- A 529 college savings plan can be flexible as situations change
- Penalty-free beneficiary change
- Examples to consider:
- Additional considerations
- When a beneficiary change may make sense
- When a beneficiary change may not make sense
- In Changing Times, Does Investing in a 529 Plan for College Still Make Sense?
- Key Takeaways
- Start your email subscription
- 529 savings plans are not just for college anymore
- More options
- Retaining control
- Small savings
- Need for research
- 529 Plans: Understanding Changes to Help with College Funding
- Handling Refunds
- SECURE Act Changes
- ABLE Accounts
- K-12 Educational Expenses
- 529 Savings Plans
- 529 Basics
- Not Limited to In-State Public Colleges or State Residents
- Covered Education Expenses
- Contribution Limits
- Investment Options
- Investment Risk
- Fees, Charges and Expenses
A 529 college savings plan can be flexible as situations change
Most families recognize the tax benefits of a 529 college savings plan. Contributions grow and are withdrawn tax-free as long as the money is used for qualified education expenses.
There is another advantage that may be even more powerful over time: A 529 plan is an owner-controlled account.
With a 529 account, the owner can make investment changes twice per year, direct withdrawals, and change beneficiaries at any time. Sometimes a child does not finish college, takes on a full-time job, or simply does not need all the assets in the college fund. The beneficiary flexibility allows parents to make changes over time.
Penalty-free beneficiary change
1. Change to a “member of the family”
A 529 account owner can change the beneficiary at any time without tax consequences if the new beneficiary is a member of the family. A member of the family is defined in Internal Revenue Code section 529.
If the new beneficiary is not a member of the family, the change will be treated as a non-qualified distribution. The earnings portion of the account may be subject to income tax and a 10% penalty. In addition, the IRS may treat the change of beneficiary as a gift for the new beneficiary.
2. New beneficiary is in the same generation or older
If the new beneficiary is a member of the family, in the same generation or older, there is no penalty. If the new beneficiary is part of a later, or younger, generation, the change may be treated as a gift for tax purposes.
It is important to note that there are annual, lifetime, and five-year election exclusions for the purposes of gift taxes.
Annual. Individuals can gift up to $15,000 per year per beneficiary ($30,000 for married couples, as of 2019)
Lifetime. The lifetime gift tax limit is $11.4 million (as of 2019)
With a 529 plan, parents and grandparents can gift up to five years’ worth of gifts ($75,000 single and $150,000 for couples) in a single year without incurring any gift taxes (as of 2019).
In order to qualify for the five-year election, the contribution must be submitted via a federal gift tax return (Form 709)https://www.fa-mag.com/news/avoiding-section-529-plan-pitfalls-6204.html
In addition, taxpayers must report 20% of the total 529 plan contribution each year for five years. If a grandparent passes away during the five-year duration, a pro rata portion of the contribution will be added back to their estate.
Examples to consider:
- The parent owns one 529 plan for Child A. Child A does not go to school or has money left over after attending a four-year college. There are no tax implications if the parent decides to change the beneficiary to a sibling (Child B).
- If a grandparent owns the account for the benefit of a grandchild, they can change the beneficiary to another grandchild, a grandniece or nephew, or the child’s parents, without tax consequences. They must, however, follow the gift tax rules detailed in the generation-skipping transfer tax.
Using a 529 in perpetuity. If the beneficiary has money left over, the account can continue and pass the money to the next generation. But the transfer would be considered a new gift to a younger generation and subject to gift tax limits.
Establish one account for the family. With a 529 plan, there can only be one owner and one beneficiary at a time. If there are two family members that are four or more years apart in age, it may be easier to have only one account to manage.
Remember to review the investment options in order to meet the new student’s time horizon and goals. Account owners can only make investment changes twice per year.
However, if the investments are changed while changing the beneficiary, it will not count against the annual limit.
When a beneficiary change may make sense
1. When there is only one account and the first beneficiary no longer needs the assets.
2. To reduce the tax liability on unused funds, change the investment options, or roll over assets to another 529 plan.
3. When individuals without children want to plan ahead. Account owners can name themselves the beneficiary and then change it after the child is born.
When a beneficiary change may not make sense
1. If a child decides not to go to a four-year college. The funds can still be used for other qualified educational expenses such as trade schools, associate programs, or enrollment in online classes.
2. When your child completes an undergraduate program. There is no need to change the beneficiary immediately. There may be additional fees and expenses owed. The student may decide to take a break and then go to graduate school.
3. To transfer money from one child to another, parents may consider a rollover rather than a beneficiary change. A rollover is tax-free as long as the funds are reinvested in another 529 plan within 60 days.
4. When a generation-skipping tax will occur.
For more information about 529 plans, including resources and tools to help families plan and save for education, meet with a financial advisor or visit Putnam.com/529. The IRS has resources to help families and students understand tax benefits when paying for college including IRS Publication 970 Tax Benefits for Education, as well as facts about 529 plans.
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.
In Changing Times, Does Investing in a 529 Plan for College Still Make Sense?
High costs and an uncertain job future have some parents weighing the idea of college.
5 min read
Photo by Getty Images
- The average annual tuition at a private four-year college is more than $32,000
- 529 college funds can help supplement costs
- Any family member can use a 529 plan—even the parent
Among the many things COVID-19 changed is how we view post-secondary education. Many parents and students now ask if the traditional college experience is still the way to go, and whether a 529 college savings plan is still worth it.
Thanks to the novel coronavirus, college campuses have become a mix of online and in-person learning. Many of the extracurricular activities that arguably help make going away to college worth the cost aren’t happening because of social distancing restrictions. Automation and technology could also make certain jobs obsolete in the future.
That’s made parents, and perhaps even students, reconsider their thoughts about college in ways they never did before.
The College Board lists the average annual tuition and fees for one year at a four-year private college at more than $32,000, and a four-year public college costs nearly $24,000 for out-of-state students.
Over four years, that’s more than $100,000 before you even count the costs of housing, food, books, and transportation if your child attends a college away from home.
Given the cost of higher education, along with a possible rethink of its utility, parents may wonder if they should invest in a 529 college savings plan. No one has a crystal ball, but there are still plenty of benefits in these plans, in part because 529 college funds can be used for a wide variety of educational purposes.
They’re also not just for your kids.
For one thing, a 529 account is a savings tool that can be used in many different ways.
Even if students attend a college where the money in a 529 account isn’t enough to cover the entire cost of schooling, the funds can supplement scholarships and loans, said Dara Luber, senior manager, retirement product at TD Ameritrade.
In addition to tuition, 529 plans cover the cost of education incidentals such as books, computers, and other items, and sometimes they cover room and board. In some states, 529 plan money can be used for kids’ K-12 educational costs.
That’s not to say this is a perfect savings tool. The pros include having a tax-sheltered account as a college fund, while the cons are the uncertainty of what college might look in the future.
Although most people think of traditional college when they think of secondary education, college isn’t necessarily right for everyone. Some people excel in hands-on work and would be better suited to a technical, vocational, or other type of school. Money in 529 college funds can be used for these other types of schooling, as long as the school is eligible.
Certain highly skilled trade jobs are unly to be replaced by robots and are in high demand, such as mechanics, electricians, and dental hygienists.
“As a family, you need to consider what post-high school education might look for your child,” Luber said.
Another benefit of a 529 plan is that the money saved is not earmarked for a particular family member. And the Internal Revenue Service (IRS) has a broad definition of “family member.” So, if your child doesn’t use the money in the account, it can be used for other children and family members, including spouses, siblings, nieces, nephews, cousins, and grandchildren.
If the cost of college seems so daunting that parents think they may not be able to invest and save to help pay for all of their college expenses, Luber noted it’s still worth considering a 529 plan as they are tax-deferred vehicles.
“It’s better to start saving than not at all, even if it’s just $25 or $50 per month,” Luber said, adding that “saving for retirement should come before saving for college.”
Parents can contribute up to $15,000 per year per person in a 529 plan without incurring federal gift taxes, or they can save up to $30,000 if parents are married and filing jointly.
People of means can frontload five years’ worth of 529 contributions.
Single people can put in up to $75,000 per child—or $150,000 if married and filing jointly—and write off the contribution from their taxes over five years.
There are no age limits associated with 529 plans—anyone can use them, including you. If your child decides not to go to school, you can take the money in the 529 plan and use it for your own secondary education. That could include graduate school or enrichment courses at a local community college. The institution just has to be eligible to receive the money.
If the money in a 529 plan ends up not being used by anyone, parents haven’t completely lost that money. In a worst-case scenario, any money in the account can be withdrawn and they would pay the tax penalty.
By Debbie Carlson
Ticker Tape Contributor
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529 savings plans are not just for college anymore
The nation’s most widely used investment vehicle for paying for college is also becoming popular as an estate planning tool and for financing other non-college-related costs thanks to recent tax changes and some creative financial thinking.
As a result of the 2017 tax reform law, an individual contributing to a 529 college savings plan can frontload five years’ worth of contributions — or $75,000 total — into one year without incurring federal gift taxes.
For instance, if two grandparents want to help finance college for a grandchild, they can put $150,000 into his or her 529 plan. Doing so also helps them reduce the potential bite of estate taxes.
“It’s a pretty unique device in order to do some gifting,” said Jeremy Gottlieb, chief executive of Gottlieb Wealth Management.
Recently, he had a client with a large estate who moved a big chunk of money immediately into his grandchildren’s 529 plans.
“He and his wife were able to accelerate the gifting, which I thought was powerful,” Mr. Gottlieb said.
There’s also the psychological boost for clients who want to make education part of their legacy for their family.
“There’s a real blessing to giving money while you’re alive and helping a son, daughter or grandchild realize a dream,” said Frank Fantozzi, president of Planned Financial Services.
Assets in 529 plans, which are sponsored by individual states and grow tax free as long as the assets are used for college expenses, have grown to $328 billion since they were created by Congress in 1996. These funds have been saved in 13.1 million accounts, with another $25 billion invested in 1 million 529 prepaid tuition plans as of June, according to Strategic Insight.
That’s up from $34.8 billion in savings plans and $10.8 billion in prepaid tuition plans in 2003, according to the Investment Company Institute.
Source: Investment Company Institute and College Savings Plans Network
Being used as an estate planning tool is only one way that 529 college savings plans have evolved in recent years.
The 2017 tax law also allows the withdrawal of up to $10,000 annually to pay for K-12 education at public, private or parochial schools. In addition, funds in 529 plans — up to the annual contribution limit of $15,000 — can be rolled over into an Achieving a Better Life Experience Account, which promotes savings for expenses related to disabilities.
Money from a 529 plan for one sibling can be rolled into an ABLE account for another sibling. About $259 million has been saved so far in these accounts, which were created five years ago. That benefit will sunset in 2026, unless the U.S. Congress extends it.
Beyond the tax-law changes, there are techniques for using a 529 account that are now catching on with planners. For instance, they can fund computers and other technology purchased for a student.
They can also be utilized by adult account holders to pay for their own education or retraining, a move that’s occurring in about 2% of 529 plans, according to Paul Curley, director of college savings research at Strategic Insight. These types of uses for the adult will ly grow as technological advances change the workplace.
“That’s a trend that’s happening and we would expect that to continue,” Mr. Curley said.
Some members of Congress want to expand 529 uses even further. A major retirement bill is being held up in the Senate by a lawmaker who wants to allow 529 funds to cover the costs of home-schooling.
The prevailing mindset is that 529s must be targeted toward undergraduate education.
“The uses are pretty flexible,” said Sallie Mullins Thompson, a financial planner who runs a solo practice. “People don’t realize that these funds can be used for more than a four-year college.”
Advisers can deploy 529 plans in even more creative ways for clients.
“It’s good to have that flexibility,” said Brian Mercado, an adviser at JSF Financial. “People have situations that evolve. It’s good that  plans are evolving, too.”
An added advantage of turning to a 529 to help manage an estate is that the person making the contribution to the plan retains control over the funds.
“You can sock away a lot of money from your estate in a short period of time, but not lose the rights to those dollars,” said Jarrod Winkcompleck, chief executive of Gap Financial Services.
It’s the most unique aspect of using 529s for estate planning, said Sam Huszczo, founder of SGH Wealth Management.
“While the client’s living, they still own the money,” Mr. Huszczo said.
Clients also have the latitude to change the beneficiary of the 529 plan at any time.
For instance, if a child decides college is not for her, the 529 owner can instead make the recipient a sibling, niece, nephew or grandchild.
“It’s creating a tax-free scholarship fund for future generations,” Mr. Mercado said.
For many parents, exploding educational costs are not just something to prepare for when kids get to college. They’re a reality from kindergarten through high school, especially if their children attend private schools throughout their education.
Whether it makes sense to withdraw funds from a 529 plan to pay for K-12 expenses can depend on the state.
Indiana, for instance, offers a 20% tax credit for contributions up to $5,000 annually to its 529 plan that can be used to offset the Indiana income tax. Therefore, it pays for people using the Indiana 529 to put K-12 tuition money into the account, even if they’re going to quickly withdraw it to pay for the upcoming semester because it will qualify them for the tax break.
“Just by adding a middleman to an expense you’re already paying, you can save on taxes,” said Russ Ford, owner of Wayfinder Financial.
The tax math also is favorable in Missouri, where contributions to the state’s 529 plans are deductible for state taxes up to $8,000 for an individual, or $16,000 for a couple. Missouri also is a place where using the 529 plan as a pass-through for K-12 expenses generates tax benefits, said Christopher Beste, an adviser at RFG Advisory.
“It’s not going to wow you on your taxes. But any savings is worth it. You’re just playing by the rules,” Mr. Beste said.
But dipping into a 529 plan to pay for K-12 education in Oregon is less inviting.
An investor would need to add back to their taxable income any amount of K-12 distribution that received a state deduction and any earnings on the distribution would have to be claimed on state income taxes, according to Ryan Mohr, principal and founder of Clarity Capital Management.
“That could complicate things for situations where funds are used to pay for K-12 expenses,” Mr. Mohr said. “It has to be part of the conversation if [clients] are going to take out funds to pay for tuition for private school.”
Several states have not recognized paying K-12 costs as a qualified 529 distribution. California, for instance, imposes a 2.5% penalty tax on withdrawals.
Given that 529s are sponsored by states, the rules can differ for each, giving advisers and their clients more to ponder.
“It’s a huge challenge,” Mr. Winkcompleck said. “I don’t think there are any two [states] that are similar, so you always have to double-check.”
Recently, the Financial Industry Regulatory Authority Inc. counseled investors to study each state’s plan before deciding which one to purchase.
Need for research
“Start with your home state when looking for a 529 savings plan,” the regulator said in an August alert. “Pay special attention to state tax breaks and fees that are waived or lowered for in-state residents. Do some research to see if there are other state benefits available to you.”
It may take state-by-state analysis to determine whether utilizing the K-12 feature is worth it, but the added flexibility is generally welcomed.
“Some parents find some comfort in knowing they can use the 529 in the short term,” Mr. Curley said.
Even though 529 plans are evolving into estate planning tools and expanding to cover K-12 costs, it’s their original purpose as a savings plan for college that will continue to be their bread and butter, according to Brian Jones, an adviser at NextGen Financial Advice.
“The average middle-class [investor] isn’t going to use the new features of the 529 that much,” Mr. Jones said. “For a lot of people, they’re really setting [money] aside for college.”
529 Plans: Understanding Changes to Help with College Funding
For financial advisers whose clients are saving for their children’s college education, 529 college savings plans can be a good place to save and invest for this goal.
These plans offer the opportunity for money contributed to the child’s account to grow tax-free. If the money is withdrawn and used for qualified higher education expenses, there are no taxes or penalties on these withdrawals. Additionally, some states offer incentives for residents under certain conditions.
In advising savers on 529 plans, it's important that recent changes in some of the rules and other updates are taken into account.
Your clients might be receiving refunds for universities for room and board expenses that they paid for with money from a 529 plan. This has become a pretty common occurrence in 2020 with the move to virtual or hybrid schedules among many colleges and universities.
The rules are that this money should be put back into the 529 account within 60 days of receiving it, otherwise your client’s account could be assessed with a 10% penalty plus any applicable taxes.
If there are other qualified higher educational expenses for that student, such as tuition, books, lab fees, etc., conceivably this money could be used for that purpose.
It’s not always clear how well this is tracked by the IRS, but at the very least your client should keep meticulous records regarding the use of these funds in case there is ever a question.
It’s always possible the IRS will change the rules regarding these types of refunds at some point in the wake of the impact of COVID-19, but it’s not a good idea for clients to count on this.
SECURE Act Changes
The SECURE Act passed at the end of 2019 contained a couple of provisions impacting 529 plans that might factor into some of your client’s situations.
The SECURE Act allows up to $10,000 to be withdrawn to repay the account beneficiary’s student loans on an aggregate lifetime basis. These student loan payments will be considered to be qualified expenses and the withdrawals will not be subject to taxes.
In addition to the $10,000 for the account beneficiary, the same $10,000 limit is in place to repay student loan debt for each of the beneficiary’s siblings.
As many of your clients may utilize a combination of sources to pay for college including student loans, this rule change allows money left over in a 529 plan to be used to pay off this student loan debt.
Note that any student loans paid with 529 funds are not eligible for the student loan interest deduction.
The SECURE Act also expanded the use of 529 funds to cover approved apprenticeship programs.
Expenses related to programs offered by employers to train workers in industries such construction, healthcare, technology and a host of others are now considered to be qualified expenses.
Expenses including fees, supplies, books and equipment needed within the industry covered by the program are considered to be qualified 529 plan expenses.
The 2017 Tax Cuts and Jobs Act allows clients to transfer funds from a 529 account to an ABLE account for the same beneficiary or another family member as long as these transfers don't exceed the annual contribution limits for ABLE accounts. ABLE accounts are tax-advantaged accounts that can be used by individuals with disabilities for educational expenses without impacting their eligibility.
This can help with planning for educational needs for those clients with children with disabilities or special needs.
K-12 Educational Expenses
The Tax Cut and Jobs Act also allowed for the use of 529 assets to cover the cost of K-12 educational expenses. Presumably this would apply to clients who wish to send their kids to a private or parochial school as an alternative to their local public schools. Up to $10,000 can be used each year tax-free.
Whether or not this is a good use of these funds for your client is a planning issue. If they tap their 529 assets, will they still have enough to cover the college costs of the account beneficiary? Also, does their state follow the federal rules in not taxing these types of withdrawals?
Using a 529 plan to save for college expenses can offer a lot of advantages for your clients. It's important that you help them keep up on the latest developments in the rules for using these plans so their children can derive the maximum benefit.
529 Savings Plans
FINRA's 529 Expense Analyzer tool has been retired. To learn more about 529 Savings Plans, check out FINRA’s Investor Alert, 529 Savings Plans—School Yourself Before You Invest.
Legislation has brought important changes to 529 plans.
Setting Every Community Up for Retirement Enhancement (SECURE) Act (2019) allows for tax-free withdrawals of up to $10,000 from a 529 plan to repay qualified student loans. The $10,000 cap is a lifetime—not annual—limit. Student loans repaid with tax-free 529 plan funds are not eligible for the student loan interest deduction under the Internal Revenue Code.
Tax Cut and Jobs Act (2017):
- 529 Savings Plans can be used to pay for K-12 tuition, up to $10,000 per year per beneficiary.
- Families currently saving in a Coverdell ESA can switch to a 529 plan with no tax consequences.
- Existing 529 Savings Plans can be rolled into 529 ABLE accounts. The amount you can roll over is capped at $15,000.
There are two types of 529 plans—college savings plans and prepaid tuition plans. The college savings version allows earnings to grow tax-deferred and withdrawals are tax-free when used for qualified education expenses. Every state offers at least one of these types of plans. Some states offer both, and a consortium of private colleges also offers a prepaid tuition plan.
With college savings plans, students of all ages can save for all college costs, including tuition, fees, room, board, textbooks and computers (if required by the school). Beginning in 2018, 529 Savings Plans can be used to pay for K-12 tuition, up to $10,000 per year per beneficiary.
Not Just for Children
If you are considering going back to college or graduate school, you can open a college savings plan for yourself. You will save on taxes, and if you end up not going to school, you can always transfer the money, tax-free, to another 529 plan for your children or spouse.
Not Limited to In-State Public Colleges or State Residents
Withdrawals from college savings plans can be used at most colleges and universities throughout the country, including graduate schools. Some overseas educational institutions also may be eligible. Many states now offer at least one college savings plan that has no residency restrictions.
You can live in Ohio, contribute to a plan in Maine and send your child to college in California. However, if your state offers state tax advantages to residents who participate in the local plan, you'll miss out if you opt for another state's 529 plan.
If you plan to use your 529 savings for K-12 tuition and expenses, check with your state to see if it allows a state tax deduction for qualified withdrawals (qualified withdrawals are free from federal taxes for everyone).
Covered Education Expenses
College savings plans typically cover all “qualified education expenses” at eligible colleges, universities and other post-secondary institutions, including:
- Books and supplies
- Equipment required by school
- Room and board
- Computers (including tablets) and peripherals such as printers, and education software.
When you invest in a college savings plan, you pay money into an investment account on behalf of a designated beneficiary.
Contributions can vary and are only limited by the maximum and minimum contribution limits set by most plans.
Although the maximum contribution amount differs from state to state, in the majority of states offering college savings plans, the maximum amount that you can contribute for one beneficiary exceeds $250,000.
To further increase the amount of contributions you can make, you can open a second college savings plan in another state.
Currently, the IRS only requires that contributions for one child cannot be more than the amount necessary for the qualified higher education expenses of that child.
So if you want your child to go to an expensive college and graduate school, one option you have is to open more than one college savings plan.
Most states also offer very flexible minimum contribution limits. Many require a $250 initial contribution with subsequent contributions of as little as $50. These minimum contribution amounts can be reduced even further in many states if you make contributions through payroll deductions or automatic transfers from a bank account.
Typically, each plan gives you a number of investment options that allow you to invest in various mutual fund and exchange-traded fund portfolios. Some college savings plans offer age-based fund portfolios.
When the child is younger, the portfolio typically invests mostly in stock funds, which carry a higher risk, but higher return potential.
As your child grows older, the asset allocation becomes increasingly conservative as it gradually shifts to bond funds and other fixed-income funds.
Many states also offer non-age-based investment options, allowing you to select portfolios with conservative, moderate and aggressive asset allocations. Some states also offer investment options that allow you to invest in certificates of deposits whose interest rates are linked to an index that measures the average cost of college tuition.
The IRS allows you to change your investment options twice every calendar year in a college savings plan and when there is a change in designated beneficiary.
Investing in college savings plans does come with some risk. Un prepaid tuition plans, they don't lock in tuition prices. Nor does the state back or guarantee the investments.
There also is the risk with most college savings plan investment options that you may lose money, or your investment may not grow enough to pay for college.
For example, if you choose a plan option that invests in stock mutual funds, chances are that your invested funds' annual performance will mirror the trends of the stock market. Thus, you may lose money during a declining market.
Fees, Charges and Expenses
All 529 college savings plans have fees and expenses. Not only do these charges vary among 529 plans, but also they can vary within a single plan.
mutual funds, a single college savings plan may offer more than one “class” of shares to investors. Often referred to as A, B or C classes, units or fee structures, each class has different fees and expenses.
You can look at the offering document to see if a particular college savings plan offers more than one class.
Higher fees and expenses can make a big difference in the value of your investment over time. Let's say you invest $10,000 in a college savings plan with a return of 8 percent before expenses.
With a plan that had annual administration and operating expenses of 2 percent, after 18 years, you would end up with $27,880. If the college savings plan had expenses of only 0.
65 percent, you would end up with $35,548—an additional $7,668.
Here are some of the most common fees, charges and expenses found in college savings plans:
- Enrollment Fee. Many college savings plans do not charge an enrollment fee. Almost all enrollment fees are $50 or less.
- Annual Maintenance Fee. Most college savings plans charge annual maintenance fees. These fees usually range from $10 to $25. Many plans reduce or eliminate this fee for residents, if you make automatic contributions or if you maintain a certain balance, typically $25,000.
- Sales Charge (Front-End Sales Load). Several college savings plans charge a sales charge when you buy certain investment options within a plan or purchase a plan through a broker or investment adviser instead of directly from the state. Generally, you can determine the sales load by looking at the fees and expenses section of the offering circular or prospectus. Not every plan has a sales load. In some plans, a sales charge may only be levied on certain share classes of the plan.
Get a Break on Front-End Sales Loads
mutual funds, Class A shares of college savings plans often offer discounts that reduce the front-end sales loads you pay. The investment levels at which the discounts become available are called breakpoints. The amount of the discount is the size of your investment, and the discount increases as the size of your investment increases.
- Deferred Sales Charge. A deferred sales charge or contingent deferred sales charge (CDSC) is a charge you pay when you withdraw money from an investment option or college savings plan. It is sometimes referred to as the back-end load. The charge may start out at 2.5 percent for the first year, and get smaller each year after that until it reaches zero. Generally, you can determine the deferred sales charge by looking at the fees and expenses section of the offering circular or prospectus. Not every college savings plan has a deferred sales charge. In some plans, a deferred sales charge may only be levied on certain classes of the plan.
- Administration/Management Fee. This is the total annual college savings plan operating expenses expressed as a percentage of the plan's assets. For example, an expense ratio of 1 percent represents an annual charge to the plan's assets—including your proportional interest in those assets—of 1 percent per year.
- Underlying Fund Expenses. Because college savings plan portfolios typically invest in a number of mutual funds, they bear part of the fees and expenses of these underlying funds. This expense is expressed as a percentage of a mutual fund's assets. Because college savings plan investment portfolios sometimes invest in a number of mutual funds, the offering circular or prospectus may contain fund expense percentages for each of these funds.