TIAACREF

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• TIAA-CREF
• Financing College Education Expenses
• An Overview of Section 529 Plans

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Saving for College

• One of the most important financial objectives
• A college education is key to earnings ability
  and lifestyle
• College costs rising faster than inflation rate
• Average college cost for 4 years
• Public 49,440 currently 136,333 in 18 years
• Private 105,192 currently 290,100 in 18 years
• The financial professional needs to know the
  options available

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College Funding Opportunities

• Education IRA Renamed Coverdell Education
  Savings Account for 2002
• Qualified Tuition Programs
• Savings Plans
• Prepaid Tuition Plans

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Coverdell Education Savings Accounts

• Increased the annual contribution limit from 500
  to 2,000
• Expanded use includes elementary and secondary
  school qualified expenses
• Increased phase-out range for married taxpayers
  filing jointly - 190,000 to 220,000 of modified
  AGI
• Corporations including tax-exempt organizations
  may make contributions
• May claim HOPE credit or Lifetime Learning credit
  if eligible coordination required

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State-sponsored Savings Tuition Plans

• Qualified Tuition Programs (QTPs)
• Internal Revenue Code section 529
• Congress allowed states to create savings plans
  that go beyond tuition
• Funds may generally be used at any eligible
  school in the U.S. and abroad
• QTPs vary from state to state

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QTP Advantages

• Federal and state income tax advantages
• Some states offer additional state tax incentives
• Significant and unique estate and gift tax
  benefits
• No income limits for participation or benefits
• Limited impact on eligibility for Hope
  Scholarship and Lifetime Learning Credit

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QTP Tax Provisions

• Provide federal tax-free growth
• Most states exempt state earnings tax for
  qualified withdrawals
• Penalties apply to non-qualified distributions

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Important Tax Changes

• The Economic Growth Tax Relief Reconciliation
  Act of 2001 enhanced 529 plans effective January
  1, 2002
• Federal income tax-free withdrawals for qualified
  higher education expenses
• Generous Room and Board allowances
• More flexible transfer among Section 529 plans
• Expansion of members of the family

Note, all provisions of the 2001 Tax Act are
scheduled to expire December 31, 2010. Congress
may or may not extend these new benefits beyond
this date.
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Who Can an Owner Contribute For?

• Anyone may be designated as the beneficiary
• Children
• Self
• Relatives
• Friends
• Beneficiary can be changed and accumulation
  transferred to benefit another member of the
  beneficiarys family

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Is There a Contribution Limit?

• Section 529 mandates safeguards to prevent excess
  contributions
• Usually no annual maximum contribution limit
• Each state sets specific lifetime contribution
  limits for each beneficiary
• Total account balances are limited and set by
  each Program it must be based on current cost
  of attending a selected institution over four or
  seven years

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What Are Qualified Higher Education Expenses?

• The account is set up to pay not only tuition but
  other qualified higher education expenses
  including
• Fees
• Books
• Supplies/equipment required for enrollment
• Room and board (restrictions apply)

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Non-Qualified Withdrawals

• Are subject to a federal 10 penalty on earnings
  
• Earnings are included in account owners federal
  and state taxable income
• Pro-rata distribution of earnings and
  contribution
• Some states restrict non-qualified withdrawals
• Some states may not have eliminated their own
  penalty

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Gift and Estate Tax Issues

• Unique gift and estate tax consequences
• Account owner retains control regarding
  distributions and power to revoke
• Value is generally shifted from the owners estate

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Gift Tax Issues

• Contributions are completed gifts of present
  interest
• Contributions, transfers and beneficiary changes
  may have estate, gift or GST consequences
• Annual exclusions of 11,000 may be used

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Gift Tax Issues

• Transfer of funds or a change in beneficiary is
  not a taxable gift if the new beneficiary
• Is a member of the original beneficiarys family
  (as defined by the tax law)
• Is of the same generation as the original
  beneficiary

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Special Gift Tax Provision

• 5 year election
• Account owner may elect to treat up to 55,000 as
  having been made ratably over a 5 year period
• If more than 55,000 is contributed in one year,
  excess would be a taxable gift in the year of
  contribution

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Gift Tax Issues

• If a transfer of funds or a beneficiary change is
  subject to gift tax, the tax is imposed on the
  original beneficiary

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Generation Skipping Tax Issues

• Transfer of funds or a change in beneficiary is
  subject to GST if
• New beneficiary is 2 or more generations younger
  than the original beneficiary
• If transfer is subject to GST, tax is imposed on
  the original beneficiary
• 5-year averaging rule applies for GST

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Estate Tax Issues

• Accounts will not be included in the account
  owners federal taxable estate unless
• Owner has chosen 5-year averaging and dies before
  the end of the 5-year election period (remaining
  portion under election allocable to the owners
  estate)

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QTP Investment Considerations

• Programs are offering increasingly more
  investment options
• IRS Notice 2001-55
• Account Owners may transfer assets between broad
  investment options once per calendar year
• Account Owners may transfer accounts between 529
  savings plans once every 12 months

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Choosing the Right 529 Plan

• Things to consider
• State tax incentives
• Eligibility requirements
• Minimum Maximum contribution limits
• Fees
• Investment options
• Restrictions
• Program manager experience and reputation

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Qualified Tuition Savings Program

• May be appropriate if
• Savings will be used for higher education
  expenses
• Large investments needed for college
• 100,000 (per child) is available for savings
• Tax-free growth is key
• Advising high income families
• Estate tax planning is involved

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• Financing College Education Expenses
• Pierre M. Dejean, CFP
• TIAA-CREF