An Overview of Section 529 Plans

Douglas Chittenden
VP Institutional Product Management
TIAA-CREF
Cost of Higher Education

$250,000

$200,000

$150,000
4yr Public $100,000
4yr Private
$50,000

$0
2005 2010 2015 2020
Year
*Source: Trends in College Pricing, published by the College Board FS-3
College Funding Opportunities

Qualified Tuition Programs – “529”

– Prepaid Tuition Plans
– College Savings Plans
 Prepaid Tuition Plans

 Allows for the purchase of future tuition at

today’s prices.
 Approx. 20 states operate pre-paid programs
for public universities in those states.
 Typically funds may be used tax-free for
tuition and room and board.
 A program for independent colleges and
universities is available through the Tuition
Plan Consortium with TIAA-CREF as the
program manager.
 College Savings Plans
 Federal tax deferred growth and federal tax
free withdrawals for qualified higher education
expenses
 Some states offer additional state tax
incentives
 Funds can be used at any eligible school for
tuition, fees, room and board, books, supplies
and required equipment such as computers
 No income limits for participation or benefits
College Savings Plan Program Design
 Programs typically offer a range of investment
options.
– Aged based models
– Asset based options, fixed income, equity
– Fund specific options
 Account owners can change options yearly
 States set contribution maximums set to allow for full
funding of four years of college
 College Savings Marketplace

 529 Assets have grown to over $90 Billion industry wide

 Federal Tax Permanency enacted – “Sunset Provision”
eliminated
 Broker-Driven Growth, 70-80% of assets are invested through
Advisors and Brokers
 Confusing 529 Landscape
 Pre-Paid vs. Savings vs. Other College Savings Options such
as UGMA accounts
 Large number of 529 programs to choose from
 College Savings Programs –
Market Overview

 Programs are maturing and assets are

growing, driving down costs and leading to
product innovation – affinity programs etc..
 State market is segmenting as larger states
accumulate more assets
 Industry Groups are Pushing for State Tax
Equity – more attention to suitability
 Principles for Successful
College Savings Strategy
 Start Early and make continuous, on-going
contributions
– Typical Re-contribution Rate – 60%
 Use a diversified portfolio of investments
– Age Based Allocation Options typically hold 60% -
70% of program assets
 Take advantage of federal and state based
tax incentives
 Minimize expenses
 Take Advantage of Tax
Incentives
$155,000 $154,325
$150,000 $148,035
$145,000 $137,867
$140,000
$135,000 $129,752
$130,000
$125,000
$120,000
$115,000
Mutual Mutual 529 529
Fund Fund Savings Savings
(After- (UGMA) (no state (with
tax) ded.) state tax
ded.)
* $6,000 invested each year for 15 years. 6% investment return. Account owner in 27% federal and
5% state income tax brackets. Beneficiary child is in the 10% federal and 5% state income tax
bracket. 35% of proceeds are dividends taxed at 27% federal and 5% state income tax rates. 30%
are short-term capital gains and 35% are deferred capital gains taxed at a 20% rate (10% for
UGMA). FS-19
 Minimize Expenses
$35,000
$30,546
$29,529
$30,000 $28,543
$26,215
$25,000

$20,000

$15,000

$10,000 0.60% 0.80% 1.00% 1.50%

Assumes a $10,000 deposit at birth and allowed to grow for 18 years in the same plan,
with different annual asset-based fee charges . Assuming a 7% return.
 TIAA-CREF – College Savings Programs
 TIAA-CREF is program manager for 10 state
programs
Michigan Connecticut

Idaho Kentucky
Tennessee Mississippi
Georgia Minnesota
Vermont California
 TIAA-CREF College Savings Program -
Independent College (I-529) Pre-Paid Program

 I-529 program provides for the pre payment of tuition at

Independent Colleges and Universities, it is operated by the
Tuition Plan Consortium (TPC)
 Approximately 275 Member Private Colleges and Universities,
including Princeton, Stanford, University of Notre Dame and
Johns Hopkins (new member.)
 Pre-paid tuition can be applied to any member institution
 If child does not attend member institution, account owner
receives a refund with a nominal rate of investment return