Your Portfolio Attention grandparents: Recent changes to 529s may enhance gift

As you may already know, by investing in a 529 college savings plan, you can give your grandchildren the opportunity to benefit from a college education while taking advantage of potential tax and estate planning savings. This is because you can make this investment federal-tax-free and you can also contribute up to $60,000 per beneficiary without triggering gift tax consequences.

In 2009, you can continue to benefit from these perks, but you can also take advantage of some enhancements made relative to the 529 plan.

In September 2007, President Bush signed into law The College Cost Reduction and Access Act of 2007, which will not only cut loan rates and forgive debt for some graduates; it also changes some of the federal financial aid rules with regard to the 529 plan.

Currently, 529 accounts that are held by dependent students, grandparents or other third parties are not taken into account in the federal financial aid calculation. However, beginning on July 1, 2009, 529 accounts held in the name of the dependent student will be counted as a parental asset in the federal aid formula and therefore will be assessed at a rate of 5.64 percent. This change makes grandparent- or other third-party-owned 529 plans even more attractive from a financial aid perspective. Your grandchildren could benefit from a large gift in which you maximized the contribution limits, and at the same time it will not reduce the amount of federal aid awarded to them.

Back to the Basics: Remember, although 529 plan contributions are immediately excluded from your taxable estate, you maintain ownership and control of the account. As the account owner, you — not the beneficiary — approve all investments and withdrawals and you also have the freedom to change your beneficiary to a relative of the original beneficiary without taxes or penalty. Additionally, you name a successor owner on the account so that control passes at your death to that successor owner who would then have the same control over the assets that you had.

If you haven’t begun contributing to a 529 plan for your grandchildren, but would like to take advantage of the new benefit, it is important to note that many 529 plans require an initial investment of as little as $250. And, after that you can generally make additional contributions of as little as $25 or $50 at a time.

Once you begin setting money aside for your grandchild’s education in a 529 plan, you can leave the investment decisions to the experienced professionals that manage the plan you choose. Depending on the particulars of your plan, the investment options may include individual mutual funds, age-based portfolios with asset allocations that change over time, or set portfolios in which the investments stay the same for the duration of your holdings. An investment in a 529 plan will fluctuate such that an investor’s shares when redeemed may be worth more or less than the original amount, and there is no guarantee that an account will grow enough to cover higher education expenses. Consequently, you should consider a 529 plan’s investment objectives, risks, charges and expenses carefully before investing. The plan’s official statement, which contains this and other important information, should be read carefully before investing.

With rising college costs, your grandchildren could greatly benefit from money set aside for them in a 529 plan, especially in the wake of this new provision that won’t hinder their ability to access federal financial aid. Talk with a financial professional today to see about setting up one of these valuable savings plans.


This article was provided by Chris Facka, Vice President – Investment Officer of A.G. Edwards. A.G. Edwards is a division of Wachovia Securities, LLC. Member SIPC.

© 2008 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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