A 529 Plan is a savings vehicle designed specifically for higher education expenses. The name “529” comes from Section 529 of the federal tax code, which authorizes states to offer the plans. There are two types of 529 Plans – Prepaid and Savings, and both Prepaid Plans and Savings Plans are authorized 529 college savings plans. Earnings in 529 Plans are tax-free when they are used for Qualified Higher Education Expenses. In general, qualified expenses include tuition, fees, room and board, and the cost of books, supplies and equipment required for the enrollment or attendance at an Eligible Educational Institution, including undergraduate, graduate, and vocational/technical schools.
A Prepaid Plan is basically a prepackaged college savings plan covering specified college costs in the future. Prepaid Plans simplify saving for future college costs. You do not have to worry about how much to save, when to save or how to invest with a Prepaid Plan. Simply pick a plan, make your payments, and when your student is ready for college, the plan pays for the costs covered by the plan. The Prepaid Plans offered by the Florida Prepaid College Board are guaranteed by the State of Florida, so you can never lose what you’ve paid toward the plan.
A Savings Plan allows you to develop your own plan to save for college. You decide how much you want to save and when you want to save. You also get to choose how you want to invest your savings using the investment options offered by the plan. When it comes time for college, you use your savings to pay for actual college costs at that time. Savings Plans are not guaranteed, so the value of your investment is subject to market fluctuations.
Yes. Prepaid and Savings Plans work well together. For example, you could use a Prepaid Plan to cover up to four years of tuition and fees and a Savings Plan to pay for books, a computer, room and board. If you don’t want to use a Prepaid Plan to save for all four years of tuition and fees, you could purchase a 2-Year Florida College Plan or one or more 1-Year University Plans and also open a Savings Plan.
When deciding how to save, focus on your investment preferences. For example, do you prefer guaranteed investments (Prepaid) or investment control (Savings)?
Also, consider what you can afford. You may want to, but you don’t have to save for everything. Parent surveys suggest that most parents anticipate paying 40% of their child’s higher education expenses.
Savings vehicles like 529 Plans offer distinct advantages over traditional checking or savings accounts, namely the opportunity for tax-free earnings. Here is how 529 Plans compare to other college savings vehicles.
| 529 Plans | Coverdell Education Savings Accounts | Qualifying U.S. Savings Bonds | UGMA/UTMA | |
| Federal Income Tax | Contributions made with after-tax funds; earnings excluded from income for federal tax purposes when used for qualified college expenses | Contributions made with after-tax funds; earnings excluded from income for federal tax purposes when used for qualified college and K-12 expenses | Certain “EE” and “I” bonds may be redeemed tax-free for college expenses | First $1,050 is tax-exempt; unearned income over $2,100 for certain children under age 24 is taxed at parent rate |
| Federal Gift Tax Treatment | Contributions treated as gifts; annual and 5-yr… federal exclusions apply | Contributions treated as gifts; annual federal exclusions apply | Not considered a gift | Contributions treated as gifts; annual federal exclusions apply |
| Federal Estate Tax Treatment | Value excluded from contributor’s estate; included for death during 5-yr.. election period | Value excluded from contributor’s estate | Value included in owner’s estate | Value excluded from contributor’s estate |
| Maximum Investment | $418,000 per Beneficiary in Florida | $2,000 per Beneficiary per year (all sources) | $10,000 face value per year, per owner, per type of bond | No limit |
| Qualified Expenses | Tuition, fees, books, computers and related equipment, supplies, special needs; room and board for minimum half-time students | Tuition, fees, books, supplies, equipment, special needs; room and board for minimum half-time students; additional categories of K-12 expenses | Tuition and fees | No restrictions |
| Change Beneficiary | Yes (member of family) |
Yes (member of family) |
Not applicable | Prohibited |
| Time/Age Restrictions | Prepaid: Enroll before 11th grade, 10-yr.. benefit period Savings: None |
Contributions before Beneficiary reaches age 18; use of account by age 30 | Bond purchaser must be at least 24 years old at time of bond issuance | Custodianship terminates when minor becomes adult |
| Income Restrictions | None | Contributions limited for incomes approx. $100K and above | Interest exclusion for incomes approx. $77K and below | None |
| Federal Financial Aid | Asset of parent if owner is parent or dependent student | Asset of parent if owner is parent or dependent student | Counted as asset of bond owner | Counted as asset of the student |
| Use for Non-Qualifying Expenses | Withdrawn earnings subject to federal tax and 10% penalty | Withdrawn earnings subject to federal tax and 10% penalty | No penalty; interest on redeemed bonds included as income | Funds must be used for benefit of the minor |
For specific information about your situation and options, please consult an investment adviser or certified public accountant.
A Beneficiary is the person whom you are saving for.
Qualified Higher Education Expenses are defined in Section 529 of the federal tax code. They include:
An Eligible Educational Institution is an accredited postsecondary institution offering credit toward a bachelor’s degree, an associate’s degree, a graduate-level or professional degree, or another recognized postsecondary credential. Certain proprietary institutions and postsecondary vocational institutions are also Eligible Educational Institutions. The institution must be eligible to participate in a student financial aid program under Title IV of the Higher Education Act of 1965 (20 U.S.C. Section 1088).
To check the eligibility of a school, visit Federal School Code Search or contact the school directly.
Any non-retirement investment or savings account may affect your eligibility for financial aid. A portion of your Prepaid and Savings Plan value will be considered when calculating the Expected Family Contribution (or EFC) on the Free Application for Federal Student Aid (or FAFSA). When calculating the student’s EFC, up to 5.64% of parental assets are counted. This is quite favorable compared to other student assets, which are counted at 20%.
If the plan is owned by someone other than a parent or the student, withdrawals from a plan are reported as student income in the following year for EFC purposes. Generally speaking, a higher EFC will lower financial aid eligibility.
For more information, please consult studentaid.gov or an educational financial aid adviser.
In general, a 529 Plan should not affect eligibility for merit–based scholarships. Having a 529 Plan will not prevent you from receiving a Bright Futures Scholarship in Florida. In fact, if your child receives a Bright Futures Scholarship and you also have a Prepaid Plan, excess monies can be used to pay for other Qualified Higher Education Expenses such as textbooks, supplies and housing.
For more information about the Bright Futures Scholarship, please call 1-888-827-2004.
We have answers to a number of questions relating to the Family Empowerment Scholarship Program.
Contributions to a 529 Plan are generally considered completed gifts to the student and may be contributed, up to federal gift tax limits, to a plan without being subject to federal gift tax on the contributor(s). Such contributions are not included in the contributors’ estate for federal estate tax purposes.
Federal tax law does allow an individual to contribute in excess of the annual gift tax limit by treating certain contributions as if they were made over a five-year period. These contributions are not included in the contributors’ estate for federal estate tax purposes. However, this approach requires filing a gift tax return and, if the contributor dies before the end of the five-year period, the portion of the contribution allocable to the remaining years in the five-year period will be included in the contributor’s gross estate for federal estate tax purposes. The IRS has established lifetime exclusions such that no gift tax will be due until the lifetime exemptions have been used.
For specific information about your situation, please consult an investment adviser or certified public accountant.
Contributions to a 529 Plan do not reduce the taxable income of the contributor for federal tax purposes because they are made with after-tax dollars, much like a Roth IRA (Individual Retirement Account).
Certain states may allow contributors to deduct contributions to a 529 Plan for state income tax purposes. This does not apply in Florida because Florida does not assess a state income tax.
For specific information about your situation, please consult an investment adviser or certified public accountant.
Open Enrollment ends April 30.
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