Completing an account application
To enroll in a 529 plan, you'll need to request an enrollment kit from the plan manager. The enrollment kit generally contains an application and a handbook that contains information on plan rules and investment options (if any). After carefully studying the materials in the enrollment kit, fill out and sign the application. You may be asked to give the following information on your 529 plan application:
- Name, address, and phone number of the account owner
- Name and address of the beneficiary
- Social Security number (or tax ID number) of the account owner and the beneficiary
- Birth date, school grade, and state of residence of beneficiary
- Relationship between the account owner and beneficiary
- Your funding schedule for the account
- Automatic payment information
- The investment option you wish to choose
- The successor owner you wish to designate (in the event of your death)
To make the application process easier, nearly every plan now has a downloadable version of its application available on the Internet. A growing number of states also allow you to complete your enrollment on-line.
Naming a beneficiary
When you open an account, you'll need to designate someone as beneficiary. The beneficiary is the person who will receive the plan proceeds. You can generally name anyone you choose as the beneficiary — your child, grandchild, niece, nephew, or other relative or friend. (Your choice of a beneficiary may have gift tax and generation-skipping transfer tax consequences.) Some plans even allow you to name yourself. But rules vary from state to state, so read the guidelines set out in the plan handbook before you name a beneficiary.
Choosing an investment option
529 savings plans allow you to choose among several diversified investment options chosen by the plan's professional fund manager. These options fall into two categories: age-based portfolios and static portfolios. If you choose an age-based portfolio, contributions will be placed in a portfolio of investments based on your child's age (or in some plans, the date you intend to use the funds). When your child is young, the portfolio may allocate its investments primarily to stock funds that may entail higher risk but offer higher returns than fixed income funds and money market funds. As your child approaches college age, the allocation may gradually shift to fixed income funds and money market funds.
If you choose a static portfolio, contributions will be placed in a portfolio with a fixed allocation of investments from the various investment categories. You may be able to choose an equity fund, where 70% to 100% of the holdings are in stocks; a fixed income fund, containing 70% to 100% bond and money market instruments; or a balanced fund that includes a mixture of stock and fixed income assets. You'll need to choose a fund based on factors like your child's age, your tolerance for risk, and your overall financial plan. Keep in mind that all investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.
If you want to change your investment options at a later date, you can generally do so only twice per calendar year for your existing contributions, anytime for your future contributions, or anytime you change the beneficiary of the account.
529 prepaid tuition plans work differently. With prepaid tuition plans, you can't choose among different portfolios. Instead, you buy tuition credits that are guaranteed to increase in value and meet their equivalent cost of tuition when your child starts college.
Making an initial contribution
When you submit your application, you'll need to make an initial contribution. The amount required to open an account varies from state to state. Many 529 savings plans allow you to make a small initial contribution (e.g., $25 or $50) if you agree to set up automatic contributions through payroll deductions or automatic bank transfers. (A growing number of companies let their employees contribute to savings plans via payroll deduction.) Thereafter, minimum contributions of at least $15 to $25 are generally required, although a few states have much higher minimums. The amount of the minimum contribution may also be different for residents and nonresidents of the state that sponsors the plan.
With a prepaid tuition plan, you purchase a contract that covers the cost of tuition and fees for a certain number of years. Most prepaid tuition plans require that accounts be fully funded in five years. The cost of a contract varies from state to state and may depend on the beneficiary's age at the time the contract is purchased. You can generally pay for the contract in either a lump sum or through installment payments.
Managing the account
Once you've opened your 529 account, make sure you periodically check how the plan is performing. Even though a professional fund manager will handle day-to-day investment decisions, you should monitor the progress of your account's growth (although you will have limited opportunities to change your investment portfolios). Also, if you're currently making installment payments, you might consider making a lump-sum contribution in the future. In that case, you'll need to become aware of federal gift tax rules. And as you approach the day when you'll begin withdrawing money from the account, you'll want to find out how the timing of withdrawals can affect financial aid to your child.
Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses - which contain this and other information about the investment options, underlying investments, and investment company - can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified higher-education expenses. For withdrawals not used for qualified higher-education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
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