Monthly top tips

So Says the 529 Guru

No. 8
Joe Hurley
Tuesday, July 22nd 2003

Question: Do 529 plans allow me to make contributions for my OWN continuing education? I'm in my 40s and am looking to begin a master's program. If 529 plans do not allow me to make contributions as my own beneficiary, are there similar plans that do allow this? I expect to enroll in a master's program by this time next year, if not earlier. - chelle394 on the Savingforcollege.com Message Board

Answer: Yes, you may save for your own continuing education with a 529 plan. The majority of 529 savings programs impose no limits on the age of the beneficiary or on the duration of the account, making them useful for “traditional” and “nontraditional” students alike. Simply name yourself as beneficiary when setting up the account.

Iowa’s popular 529 plan is a notable exception. It mandates that the beneficiary be under age 18 at the time the account is opened. And most of the prepaid tuition plans do not readily accommodate the adult student, so be sure to understand the rules before enrolling in the prepaid variety of 529. A few other 529 savings programs (including those in South Carolina, Utah, and Virginia) impose some restrictions based on age or time, but they aren’t necessarily off limits to people like yourself—the ability to roll over your account to a less-restrictive 529 plan at any time makes it possible to avoid involuntary termination.

I believe the use of 529 plans for “later learning” to be an underutilized opportunity, as my sense is that relatively few adults are opening 529s for themselves. Yet, many of us will readily admit to harboring a desire to go back to school at some point in the future. In fact, a recent Business Week article noted that 15 percent of all students currently attending community colleges are adults.

Adult education funded through a 529 plan can be part-time or full-time, on-campus or off-campus through distance learning programs. You don’t have to be seeking a degree. Provided the course is offered through an “eligible educational institution,” the tuition, mandatory fees, and required books, supplies, and equipment constitute qualified expenses for purposes of Section 529. (Room and board are qualified expenses only for the student who is attending at least half-time, however, so anyone looking to pay their Florida condo expenses with a 529 account by taking a single cooking class in Tampa will be disappointed.)

Even when school is just around the corner, as it is in your case, a 529 plan can be a terrific option. You’ll be avoiding tax on any money you wish to set aside for that purpose. And be sure to find out if your state offers a state income tax deduction for contributions to its own 529 plan. The value of that deduction can easily offset the cost of a few of those expensive textbooks.

One of the dedicated visitors to our message board likes to point out that adults pursuing postsecondary education should consider whether the expense (even when paid through a 529 plan) might qualify for a deduction as a business expense. So be sure to investigate that angle as well.

Question: I currently have our 3 children in Wisconsin’s Age-based Option. Our oldest, having 2 1/2 years until college, will have his account move to the Stable Value Portfolio this August. This portfolio is new to the EdVest program as of December 2002, replacing the Bond Portfolio. I have read the program description but still have questions: can someone give me more information or the "for Dummies" explanation? What are stable value investments? Are they government bonds or CDs? What are the insurance wrapper agreements? - JR

Answer: Over the past three years, stable-value portfolios have become a popular 529 option. This type of investment offers principal safety and liquidity similar to a money market fund, but pays bond-like interest.

Stable-value portfolios generally invest in guaranteed investment contracts or GICs. “Traditional” GICs, which are issued by insurance companies, guarantee principal and a fixed or floating rate of interest for a specified time. For instance, the “Guaranteed Option” found in many of the TIAA-CREF-managed 529 savings programs consists of a funding agreement between the program and the TIAA Life Insurance Company. The agreement provides for a minimum 3% rate of interest with the actual rate declared quarterly. Currently, the rates on these options range between 3% and 3.8%. The contract’s guarantees are backed solely by the issuer’s faith and credit.

A second type of stable-value portfolio (found in Wisconsin’s EdVest and other 529 plans) features something known as a “synthetic GIC.” Under a synthetic structure, the portfolio may invest in a single asset or, more commonly, in a portfolio of fixed-income securities. The fixed-income portfolio is then “wrapped” by a contractual agreement from one or more banks, insurance companies, or other financial institutions that provide stable returns through a mechanism that amortizes market gains and losses over the life of the contract and applies a crediting rate to the portfolio. The crediting rate mechanism ensures a pass-through of the portfolio’s investment performance. The contract also typically offers principal safety through a “floor” guarantee that ensures the crediting rate will not fall below a pre-determined level, as well as liquidity provisions to fund participant-initiated withdrawals regardless of the underlying value of the portfolio’s assets.

Additional details about Wisconsin’s Stable Value Portfolio, including an explanation of its risks, are described in the EdVest program disclosure booklet. If you have further questions, contact the program manager or ask a financial professional for help. Another valuable resource is the Stable Value Investment Association at www.stablevalue.org.

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