ADVOCATES FOR A SOLUTION:
THE COLLEGE SAVINGS FOUNDATION (CSF)

CSF is a Washington, D.C.-based not-for-profit organization with the mission of helping American families achieve their education savings goals by working with public policy makers, media representatives and financial services industry executives in support of education savings programs.

CSF serves the education savings industry as a central repository of information and an expert resource for its members and for representatives of state and federal government, institutions of higher education and other related organizations and associations.

A primary focus of CSF is building public awareness of and providing public policy support for 529 plans -- an increasingly vital college-savings vehicle. CSF's members include firms that offer 529 college savings programs and/or participate in those programs as investment managers; associate members include law firms, accounting and consulting firms, governmental and non-profit agencies and individuals who support CSF and its mission.

LEADERS OF THE COLLEGE SAVINGS FOUNDATION

OFFICERS

CHAIRMAN
Kevin McMullen, State Farm
VICE CHAIRMAN
Peter Mazareas, AllianceBernstein
SECRETARY
Chuck Toth, Merrill Lynch
TREASURER
David Larrabee, American Century Investments
IMMEDIATE POST CHAIR
David Pearlman, Fidelity Investments

What is a 529 College Savings Plan?

While a post-secondary education is critical to helping many people reach their full personal and professional potential, the rising cost of post-secondary education is posing a significant financial hurdle for many American families.

To encourage and help Americans to save for their children's higher education, the states and the U.S. Congress have cooperated to offer families the opportunity to participate in tax-favored, state-sponsored, qualified tuition programs. These plans are known as 529 plans, so-called for the section of the United States Internal Revenue Code that bestows federal income tax-free treatment to the earnings and distributions made from plan accounts when used for qualified expenditures covering college costs.

Every state but one has created its own 529 savings plan. Federal law does not limit a state resident to investing in his or her own state's 529 program; individuals are free to invest in the 529 plan of any state. However, in more than 20 states, favorable state tax treatment is available to a resident only if he or she invests in the home state's plan.

There are two types of 529 plans: 529 savings plans, which allow families to save for all general college expenses, and 529 pre-paid tuition programs, which effectively allow families to make advance tuition payments to cover future attendance at a designated in-state public college or university system. If the designated beneficiary does not go to a school in the system, the program will provide money instead, but state formulas vary widely. For more information on your state's prepaid plan, please check with your state agency.

Generally, under the Federal income tax rules, individuals investing in 529 savings plans can:

• make after-tax contributions into to pay qualified higher education expenses (as defined in section 529 of the Internal Revenue Code) for the post-secondary education of any beneficiary
• have contributions grow tax-deferred and distributions withdrawn federal income tax-free if used for qualified higher education expenses
• Qualified higher education expenses include tuition, fees, books, supplies and equipment required for attendance at an accredited institution of higher education. They also include room & board expenses for students attending at least half-time.

Each state sets limits on contributions to its plan. The owner of the account, often called the "participant," retains control of the account and can change the beneficiary of the account to another eligible family member (as defined under section 529) at any time without paying any federal income taxes or penalties. If not needed for educational expenses, the owner can use the money for any purpose, although income taxes at the distributee's tax rate and a federal 10% penalty tax on earnings will apply.

Many states offer additional state tax benefits for their residents, but only if they invest in the state's own plan. For example, some states provide income tax advantages for contributions made to 529 plans, but only for the in-state program; similarly, not all states provide a state tax benefit for withdrawal of funds from out-of-state 529 plans.

Section 529 plans provide flexibility by allowing (subject to certain limitations) tax-free rollovers from one designated beneficiary to another, and for the same beneficiary between different plans. So, money not needed for one child can be used to benefit another. However, some states impose tax penalties or recapture tax deductions previously taken on contributions when a rollover out of the state's plan is made.

The intent or spirit of the legislation establishing section 529 was to promote flexibility and choice -- and facilitate sound financial planning -- by not requiring an investor to choose his or her own state's 529 plan and by making the favorable federal tax treatment available to any contributor and beneficiary regardless of the state sponsorship of the plan.

At the same time, the College Savings Foundation believes that, where applicable, states should take steps to enhance even further the flexibility as well as the effectiveness of the 529 concepts, by:

• allowing distributions from both in-state and out-of-state 529 plans tax-free when used to pay for qualified high education expenses
• extending current state tax deductions or credits to contributions to out-of-state plans
• removing penalties associated with moving assets between different 529 plans.

Investments in 529 College Savings Plans involve investment risk and may be subject to market volatility and fluctuation.

The content provided herein is general in nature and is for informational purposes only. It is not intended to be, and should not be construed as (i) a recommendation; (ii) legal or tax advice; or (iii) a legal opinion. Laws of a particular state or laws which may be applicable to a particular situation may impact the applicability, accuracy, or completeness of this information. Tax laws and regulations are complex and are subject to change. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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