Transferring Assets to a 529 Plan

A 529 College Savings Plan may be an attractive vehicle for those looking to save for a child's education.¹ If you have already committed college-earmarked assets to another type of financial vehicle, such as a Coverdell Education Savings Account or a custodial account for a minor beneficiary, you may want to investigate transferring those assets into a 529 plan.

 

Making the Move from a Coverdell

Amounts transferred from a Coverdell account to a "qualified tuition program" (IRS lingo for a 529 plan) are viewed as qualified education expenses by the IRS and are therefore tax free as long as the amount of the withdrawal is not more than the designated beneficiary's qualified education expenses.

There are several reasons why a college saver may want to take this course of action:

• Consolidation with a more generous contribution limit. Whereas Coverdell accounts limit contributions to $2,000 per beneficiary per year, 529 plans typically allow much higher lifetime contribution limits in excess of $200,000 per beneficiary in many states.
• No income restrictions. Unlike Coverdells, 529 plans generally do not impose income limits that restrict the ability of higher-income taxpayers to contribute.
• No taxes or penalties. Moving assets from a Coverdell to a 529 does not trigger taxes or penalties.

There are also some drawbacks. Keep in mind that Coverdells and 529 plans are still relatively new, so legal and procedural precedents for specific strategies may not be well established yet. Since the funds in a Coverdell are owned by the beneficiary, any assets moved to a 529 plan owned by a parent could be construed as a transfer of ownership from the beneficiary to the parent. This could raise legal issues down the road if the parent subsequently changes the beneficiary. What's more, Coverdells can be used to pay for primary or secondary school costs, whereas 529 plans are limited to college expenses.

Relocating UGMA/UTMA Assets

Many 529 plans accept rollovers from custodial accounts established for minor beneficiaries, such as those created under the provisions of the Uniform Gifts/Uniform Transfers to Minors Act (UGMA/UTMA). Be aware that the money in an UGMA/UTMA account belongs to the minor, so any subsequent withdrawals after a transfer to a 529 plan may only be used for that minor. Also, since contributions to 529 plans must be in cash, UGMA/UTMA assets first need to be liquidated, with any capital gains taxable to the minor.

 

Moving Savings Bond Assets

The third option for a transfer to a 529 plan involves cashing in qualified U.S. savings bonds and contributing the proceeds to the plan, in accordance with the guidelines established by the IRS and the Treasury Department's Education Bond Program.² You can find more information at the Treasury Department's Treasury Direct Web site: http://www.treasurydirect.gov/indiv/planning/plan_education.htm.

¹By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.

²Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing "Investors should consider the investment objectives, risks, charges and expenses associated with the municipal fund securities carefully before investing. The issuer's official statement contains this and other information about the investment. You can obtain an official statement from your financial representative. Read carefully before investing.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

Not NCUA Insured

No Credit Union Guarantee

May Lose Value

Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.

Portions of this material prepared by Standard & Poor’s Financial Communications. All rights reserved.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

Budget Your Way to Extra Savings

Investing a few hours to create and maintain a household budget may be the key to identifying opportunities to save more for the future, including long-term goals such as retirement. Yet it's surprising how few households take the time to commit to a budget. Many financial experts recommend making time for this task, which could pay dividends down the road.

Get a Grip on Your Money

Finding the extra money to save is not always easy. The good news is that many families realize they spend money on nonessentials -- such as eating out and specialty coffees. These are expenses that can often be reduced with the aid of a budget. A budget may also help you reduce large expenses to make room for savings. For example, if your transportation costs are considerable because of a long commute to work, look into carpooling with a colleague or working at home periodically.

Budget Basics

The first step is to understand and summarize your various sources of income, which may include earnings from a job, alimony, real estate income, and income or dividends from investments. Next, determine how you spend your money. Start by tracking your spending for a month. Gather bills and receipts and don't forget things like an occasional splurge on new shoes or a cup of coffee.

You may want to group expenses into the following categories:

Fixed committed expenses, such as mortgage, loan, and insurance payments that are the same from month to month.

• Other committed expenses, which are things you can't live without, such as food and clothing.
• Luxury expenses, which are things you like but don't necessarily need.

You can tally your income and expenses in writing if you prefer. Or consider trying one of the many online budgeting programs to help get you started.

At the end of each month, see how your actual spending stacks up against your budget and how much income is left over. When looking for places to cut additional costs, start with luxury expenses, followed by other committed expenses.

Budgeting will initially require some extra work and organization. But a little extra effort now can go a long way toward helping you pursue your financial goals.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and Director of HVFCU Financial Services, the investment division at Hudson Valley Federal Credit Union.

Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

Not NCUA Insured

No Credit Union Guarantee

May Lose Value

Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial. This material was prepared for Jeff Thatcher’s use.

Portions of this material prepared by Standard & Poor’s Financial Communications. All rights reserved.

© 2011 McGraw-Hill Financial Communications. All rights reserved.