Below is a reprint of an interaction that I had with an anonymous individual several years ago on a web bulletin board, as I thought the 20 questions that the individual listed might be interesting to you. I’ve reviewed the list and updated responses where laws have changed or where I was more snarky than necessary in my response. Let me know if you have more questions to add to the list!
Keep in mind as you read this, the questions are one individual’s specific concerns about his situation. The person asking the question has simply put this list of questions out on a public bulletin board hoping for responses – that’s part of why some of the questions aren’t fully answered or clarified, since the original poster didn’t come back to clarify his questions or respond to my responses…
The original questions are numbered, and my response is italicized.
1. Is there any income limit for parents to be able to qualify/ participate in the 529 plan.
No, there are no income limitations for eligibility to contribute to a 529 plan or to take qualified tax-free distributions from a 529 plan.
2. We are thinking about initiating the plan with Iowa/ Virginia (as we heard from some our contacts have done it) – Even if we move out of CA to another state – can it still be used?
Yes – there is no residence requirement for participation in a 529 plan. Many facets of state-specific plans are reserved for folks who file a tax return in that specific state, such as deducting the contribution amount from the state income tax return.
3. Is it possible to roll over from 1 state 529 plan to another state – any charges/ fees?
Yes, it is possible. Fees will depend upon the plan chosen. Generally rollovers are restricted to once per year.
4. Assume that the child does not get educated here in the USA, can the funds be used for International education – Canada, France, Singapore, India ?
The funds could be used for international education, but if the school is not accredited in the US, you’ll pay a penalty and taxes on the growth of the fund if you withdraw funds for this purpose, which is not considered a Qualified Higher Education Expense (QHEE).
5. What are the annual contribution limits – per child/ couple/ family?
In general, this is up to the plan, and the limits range between $235,000 and $500,000, depending on the state. In order to maintain simplicity, most folks limit their annual contribution to the annual gift exclusion limit ($15,000 per child per parent in 2020), while some utilize the special 5-year front-load gift limit ($75,000 per child per parent in 2020). If you contribute more than the gift exclusion limit, you’ll need to file a gift tax return and possibly pay tax on the gift.
Having said this, though – many states limit tax benefits to $10,000 per child per year. This will be different on a plan/state basis. If you’re investing in an out-of-state plan, this won’t matter to you.
6. What is the process to take out the funds in the middle? Would there be any penalties?
You contact the plan to make a distribution from the plan. There would be penalties and taxes due on the growth in the account. Depending upon state tax benefits (and the plan you’re using), there may be state taxes and/or penalties involved as well, since some states require recapture of any deduction benefit that was provided for contributions.
7. Is it possible to have a 529 in more than 1 state? Are there any restrictions?
Yes, you may have 529 plans in more than one state. Primary restriction that I can think of would be the gift tax exclusions noted earlier. Otherwise there is no reason you couldn’t have several states’ plans.
8. Is it possible to move $ across funds? Are there any restrictions/ charges?
Again, this depends upon the plan. If your question is “can I move money around to other funds/allocations within the same 529 plan?”, then the answer is yes, but depending upon the plan, there are likely restrictions, such as rebalancing can only be done once every 12 months.
If your question is “can I move money around to other 529 plans?”, the answer is yes, but I believe you need to move the entire account (roll over) when you do this, and I believe you are limited to one such rollover in twelve months.
9. What happens if I loose the $ in account? Are there chances of loosing?
You have a smaller balance at the end of the month than you did at the beginning of the month.
Of course there are chances of losing money – just the same as any investing activity. This of course will depend upon your investment allocation decisions. The more risky your choices, the more likely you are to lose (and gain) money.
10. Who holds control in a 529? What happens if a beneficiary is no longer part of the family (God Forbid !!)? Etc or something happens to the contributor?
The owner of the account (you, your spouse, etc.) has control over the beneficiary of the account, and so you can change the beneficiary as you see fit. If something happens to the contributor (and by this I assume you mean the owner – yourself), hopefully you’ve chosen an appropriate contingent owner to manage the funds in your absence. Otherwise it is probably up to state statutes to determine management.
11. Is there any age restrictions in using this 529 $ for the beneficiary or can it be used at any age?
No restriction on the age of the beneficiary.
12. What happens if there is left over’s & I am not able to use it?
This partly depends upon why there is left over money: if this is due to the fact that the student received scholarships, then you are allowed to distribute an offsetting amount (same as the scholarship) from the 529 account, to the extent that the scholarship monies are used for QHEE. This distribution must take place in the same year that the expenses are paid.
If there are funds remaining in the account due to the death or disability of the primary beneficiary, you are allowed to remove the funds from the account without penalty. You must pay tax on the growth of the account, but no penalty.
If there are funds remaining in the account because the cost of school for that beneficiary was less than you anticipated, you have two choices: roll the funds over to a new beneficiary, or take a distribution and pay the tax/penalty. The rollover can be done to anyone who is a member of the original beneficiary’s family. Qualified family members include the beneficiary’s siblings, parents, children, first cousins, nieces and nephews, among others.
13. Can I pass this to my brothers / sisters children? & is there any limitations? Can the funds be used for self/ spouse?
Yes – as long as the new beneficiary is related to the original beneficiary as described in #12.
14. Can the 529 funds or any left over’s be used by the next generation?
15. Does having a 529 account mean, one cannot initiate a UTMA/ UGMA, Coverdall etc?
No, a 529 account does not exclude eligibility to utilize those vehicles. Funding those plans may be limited by gifting limitations as described previously.
16. I was reading an article & vaguely recall a # $239,000 (Is this the total $ contribution or the $ balance on the account (attributed due to appreciation/ dividends etc).
I don’t know – I don’t vaguely recall reading that article. The limits are going to be different for each plan. See #5.
17. Are (qualified/ nonqualified) withdrawals exempt from state taxes?
Depends upon the plan. Most qualified withdrawals are exempt for most states’ tax. Nonqualified withdrawals may or may not be exempt from state taxes – look at your state’s tax laws and the plan information.
18. How does the process work? Should I prepay for the university & give a receipt to the 529 plan? or will the 529 pay the university directly? Will it cover only University fees/ registration/ dorm/ living? Clothing, Books?
Again, take this up with your specific plan. In general, you can either pre-pay or make a withdrawal to pay the amount(s). Just keep good records. In general your QHEE will include tuition, fees and books. Room/board may also be covered, depending upon the plan in question.
In my experience, I have always found it simplest to send the distribution directly from the plan to the school to pay for expenses. This way there is only one set of accounting to maintain.
19. Is the 529 applicable for school also? or Undergraduate/ Graduate/ PhD?
Okay, what are you asking here? 529 plans are generally for post-high school education expenses, which includes undergrad, grad, and PhD studies, as well as non-degree pursuing education. The Tax Cuts and Jobs Act of 2017 also made provision for the use of up to $10,000 annually for tuition for public, private or religious elementary or secondary schools.
20. Is anyone aware of any state tax inventives for the state of CA?
No – at least not this particular anyone.