Some of the terminology involved in college savings plans can be confusing. This glossary defines some of the more complicated terms.
1099-Q. IRS Form 1099-Q is issued whenever distributions are made from a 529 plan during the previous tax year.
529 Plan. A 529 college savings plan is a specialized account used to save for qualified higher education expenses. 529 plans offer tax and financial aid advantages.
ABLE Account. An ABLE account is a savings account that is similar in design to a 529 plan, but is used to save for the future costs of a special needs beneficiary.
Account Owner. The owner of a 529 plan controls the investments and distributions from the account and may change the beneficiary.
Active Management. A portfolio is actively managed when the portfolio manager dynamically changes the investments in the portfolio from time to time, with the goal of outperforming a benchmark.
Additional Tax. See Tax Penalty.
Advisor-Sold. An advisor-sold 529 plan is sold by a financial advisor or broker, usually on commission.
Age of Majority. The age of majority is the age at which a child becomes an adult. It is age 18, 19 or 21, depending on the state.
Age-Based Asset Allocation. An age-based asset allocation is a dynamic asset allocation that changes over time with the age of the beneficiary. Usually, an age-based asset allocation will shift the mix of investments to a lower-risk mix as the beneficiary approaches college age.
Annual Rate of Return. The annual rate of return is the return on investment expressed as a percentage of the investment’s assets.
Asset Allocation. An asset allocation is a mix of several broad categories of assets, with a specified percentage of the portfolio invested in each asset class. Most of the return on investment is attributable to the asset allocation and not to the individual investments.
Asset Class. An asset class or category is a type of investment. Examples include equities (stocks), fixed-income (bonds), money market (short-term) and cash.
Asset. An asset is property with financial value that can be bought and sold.
Automated Clearing House (ACH). ACH is a form of EFT that is popular with direct deposit for payroll and tax refunds.
Automatic Investment Plan (AIP). An automatic investment plan periodically transfers money from a bank account or through payroll deduction to a 529 plan account.
Balanced Fund. A balanced fund is a mutual fund that seeks both growth and income, often through a mix of stocks and bonds. Balanced funds may also include dividend-paying stocks.
Beneficiary. A beneficiary is the recipient of the benefits from an investment. The beneficiary of a college savings plan is usually a child.
Bond Fund. A bond fund is a mutual fund that invests in bonds. Examples include bond funds that invest in bonds with short-term, intermediate-term and long-term maturities. Bond funds may also be called fixed-income funds.
Bond. A bond is a loan to a corporation or government entity that pays interest until a maturity date. The maturity date is the date the issuer must repay the face amount (prinicipal) of the bond.
Breakpoint Pricing. Breakpoint pricing reduces the sales charge on new investments in an advisor-sold 529 plan when the total investments exceed a specified threshold.
Broker-Sold. See Advisor-Sold.
Capitalization. A company’s capitalization is the market value of the company’s total outstanding securities minus the company’s liabilities. Companies are divided into one of three groups, based on capitalization: small-cap (less than $2 billion), mid-cap ($2 billion to $10 billion) and large-cap ($10 billion or more).
Certificate of Deposit (CD). A certificate of deposit is a savings certificate with a fixed interest rate over a fixed period of time. CDs are usually issued by banks. A penalty of three months interest is charged for early withdrawal before the CD reaches maturity.
College Savings Plan. A college savings plan is a savings account used to save for college costs, with special tax and financial aid benefits.
Compound Interest. Compound interest intensifies the power of interest by adding the interest to the principal balance of the account, thereby allowing the crediting of interest on interest. For example, reinvesting interest and dividends in a mutual fund is a form of compound interest. Interest may be compounded on a periodic basis, with daily, monthly and annually as the most common frequency of compounding. Compound interest yields exponential growth in an investment.
Contribution. A contribution is a gift to a college savings plan account, often by the beneficiary’s parent or grandparent.
Cost of Attendance (COA). A college’s cost of attendance, also called a student budget, is the total cost of attending the college for one year. It includes tuition and fees, room and board, books, supplies and equipment, transportation and miscellaneous/personal expenses. The cost of attendance may also include disability-related expenses and dependent care costs.
Coverdell Education Savings Account. A Coverdell ESA, formerly known as an Education IRA, is an education savings account. Coverdell ESAs allow the family to save for K-12 and college costs. Contributions are limited to $2,000 per year until the beneficiary reaches age 18 and distributions must be taken before the beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary.
Custodial Account. A custodial account is a savings account that is controlled by an adult until the beneficiary reaches the age of majority, at which point control of the account transfers to the beneficiary. UGMA and UTMA bank and brokerage accounts are examples of custodial accounts. There is also a custodial version of a 529 plan account, called a custodial 529 plan.
Custodian. A custodian is an adult who controls a custodial account.
Direct-Sold. A direct-sold 529 plan is obtained directly from the state.
Distribution. A distribution from a 529 plan is a withdrawal of funds from the 529 plan. Distributions can be qualified or non-qualified, which affects whether the earnings portion of the distribution is reported as taxable income to the beneficiary.
Dividend. A company can pay all or part of their profits to stockholders as dividends.
Dynamic Investment. A dynamic investment changes the investment’s asset allocation over time. An age-based asset allocation is an example of a dynamic investment.
Electronic Funds Transfer (EFT). EFT is the digital (electronic) transmission of funds from one bank account to another over a computer network.
Eligible Educational Institution. An eligible educational institution is a college or university that is eligible for Title IV federal student aid. This includes thousands of U.S. domestic colleges and universities and hundreds of foreign colleges and universities.
Equities. See Stocks.
Estate. An estate is the assets and debts of a person who has died.
Exchange-Traded Fund (ETF). An exchange-traded fund is a collection of securities that are traded on a stock exchange, like stocks. ETFs are usually pegged to a particular market index, such as the S&P 500 or a total stock market index.
Expense Ratio. The expense ratio is an asset-based fee that is used for management, advertising and other administrative expenses of a fund.
Family Member. A member of the family of a beneficiary includes the beneficiary’s spouse, the beneficiary’s child or descendant of the beneficiary’s child, the beneficiary’s brother, sister, stepbrother or stepsister, the beneficiary’s father or mother or an ancestor of the beneficiary’s father or mother, the beneficiary’s niece or nephew, the beneficiary’s aunt or uncle, the beneficiary’s son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in law, the spouse of one of these family members, or a first cousin of the beneficiary.
Federal Deposit Insurance Corporation (FDIC). The FDIC provides insurance for bank deposits in U.S. banks, protecting them against bank failure.
Financial Advisor. A financial advisor provides financial advice and information to clients. Financial advisors can include credit counselors, brokers, financial planners, accountants and attorneys.
Financial Aid. Financial aid is money to help a student pay for college costs. Financial aid includes gift aid and self-help aid.
Fixed-Income Fund. A fixed-income fund is a bond fund.
Gift Aid. Gift aid includes grants, scholarships and other money that does not need to be earned or repaid.
Gift Tax. Gift tax is a tax charged to the giver of a gift to another person. There is an annual gift tax exclusion of $15,000 per recipient in 2018.
Gift-Tax Averaging. 529 plans provide 5-year gift-tax averaging, where a gift that is greater than the annual gift tax exclusion is treated as being given proportionately over a 5-year period. This allows contributors to give up to $75,000 per beneficiary as a lump sum contribution to the beneficiary’s 529 plans.
Grants. A grant is a form of gift aid that is based on the student’s financial need.
Growth Fund. A growth fund is a collection of stocks that have the potential for growth in revenue or earnings. Growth stocks often have above-average prices compared with earnings because of the expectation that the earnings will increase.
Growth. Growth refers to the appreciation of an asset in value.
High-Yield Bond. A high-yield bond, sometimes called a junk bond, has high risk, but also pays a higher yield to compensate investors for the higher risk.
Independent 529 Plan. See Private College 529 Plan.
Index Fund. An index fund is a passively managed mutual fund that tries to track the performance of a market index, such as the S&P 500 or the Total Stock Market.
IRA. An Individual Retirement Account (IRA) is a retirement plan for investors. There are two types of IRAs. The traditional IRA invests before-tax money, deferring taxes on the contributions and earnings until the individual reaches age 59-1/2. The Roth IRA invests after-tax money, with tax-deferred earnings. Distributions from a Roth IRA are tax-free if they are a return of contributions or if the individual has reached age 59-1/2.
IRS. The IRS is the Internal Revenue Service of the United States, responsible for collecting taxes and enforcing U.S. tax law.
Large-Cap. See Capitalization.
Maintenance Fee. A 529 plan’s maintenance fee is an annual fee, typically $10 to $25, charged for maintaining the 529 plan account.
Management Fee. A management fee is charged to cover the cost of administering the fund.
Maximum Contribution Limit. The aggregate balance of all 529 plans for a particular beneficiary must be lower than the state’s maximum contribution limit. Maximum contribution limits are several hundred thousand dollars. Once the aggregate balance reaches this limit, no further contributions may be made until balance drops below this limit.
Member of Family. See Family Member.
Mid-Cap. See Capitalization.
Money Market Fund. A money market fund is a mutual fund designed to protect the principal balance of the fund. Money market funds usually invest in low-risk investments, such as short-term securities with a maturity of one year or less, bank CDs and US Treasury Bills.
Mutual Fund. A mutual fund invests in a group of assets, such as stocks, bonds, and money market funds. Mutual funds are usually diversified over a single type of investments. Mutual funds may be sold once a day, unlike ETFs.
Net Asset Value (NAV). The net asset value is the market value of an asset minus the liabilities, divided by the number of shares outstanding.
Non-Qualified Distribution. A non-qualified distribution is a distribution that was used to pay for non-qualified expenses, such as distributions that are not used to pay for college.
Passive Management. A passively managed investment does not involve much buying and selling. Index funds are examples of passive investing that does not involve much turnover of the fund’s holdings.
Plan Document. A 529 plan document or disclosure statement provides detailed information about the 529 plan, including a description of the plan, risk factors, options for contributing to the account, available investment portfolios (including past performance), plan fees and expenses, tax considerations, the rules concerning distributions, limitations and penalties.
Portfolio. A portfolio is an investment consisting of a collection of stocks and/or bonds.
Prepaid Tuition Plan. A prepaid tuition plan is a college savings plan that locks in future tuition rates at today’s prices, usually with a premium charged on top of the current cost of tuition. Prepaid tuition plans are usually limited to tuition and fees at public colleges of the state that sponsors the prepaid tuition plan.
Private College 529 Plan. The Private College 529 Plan is a prepaid tuition plan organized by about 300 private colleges and universities.
Prospectus. A prospectus is a document that provides information about an investment, such as a mutual fund, that is offered for sale.
Public Offering Price (POP). The POP is the price at which a fund is offered to investors. It is equal to the NAV minus sales charges.
Qualified Distribution. A qualified distribution is a withdrawal of funds from a 529 plan that are used to pay for qualified expenses. Qualified distributions are tax-free.
Qualified Expenses. Qualified higher education expenses for a 529 plan include tuition, fees, required textbooks, supplies and equipment, room and board (if the student is enrolled at least half-time), a computer, peripherals, software and internet access. It also includes special needs expenses. It does not include transportation, dependent care costs or personal/miscellaneous expenses.
Recapture. Recapture refers to the recovery of state income tax benefits attributable to a non-qualified distribution.
Rights of Accumulation. Rights of accumulation allow investors to qualify for a breakpoint by combining all assets held by the investor and the investor’s family, not just the 529 plan account.
Rollover. A rollover is a distribution from one 529 plan that is reinvested in another 529 plan within 60 days. A rollover is allowed once per 12-month period without incurring federal income tax. Some plans treat a rollover to an out-of-state plan as a non-qualified distribution, resulting in state income tax on the earnings portion of the distribution, plus recapture of state income tax benefits previously received.
Sales Charge. A sales charge is a commission on the purchase of an advisor-sold 529 plan. A sales charge is sometimes called a front-end load.
Savings Bond. A savings bond is a government bond, such as a Series EE or Series I bond.
Scholarship. A scholarship is a form of gift aid that is based on the student’s academic, artistic or athletic merit.
Section 529. 529 plans are named after Section 529 of the Internal Revenue Code of 1986, the section of U.S. tax law that defines 529 plans and specifies their requirements.
Self-Help Aid. Self-help aid includes money that must be earned or repaid, such as student employment and student loans.
Share Class. Advisor-sold 529 plans may be issued in one of several share classes. The investments are the same, but each class charges different fees and expenses. Class A shares have a front-end sales charge in addition to operating expenses. Class B shares have a contingent deferred sales charge instead of a front-end sales charge in addition to higher operating expenses than class A Shares. The contingent deferred sales charge is eliminated after a number of years and the Class B shares eventually convert into Class A shares. Class C have no sales charges, but have higher annual operating expenses than Class A shares.
Small-Cap. See Capitalization.
Static Investment. A static investment does not change over time.
Stock Funds. A stock fund is a type of mutual fund that invests in company stocks. Some stock funds invest in large-cap, mid-cap and small-cap stocks. Stock funds can also invest in value, growth and blend stocks.
Stock. A stock is a security that represents ownership rights in a company.
Successor Account Owner. The successor account owner is a person who will be designated as the new account owner upon the death of the current account owner.
Superfunding. Superfunding refers to the use of 5-year gift-tax averaging to make a lump sum contribution to a 529 plan account.
Tax Advantages. Tax advantages include tax-deferred earnings and tax-free distributions from a 529 plan, as well as the state income tax deduction or tax credit for contributions to the state’s 529 plan.
Tax Credit. A tax credit is a reduction in a tax liability.
Tax Deduction. A tax deduction is a reduction in taxable income.
Tax Deferred. When income taxes and capital gains taxes are deferred, they are paid at a future date instead of when they are incurred. This can shift the taxes to a time when the taxpayer has a lower tax bracket or a situation when the tax liability is disregarded, such as qualified distributions.
Tax Penalty. A tax penalty is additional tax that serves as a disincentive for certain activities, such as non-qualified distributions from a 529 plan.
Total Return. The total return on an investment is the percentage change in the investment’s net asset value, assuming that all dividends and capital gains distributions are reinvested.
Trust Fund. A trust fund is a set of assets that are managed by a trustee for the benefit of one or more beneficiaries.
UGMA. The Uniform Gift to Minor’s Act (UGMA) allows assets to be held by a custodian for the benefit of a minor. When the minor reaches the age of majority (typically 18 or 21), control shifts to the beneficiary. UGMA has mostly be superseded by UTMA.
UTMA. The Uniform Transfer to Minor’s Act (UTMA) is a custodial account where a custodian controls assets for the benefit of a minor until the minor reaches the age of trust termination, usually age 21. UTMA has replaced UGMA in most states.
Withdrawal. Withdrawal is another term for distribution. Distributions may be qualified or non-qualified.
Yield. Yield is the earnings from an investment over a period of time. Yield is expressed as a percentage of the market value of the investment.