|Question: What is the Independent 529 Plan?|
The Independent 529 Plan is the country's first college-sponsored prepaid tuition plan. College-sponsored prepaid tuition plans (also referred to as private prepaid tuition plans) are an alternative to traditional state-run prepaid plans.
Both types of plans receive favorable federal tax treatment under Section 529 of the Internal Revenue Code (assuming they're structured properly) and both allow you to prepay tuition now for use in the future. The difference between them is that state-run prepaid tuition plans allow you to prepay tuition at one or more public state colleges, while college-sponsored prepaid plans allow you to prepay tuition at the private colleges in the plan.
How does the Independent 529 Plan work? Parents, grandparents, or other relatives or friends can open an account for a beneficiary and purchase certificates that buy a percentage of future tuition at any of the colleges across the nation that participate in the plan. The percentage varies, depending on the school's current tuition rate and the discount it offers.
You aren't required to choose a specific college when you purchase a certificate, but you may choose to have up to five colleges that you are considering displayed hypothetically on your quarterly statements. Your statements will show how much tuition your current certificates would cover at each of these institutions. At college time, certificates can be redeemed at the participating college the beneficiary actually chooses to attend.
A major benefit of the Independent 529 Plan is that it consists of a network of hundreds of private colleges, so the beneficiary isn't locked into attending only state colleges. Another advantage is that the participating colleges have promised to make up any financial shortfall if the plan's investment returns don't keep pace with tuition increases--they won't leave you holding the bag. Plus, the plan doesn't charge sales, application, or maintenance fees.
But despite the benefits, there are some drawbacks to consider. If the beneficiary doesn't attend one of the participating colleges, you'll get your original contributions back, but your refund will be adjusted by the actual investment return the program trust has earned (a cap of 2 percent applies, however, to either a gain or a loss). Keep in mind, too, that you'll pay a 10 percent federal penalty, as well as income tax, on the earnings part of any refund that is not used for college expenses (a state penalty may also apply). And although the plan lets you prepay only tuition and mandatory fees (those required as a condition of enrollment), you can't prepay room and board, books, or nonmandatory fees. In addition, your account must be open for at least 36 months before you can redeem any certificates.
For more information and a list of participating colleges, visit the Independent 529 Plan's website at www.independent529plan.org.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.