary by state).

• Unlimited participation: Anyone can open a 529savings plan account, regardless of income level.

• Wide use of funds: Money in a 529 savings plancan be used to pay the full cost (tuition, fees,room, board, books, supplies) at any accreditedcollege or graduate school in the United States orabroad; for certified apprenticeship programs(fees, books, supplies, equipment); for studentloan repayment (there is a $10,000 lifetime limitper 529 plan beneficiary and $10,000 per each ofthe beneficiary's siblings); and for K-12 tuitionexpenses up to $10,000 per year.

• Professional money management: 529 savingsplans are offered by states, but they are managedby designated financial companies who areresponsible for managing the plan's underlyinginvestment portfolios.

• Flexibility: Under federal rules, you are entitled tochange the beneficiary of your account to aqualified family member at any time as well as rollover (transfer) the money in your account to adifferent 529 plan once per calendar year withoutincome tax or penalty implications.

• Accelerated gifting: 529 savings plans offer anestate planning advantage in the form ofaccelerated gifting. This can be a favorable way forgrandparents to contribute to their grandchildren'seducation while paring down their own estate, or away for parents to contribute a large lump sum.Under special rules unique to 529 plans, alump-sum gift of up to five times the annual gift taxexclusion amount ($15,000 in 2020) is allowed in asingle year, which means that individuals canmake a lump-sum gift of up to $75,000 andmarried couples can gift up to $150,000. No gifttax will be owed, provided the gift is treated ashaving been made in equal installments over afive-year period and no other gifts are made to thatbeneficiary during the five years.

• Transfer to ABLE account: 529 account ownerscan roll over (transfer) funds from a 529 account toan ABLE account without federal taxconsequences. An ABLE account is atax-advantaged account that can be used to savefor disability-related expenses for individuals whobecome blind or disabled before age 26.

Choosing a 529 savings planAlthough 529 savings plans are governed by federallaw, their implementation is left to the states.Currently, there are over 50 different savings plansavailable because many states offer more than oneplan.

You can join any state's 529 savings plan, but thisvariety may create confusion when it comes time toselect a plan. Each plan has its own rules andrestrictions, which can change at any time. To makethe process easier, it helps to consider a few keyfeatures:

A brief history

529 plans were created byCongress in 1996 and havebeen modified through theyears by various pieces oflegislation. Known officiallyas "qualified tuitionprograms" or QTPs, 529plans are so namedbecause they are governedby section 529 of theInternal Revenue Code.

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Nicholson Financial Services, Inc. is not a registeredbroker/dealer, and is independent of Raymond James Financial Services. Investment Advisory Services are offered through Raymond JamesFinancial Services Advisors, Inc.

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• Your state's tax benefits: A majority of states offersome type of income tax break for 529 savingsplan participants, such as a deduction forcontributions or tax-free earnings on qualifiedwithdrawals. However, some states limit their taxdeduction to contributions made to the in-state 529plan only. So make sure to understand your state'srules.

• Investment options: 529 savings plans vary in theinvestment options they offer. Ideally, you'll want tofind a plan with a wide variety of investmentoptions that range from conservative to moregrowth-oriented to match your risk tolerance. Totake the guesswork out of picking investmentsappropriate for your child's age, most plans offeraged-based portfolios that automatically adjust tomore conservative holdings as your childapproaches college age. (Remember, though, thatany investment involves risk, and pastperformance is no guarantee of how an investmentwill perform in the future. The investments youchoose may lose money or not perform wellenough to cover college costs as anticipated.)

• Fees and expenses: Fees and expenses can varywidely among plans, and high fees can take abigger bite out of your savings. Typical feesinclude annual maintenance fees, administrationand management fees (usually called the"expense ratio"), and underlying fund expenses.

• Reputation of financial institution: Make sure thatthe financial institution managing the plan isreputable and that you can reach customer servicewith any questions.

• User experience: Is the plan's website easy touse? Can you easily take care of routine tasksonline, such as set up automatic monthlycontributions, change your contribution amount,research plan investments, find your rate of return,or request a withdrawal?

With so many plans available, it may be helpful toconsult an experienced financial professional who canhelp you select a plan and pick your planinvestments. In fact, some 529 savings plans areadvisor-sold only, meaning you must go through adesignated financial advisor to open an account.

Account mechanicsOnce you've selected a plan, opening an account iseasy. You'll need to fill out an application, where

you'll name a beneficiary and select one or more ofthe plan's investment portfolios to which yourcontributions will be allocated. Also, you'll typically berequired to make an initial minimum contribution,which must be made in cash or a cash alternative.

Thereafter, most plans will allow you to contribute asoften as you like. This gives you the flexibility to tailorthe frequency of your contributions to your own needsand budget, as well as to systematically invest yourcontributions by setting up automatic monthlytransfers from your bank account.

As for investment changes, beware that under federallaw you are allowed to exchange your existing planinvestments for new investments only twice per year.In other words, if your existing plan funds arecurrently invested in plan portfolios A & B but youwant to change them to plan portfolios C & D, you cando this only twice per calendar year. However, yougenerally have unlimited say in how your futurecontributions will be invested.

You will also be able to change the beneficiary of your529 savings account to a qualified family memberwith no income tax or penalty implications.

529 prepaid tuition plans — a distantcousinThere are actually two types of 529 plans — savingsplans and prepaid tuition plans. The tax advantagesof each are the same, but the account features arevery different. A prepaid tuition plan lets you prepaytuition at participating colleges, typically in-statepublic colleges, at today's prices for use by thebeneficiary in the future. 529 prepaid tuition plans aregenerally limited to state residents, whereas 529savings plans are open to residents of any state.Prepaid tuition plans are much less common thansavings plans.

Note: Investors should consider the investmentobjectives, risks, charges, and expenses associatedwith 529 plans before investing; specific planinformation is available in each issuer's officialstatement. There is the risk that investments may notperform well enough to cover college costs asanticipated. Also, before investing, consider whetheryour state offers any favorable state tax benefits for529 plan participation, and whether these benefits arecontingent on joining the in-state 529 plan. Otherstate benefits may include financial aid, scholarshipfunds, and protection from creditors.

Put your savings efforton autopilot

Consider linking your 529savings plan to your bankaccount so you can easilymake automatic monthlycontributions.

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