Section 529College Savings Options

from The Commonwealth of Virginia

Why Save?

The positive effect of saving versus borrowing

To accumulate $10,000 in 10 years at 7% interestSave $58 per month

To repay $10,000 over 10 years at 7%Pay $116 per month

The real cost of borrowing rather than saving$116 - $58 = $58 x 12 months x 10 years = $6,960

529 Assets and Account GrowthTotal Assets in State-Sponsored Section 529 College Savings Plans, 1996 to

2006

Number of State-Sponsored Section 529 Accounts (with Average Savings), 1996 to 2006

History of 529

• November 8,1994: 6th Circuit U.S. Court of Appeals holds that Michigan Education Trust is an agency of the state and not subject to federal taxation; ruling only applies to states in 6th Circuit (MI, OH, KY, TN)

• 1996: Small Business Job Protection Act creates Section 529

• 1997: Taxpayer Relief Act adds room and board as qualified expense

History of 529

• 1998: Proposed Regulations issued by IRS

• 2001: Economic Growth and Tax Relief Reconciliation Act- tax-free qualified withdrawals through 2010

• IRS Notice 2001-55 (investment direction)

• IRS Notice 2001-81 (record keeping)

History of 529

• February, 2006: Higher Education Reconciliation ACT (HERA) ends disparity in treatment of prepaid and savings 529 accounts for federal financial aid eligibility (now both are treated as an asset, not a “resource”)

• 2006: Pension Protection Act makes federal tax-free qualified distributions permanent

Virginia Legislation and Milestones

• 1994: Legislation authorizing a prepaid tuition program was passed unanimously by the Virginia General Assembly. Delayed effective date of July 1, 1996 to allow for resolution of uncertainty over federal tax and securities law issues

• December 1, 1996: Virginia Prepaid Education Program (VPEP) opens its first enrollment period

Virginia Legislation and Milestones

• 1998: Virginia General Assembly enacts state tax deduction or VPEP account owners

• 1999: Virginia General Assembly removes $2,000 annual cap for state tax deduction for account owners who are age 70 or older

• 1999: Virginia General Assembly authorizes addition of savings trust accounts and extends state tax deduction to these accounts; changes agency name to Virginia College Savings Plan

Virginia Legislation and Milestones

• December, 1999: Virginia Education Savings Trust (VEST) opens

• February, 2002: CollegeAmerica, Virginia’s partnership with American Funds, opens

• 2007: Virginia General Assembly increases state tax deduction to $4,000 per account per year with unlimited carry forward; higher amount will be effective for tax years beginning January 1, 2009

Virginia College Savings Plan

• Who we are– VCSP is an independent state agency– We administer Internal Revenue Code § 529

Qualified Tuition Programs

• Our current investment options– VPEPSM

– VESTSM

– CollegeAmerica®

– CollegeWealthSM

Virginia Prepaid Education ProgramSM

(VPEP)

• Eligibility

– Purchaser - age 18 or any legal entity

– Beneficiary - 9th grade and under

– State residency (account owner or beneficiary must be a Virginia resident)

• Plans

– Purchase 1-5 years of university or 1-3 years of community college

– Maximum 5yr. university and 3yr. community college contracts

– $25 application fee

VPEP

• Benefits– Cover future tuition and mandatory fees at

Virginia public colleges– Can also use at any accredited college in the

country eligible to accept federal financial aid– Program backed by statutory guarantee

• Limited enrollment periodDecember 1, 2007 – February 29, 2008

Using VPEP Benefits

• For Virginia public schools– Full coverage of tuition and mandatory fees for normal

undergraduate full-time course load (no coverage of course-specific charges)

• For Virginia private schools– Payments + actual interest rate– Cap = highest Virginia public institution

• For Out-of-state schools– Payments + reasonable rate of return (institutional

money market rate)– Cap = average Virginia public institution

Investment Managers

• Capital Guardian Trust• Century Capital Management• Chase Investment Counsel• Donald Smith & Co., Inc.• Dreyfus• Franklin Templeton• Invesco• LSV Investment Management• NWQ Investment Management

Company• Piedmont Investment Advisors,

LLC

• Pier Capital• Rothschild Asset Management• Sands Capital• Tattersal Advisory (Wachovia)• Thompson, Siegel & Walmsley,

Inc.• Utendahl Capital Management,

LP• Vanguard• Virginia Dept. of Treasury• Western Asset (Legg Mason)• Westfield Capital Management

Virginia Education Savings TrustSM

(VEST

)• No age limit for beneficiary or state residency

requirement for owner• Can be used for:

– Tuition, mandatory fees, any other fees required for enrollment or attendance

– Room and board– Required textbooks and equipment– Computers (if required by school)– Special needs services

• Enrollment is open all year• Fluctuates with the market (market risk)• One-time $25 application fee

Types of VEST Accounts

• Age-based Evolving Portfolios– Accounts automatically shift every three years to

become more conservative

• Non-evolving Portfolios– Accounts will remain as conservative or

aggressive as originally chosen by you until changed (can change only once per calendar year)

CollegeAmerica®

• VCSP’s third 529 option

• Partnership with American Funds

• Sold exclusively through financial advisers

nationwide

• 1-800-421-4120

• americanfunds.com

CollegeWealthSM

• Available only through participating banks

• FDIC insured to the maximum amount allowed by law

• No age limits

• Enrollment open all year

• No state residency requirements

Using 529 Savings

• Eligible Educational Institutions – Accredited post-secondary schools

• Includes graduate schools

– Proprietary, vocational and foreign institutions may be eligible

– Must be eligible to participate in federal financial aid programs (Title IV)

– To find out if a school is eligible, go to the Department of Education’s web site at www.fafsa.ed.gov and click on “my school codes”

529s Effect on Financial Aid• Effective July 1, 2009:• VPEP

– Considered an asset of the parent for dependent students and an asset of the student for independent students

– Reported on FAFSA at refund value

• VEST– Considered an asset of the parent for

dependent students and an asset of the student for independent students.

– Reported on FAFSA at market value(It is always prudent to check with your school’s Financial Aid Office to determine how your student’s

financial aid eligibility might be affected)

529 Flexibility

• You control your savings• Change account owner

– Only one account owner allowed– Optional designation of individual who can access

account information– Requires U.S. citizenship or resident alien status

• Change beneficiary to another “member of the family”– Beneficiary’s immediate family and their spouses

(includes descendants)– First cousins– Step-siblings and adopted children

529 Flexibility

• Rollovers– Can roll over from one type of plan to another

(VEST to VPEP or vice versa), or from one state’s qualified plan to another state’s qualified plan

• Plan-to-Plan rollover (without changing the beneficiary) allowed once every 12 months

• Investment direction (for VEST, CollegeWealth and CollegeAmerica programs)

– May change investment options within the same plan once per calendar year

529 Distributions

• Qualified or non-qualified distribution is determined by taxpayer

• Taxpayer must retain all documentation

• Any penalty for nonqualified distributions must be reported on taxpayer’s return

– 10% federal penalty and taxes on earnings

• Form 1099-Q issued for all distributions

Federal Tax Advantages

• Tax-free growth

• Tax-free distributions for qualified expenses

• Favorable estate and gift tax treatment

• Savings bonds may be used to fund accounts

– See www.TreasuryDirect.gov

Virginia State Tax Deduction• $2,000 deduction per tax year per account

– Unlimited carry-forward– Deduction is only for the account owner

• Only available for investments in Virginia 529s

• Accelerated deduction for those over age 70

• Recapture provision– Refunds and rollovers to another state’s 529 plan

or to some other non-qualified savings plans– Exceptions—death, disability, scholarship

Refunds• VPEP

– More than three years = amount paid in + reasonable rate of return

– Less than three years = amount paid in only

• VEST/CollegeAmerica/CollegeWealth– Market value of the account

• Federal Penalty– 10% of earnings penalty reported by taxpayer

• Death, disability, scholarship, rollover (VA plan to VA plan)– Refunds for these are exempt from federal penalty– You can also retain your state tax benefits (except for rollovers

to another state’s plan)

Matriculation

■ Distributions began in 2000■ Over $322 million distributed through 09/30/07

(both VPEP and VEST)■ Approximately 69% attend in-state public four-

year institutions; 11% attend community college; 7% in-state private; and 13% attend more than 460 out-of-state schools

■ 29% overall and 36% of students attending in-state public schools attend University of Virginia, Virginia Tech and William & Mary

For more information

Virginia College Savings Plan

Toll free 1-888-567-0540

www.Virginia529.com