Tax Considerations

1. Are contributions to my Private College 529 account tax-deductible?

Contributions to 529 accounts (state-run and Private College 529) are after-tax, similar to Roth IRA contributions. There is no federal tax deduction for contributions to a 529 account. However, earnings or gains in the account grow federal tax-deferred. If the gains in the account are used to pay for Qualified Higher Education Expenses, the gains are never taxed. Gains that are withdrawn to pay for non-qualified education expenses are subject to federal taxes and a 10 percent penalty.

Many states do offer state income tax deductions or credits for contributions to 529 accounts. Often the benefits apply only to that state’s 529 plans, However, if you live in Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, or Pennsylvania, you may be eligible to claim an income tax deduction or credit for contributions to any 529 plan, including Private College 529. Consult your tax advisor for information specific to your situation.

2. What are the estate planning and gift tax benefits?

Like other 529 plans, Private College 529 Plan offers you significant estate and gift tax benefits.

Parents, grandparents, other relatives or even friends may contribute up to $15,000 ($30,000 for joint filers) per child each year, or up to $75,000 ($150,000 for joint filers), prorated over a five-year period, to an account. This gift can be made without incurring a federal gift tax. If the contribution exceeds more than $75,000 in the five-year period, the excess would be a taxable gift in the year of contribution.

Contributions to 529 plans by the account owner are excluded from that account owner’s estate when taxes are assessed, even though the owner retains complete control of the account. If the account owner dies before the end of the five-year period, a prorated amount will be added back into the estate. 529 plans are an attractive option for grandparents who seek tax advantages in estate planning. Consult your tax advisor for information specific to your situation.

3. What is the Withdrawal policy?

You may request a full or partial Withdrawal of your account. Tuition Certificates must be held for 12 months before they are eligible to be Withdrawn. The Withdrawn value will be based on the amount contributed, adjusted for the net performance of the program trust, subject to a maximum increase of 2 percent per year, and a maximum loss of 2 percent per year, compounded annually.

As with any 529 plan, if you do not use the money for qualified higher education expenses, any increase in the value of your initial purchase amounts (the difference between your contribution amount and the amount Withdrawn) will be subject to federal income tax as well as an additional 10 percent penalty.