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What is a 529 savings plan?
529 savings plans are a great way to save for your future education expenses. Named for a section of the federal tax code, they offer a meaningful tax benefit. The earnings in your account are not taxed when you use the money for qualified education expenses.
What are UGMA and UTMA accounts?
You or another adult can set up these trust accounts for your children before they are adults (age 18 or 21 in most states). You can use the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) for anything that benefits your child except for the basics — food, clothing, shelter, etc. While a certain amount of earnings is generally tax-free, earnings over a certain amount are subject to the "Kiddie Tax" rules, which can impact your taxes. Consult a tax professional to evaluate your personal situation. Once your child becomes an adult, she assumes control of the account and can use the money for anything she wants.
What is a Coverdell Education Savings Account?
A Coverdell Education Savings Account (ESA) is similar to a 529 savings plan. They both help you save for your child’s future education expenses, and they offer similar tax advantages. Both can be used for college expenses, as well as K-12 costs. However, you can use money in a 529 savings plan to pay for certain student loan expenses for the beneficiary and each of their siblings (up to $10,000 lifetime maximum). You can also use the 529 assets to pay for certain apprenticeship program expenses (books, supplies, equipment, etc.). A 529 savings plan is designed for the longer term. There are some important differences between the two:
What is CollegeAmerica?
CollegeAmerica is the 529 savings plan distributed by American Funds by Capital Group. It is offered by Virginia529℠, an independent agency of the Commonwealth of Virginia.
What investment options does CollegeAmerica offer?
CollegeAmerica offers investment options that can help you, whether you're investing for a newborn, or for children who are closer to, or even enrolled, in college.
You can choose from the American Funds College Target Date Series, American Funds Portfolio Series℠ or individual mutual funds as your CollegeAmerica investment options. Talk with your financial professional, then choose from one or more of the American Funds that work with your financial plan. Think about how much time you have before you'll need the money and how risk-tolerant you are.
What is the American Funds College Target Date Series®?
A college target date fund is an investment based on the date you'll need the money. The target date is the year that corresponds roughly to the year in which the beneficiary is expected to begin taking withdrawals. It can simplify your choices by providing a one-time investment selection and is designed to work as a single stand-alone investment. Our investment professionals gradually adjust the portfolio over time so that it becomes more preservation-oriented. The funds' allocation strategy does not guarantee that investors' education savings goals will be met. You should periodically evaluate your investment to determine whether it continues to meet your needs.
Eventually, we'll move the assets into the American Funds College Enrollment Fund®, with an emphasis on trying to preserve your money. Your assets stay there until you withdraw them.
How does Capital Group manage my investments?
What fees are charged by CollegeAmerica?
We waive the $10 setup and $10 annual account maintenance fees, so you just pay the fees and expenses associated with the applicable American Funds share class. (You can read a full description in each fund's prospectus.)
How do I open a CollegeAmerica 529 savings plan?
While it's a good idea to start early, you can open an account at any age or life stage. We recommend choosing a financial professional to work with to ensure you are getting the benefits of a complete investment strategy. You can find a financial professional to work with via our financial professional locator, but if you are ready to get started you can review our CollegeAmerica program description and download the CollegeAmerica application.
How much do I need to open an account?
Not a lot! You can invest as little as $250 per fund. (The minimum is $1,000 for American Funds U.S. Government Money Market Fund℠.) And, for an employer-sponsored program, it's even easier — you can automatically transfer your investment from your paycheck, as little as $25 at a time on a schedule you select.
Who can establish a 529 savings plan account?
Any adult U.S. citizen or legal U.S. resident can open a 529 savings plan. In addition, U.S. trusts, corporations, partnerships, non-profit organizations and other entities may establish an account.
Do I need to use my own state's plan?
No. You can invest in any state’s national 529 savings plan, no matter where you live — or where your child eventually goes to school. Depending on your state of residence, there may be an in-state plan that offers additional benefits.
Can I name a successor account owner for my 529 savings plan?
Yes, and it’s a good idea even if you have someone getting ready to enter college. If something happens to you, your successor can immediately manage the account. If your child is an adult, he or she will take control, but if your child is still a minor, anyone in charge of the assets of the first owner can name a new account owner.
How do I contribute to my 529 savings plan account?
Once you’ve opened the account, you can set up an automatic investment plan, or contribute additional money online or by check anytime.
If your CollegeAmerica account is held with American Funds, by Capital Group, anyone can send a check directly to our service center. Make the check payable to CollegeAmerica and include the account number and amount to invest per fund on the check itself or in an attached letter. If you have questions, please contact us for assistance.
Who can contribute to my 529 savings plan account?
Anyone can contribute — friends, grandparents, etc. But only the “owner” who opened the account can make decisions like choosing the investments, taking withdrawals or changing the beneficiary.
Can I contribute to both a 529 savings plan and a Coverdell Education Savings Account (ESA)?
Sure, Keep in mind, there are separate limits for both accounts. A Coverdell's annual limit is only $2,000 per year, per student. 529 savings plans don't have an annual contribution limit, and many offer very high account balance limits. For example, CollegeAmerica allows you to invest until the account's value reaches $550,000. A single taxpayer can contribute up to $16,000 annually per student — or make a one-time contribution of $80,000 to cover five years — without gift-tax consequences (Double that if filing jointly.)
How often can I adjust my investment allocation?
You may adjust the investment allocation twice per calendar year or if you change the beneficiary. All of your accounts for the same beneficiary in CollegeAmerica, Invest529 and CollegeWealth will be aggregated, so after two investment changes are made in any of these accounts, subsequent changes will be treated as withdrawals. You can make changes in more than one account for the same beneficiary as long as you adjust all accounts at the same time.
Can I transfer funds from an Uniform Gifts/Transfers to Minors Act (UG/UTMA), Coverdell or savings bond into a 529 savings plan?
Yes, but check with your tax advisor about your specific situation. In most cases, it’s pretty simple to transfer assets from a Coverdell ESA or proceeds from qualified U.S. savings bonds into a 529 savings plan account without tax consequences.
It’s trickier to transfer UGMAs and UTMAs because they’re trust accounts owned by the child and managed by an adult. Generally, the beneficiary must stay the same when transferring assets from a UGMA or UTMA to a 529 savings plan account. Consider consulting your financial professional and possibly a lawyer to avoid unnecessary complications.
Can I roll over assets from one 529 savings plan to another?
Yes. If you want to transfer 529 savings plan assets into CollegeAmerica, your financial professional can assist you. You'll need to complete transfer forms provided by one or both plans.
What educational institutions and programs are eligible?
To check if any particular institution qualifies, visit the Department of Education’s federal school code search for a quick way to find out if the school qualifies.
Can I use my 529 savings plan to pay for graduate school?
Yes, including specialized training, such as medical or law school, or other graduate programs at eligible institutions.
Can the beneficiary be a part-time student?
Yes! There's no minimum level of study required. For withdrawals for room and board to be allowed, the student has to be enrolled on at least a half-time basis.
Can I use 529 savings plan assets to pay for K-12 tuition at a private school?
Yes, up to $10,000 each year per beneficiary. This use of 529 savings plan assets varies from state to state, so check with a financial professional first to make sure this is a qualified education expense in your state.
What are qualified 529 savings plan education expenses for K-12 private school?
For K-12, a 529 savings plan account can pay for up to $10,000 of tuition per year, but can't be used for any other education-related expenses. Note that states take different approaches to the income tax treatment of withdrawals for K-12 expenses, which may not be exempt from state tax in certain states. So please check with a tax professional first.
What college expenses can be paid tax-free from a 529 savings plan?
Can I use a 529 savings plan to repay a student loan?
Yes. You can use 529 assets to pay off a qualified student loan (up to a $10,000 lifetime maximum) for the beneficiary or their sibiling.
What if my child doesn't go to college?
No worries. If your child takes time off before college, you can just leave the money in the account for later use. Remember that money in a 529 savings plan can also be used for specialized training at eligible institutions or even the expenses for fees, books, supplies and equipment required for certain apprenticeship programs. If your child decides to skip college altogether, you can always change the beneficiary — or they can transfer it to their own children in the future.
What if 529 savings plan assets aren’t used for qualified expenses?
Try to avoid withdrawing money for non-qualified education expenses. While your contributions (the amount you originally deposited) can always be withdrawn without penalty, you’ll be subject to income tax on the earnings.
Who can be a beneficiary of a 529 savings plan?
A beneficiary can be anyone who is a U.S. citizen or legal U.S. resident, including the account owner. And the beneficiary doesn’t even have to be related to the account owner.
Are there age limits for 529 savings plan beneficiaries?
No, a beneficiary can be any age. All you need is a Social Security number.
Can I change the 529 savings plan beneficiary, and whom can I choose?
You can change the beneficiary anytime. To avoid possible penalties, make sure that the new beneficiary is a family member of the previous beneficiary. A member of the family generally includes the beneficiary’s children and their descendants, the beneficiary's brothers, sisters, parents, uncles, aunts, in-laws, spouses — even a first cousin!
Is there a time limit for using the assets in the account?
You have a generous time limit. Use the account assets within 30 years after the beneficiary graduates from high school or within 30 years after opening the account, whichever comes later. Or, if you think there might be unused 529 savings plan funds, designate a new beneficiary. For CollegeAmerica accounts, we'll even consider requests to extend this time limit.
Can I set up automatic 529 savings plan withdrawals and transfers?
Yes, and it’s a great idea. If you have a CollegeAmerica account, you can easily set up withdrawals, over the phone or by mailing us a completed CollegeAmerica Distribution Request Form. Then we can transfer your money to your linked checking or savings account.
Can I send 529 savings plan withdrawals directly to the school?
Yes. You may request to send the money directly to an eligible higher education institution online, or contact your financial professional to send the money directly to any eligible educational institution. If you own a CollegeAmerica account, you can call us at (800) 421-4225 to process the transfer.
How are withdrawals reported on taxes?
It depends on who receives the money from the distribution. If the plan pays the money to you, then the tax reporting will be under your Social Security number. If the plan pays the money to the account beneficiary or directly to a school, then the tax reporting will be under the beneficiary’s Social Security number.
How does a 529 savings plan account affect federal financial aid?
This can be a big worry as your child approaches college. For federal financial aid calculations, a 529 savings plan generally counts as a parent’s asset, if you own the account. So your child may qualify for more need-based financial aid than if college savings were owned by your child. If your child is an independent (rather than a dependent) then 529 savings plan assets may reduce her eligibility for aid.
How does a 529 savings plan affect my taxes?
Earnings in a 529 savings plan are free from federal income tax and generally not subject to state tax if withdrawals are used to pay qualified education expenses. Many states also offer their residents some form of income tax deduction or credit for contributions made to a 529 savings plan.
How are earnings in a 529 savings plan taxed?
Great news, they’re not! 529 savings plan account earnings grow free from federal income tax. And, if you use withdrawals to pay qualified education expenses, they will be exempt from federal income tax as well.
What are the tax implications if I transfer the account from one beneficiary to another?
There aren't any, as long as the new beneficiary is a member of the family. If he or she is not a family member, then the transfer may be treated as a non-qualified withdrawal. In that case, you'd pay income tax, as well as the 10% penalty. In addition, if you pick a beneficiary who is more than one generation younger than the existing one — say, the current beneficiary's granddaughter — then the federal government considers that a gift. That means it might trigger a generation-skipping transfer tax. But current federal law generally means the tax applies only to the very wealthy.