Anyone age 18 or older with a valid social security number or US taxpayer identification number can open a NextGen account. It doesn’t matter where you live and there are no income restrictions. You can open an account for your child, grandchild or any loved one. You can also open an account to save and invest for your own higher-education expenses. Family members and friends can even open accounts for your child, or contribute to one you’ve opened.
The terms can be confusing! The account owner (also called the Participant) is the person who establishes and retains control of the account. The designated beneficiary is the student on whose behalf the account has been established and may be any individual, regardless of age, with a valid social security number. An account owner may open accounts for multiple beneficiaries, and a student may be the beneficiary of more than one account.
Qualified higher education institutions include all accredited post-secondary institutions that are eligible to participate in Federal Student Assistance Programs. This broad list includes public universities, private colleges, graduate schools and vocational schools.
For more information on schools that are eligible to participate, visit the Federal Student Aid Web site — www.fafsa.ed.gov — and enter the names of schools your child might attend. Eligible schools will have been assigned a federal school code. Even some foreign institutions of higher learning qualify! NextGen account funds may be used at any post-secondary school with a federal school code.
Qualified expenses generally include the big-ticket items such as college tuition and room and board, as well as books and supplies. The beneficiary must be attending an accredited institution at least half-time for room and board to be considered an eligible expense.1
Any earnings have the opportunity to grow free from federal (and possibly state) income tax and are federal tax-free when withdrawn to pay for qualified higher-education expenses.1 Contributions are not deductible for federal income tax purposes. Residents of the state of Maine may receive additional tax benefits such as a state income tax deduction. These tax benefits can help maximize your contributions to your 529 account.
You may also be able to take advantage of a gift tax election that applies to contributions to Section 529 accounts. This election generally allows you to contribute up to $70,000 per beneficiary in one year and elect to prorate it over five years without federal gift tax liability, as long as you do not make any additional gifts to your beneficiary for the next five years. Married couples generally can contribute up to $140,000 per beneficiary in any one year. This gifting strategy may be an attractive option for grandparents wishing to help fund college for one or more grandchildren.2
It’s easy to take the first step with NextGen. The minimum amount required to open an account is just $250. However, if you choose to fund your NextGen account through automated contributions from a checking or savings account or through payroll deduction contributions of as little as $50 a month, an initial contribution is not required to open your account.
If you are a Maine resident, you may be eligible for the $500 Harold Alfond College Challenge Grant (Alfond Grant), which would eliminate the need for you to make an initial contribution. If you do not qualify for the Alfond Grant, you may be eligible for a $200 Initial Matching Grant, which would allow you to open your NextGen account with a minimum contribution of $50. Click here to find out more about Benefits for Maine Residents.
The NextGen Plan contribution limit is generous — $380,000 per beneficiary. That means contributions can be made until the combined contributions in all accounts set up for the same beneficiary reach $380,000. This amount is based on certain college and graduate school costs and is adjusted periodically.
With the NextGen Client Direct Series, you’re in the driver’s seat! You have many portfolios of funds to choose from that are designed with your college savings goals in mind. There are age-based options that will automatically re-allocate as your child grows, as well as diversified and single fund portfolios. The Principal Plus Portfolio is also available and may be a great choice to consider if you have low risk tolerance or your child is near college-age. Click here to get more investment information.
If you’re seeking professional assistance, the NextGen Client Select Series offers more investment options and is available through Merrill Lynch Financial Advisors or Maine Distribution Agents. Click here to learn more about the NextGen Client Select Series.
The NextGen Plan does not guarantee your investment or any specific rate of return. The value of your account may increase or decrease, based on the investment performance of the investment(s) which you select.
Transfers of securities to fund a NextGen account are not allowed. Investments must be made in the form of cash through electronic funds transfers, checks or certain rollovers.
Section 529 plans, including the NextGen Plan, have built-in flexibility that always leave you in control and gives you options. In the event your beneficiary does not choose college, you can:
- Leave it invested! The assets can stay in the account where they can continue to have the opportunity to grow tax deferred. If your beneficiary decides to attend college in the future, the funds can be withdrawn federal (and possibly state) income tax-free for qualifying higher education costs.1 There is currently no time limit on when funds must be withdrawn.
- Change the beneficiary to a qualifying family member of the current beneficiary with no immediate tax consequence.3 You could change the beneficiary in the account to a sibling, for instance, to pay for that child’s qualifying college costs. You could even change the beneficiary to yourself and pursue your own higher education! Keep in mind that if you change the beneficiary to anyone other than a qualified family member of the current beneficiary, the change could be treated as a non-qualified withdrawal and the earnings portion of the transferred amount will be subject to income tax and a 10% additional tax.
- Take the money back. Keep in mind, if you take a non-qualified withdrawal, any earnings will be subject to ordinary income tax and an additional 10% tax, and may also be subject to state and local income taxes. The additional 10% tax does not apply under the following
–– If the beneficiary receives a scholarship, you can withdraw up to the amount of the scholarship from your account.
–– If the beneficiary becomes disabled.
–– If the beneficiary dies and the withdrawal is paid to the beneficiary’s estate.
A qualifying family member of the current beneficiary includes:
- Son, daughter, stepchild, foster child, adopted child;
- Brother, sister, stepbrother, or stepsister;
- Father or mother or ancestor of either;
- Stepfather or stepmother;
- Son or daughter of a brother or sister;
- Brother or sister of father or mother;
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law;
- The spouse of the beneficiary;
- The spouse of any individual listed above;
- First cousin.
If your child is fortunate enough to receive scholarships, that’s cause for celebration! Remember, though, that you will probably still have qualifying college expenses to pay — such as room and board, required fees, books or supplies.1 The beneficiary must be attending an accredited institution at least half-time for room and board to be considered a qualified expense. You could also choose to keep any remaining funds in the 529 account to cover your beneficiary’s expenses for graduate school or you could change the beneficiary on the account to another family member.3
You also have the option of withdrawing funds from your account for the amount of the scholarship without being subject to the 10% additional tax.. You would, however, be required to pay federal and applicable state income tax on the earnings portion of the withdrawn amount.
No. As the NextGen College Investing Plan account owner, you retain control of the account. Only you can instruct how and when withdrawals are made from the account.
Yes. But, because securities cannot be contributed to a NextGen account, you must first liquidate any securities in the UGMA/UTMA account and deposit the cash into your NextGen account. In addition, you will have to report any gains/losses incurred from liquidating the custodial accounts on your personal tax return. You should discuss any financial transactions with your accountant. The good news is that once the custodial assets are deposited into a NextGen account, you have the opportunity to benefit from the advantages of NextGen and eliminate any need to file an annual tax return for the UGMA/UTMA assets held in the NextGen account!
Yes. Currently you can contribute to both, but contributions to both a Section 529 account and a Coverdell ESA in the same year for the same beneficiary will be subject to an excise tax after December 31, 2012.4
Yes. Currently, you are permitted one rollover per year from a Coverdell or other qualified Section 529 plan without having to change the beneficiary.
Yes. Contributing to a NextGen account will not affect your eligibility to receive these credits. However, you must meet the federal income requirements for these credits. Visit the Internal Revenue Service Web site at www.irs.gov and consult your personal tax advisor for more information on the American Opportunity and Lifetime Learning credits.
Not necessarily. Each state offers its own features both to the general population and to its own residents. Compare plans and find out what is truly right for you and your beneficiary. Visit collegesavings.org to do a comparison of various state Section 529 plans across the country.
The assets in a 529 plan are considered an asset of the account owner. If the account is owned by the parent or the dependent student, then the assets are currently weighted at 5.6% toward the expected family contribution (EFC) formula. Distributions from Section 529 accounts owned by the parent or the student are not considered to be income to parents or student in the EFC formula.5
1 To be eligible for favorable tax treatment afforded to any earnings portion of withdrawals from Section 529 accounts, such withdrawals must be used for “qualified higher education expenses,” as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax as well as state and local income taxes.
2 Contributions between $14,000 and $70,000 ($28,000 and $140,000 for married couples filing jointly) made in one year can be prorated over a five-year period without subjecting you to gift tax or reducing your federal unified estate and gift tax credit. If you contribute less than the $70,000 ($140,000 for married couples filing jointly) maximum, additional contributions can be made without you being subject to federal gift tax, up to a prorated level of $14,000 ($28,000 for married couples filing jointly) per year. Gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $14,000 and $70,000 ($28,000 and $140,000 for married couples filing jointly) made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in his or her estate for estate tax purposes. Please consult your tax and/or legal advisor for such guidance.
3 Some restrictions apply. You generally are permitted to change the beneficiary to another qualified member of the family, as defined under the Internal Revenue Code, without triggering income tax and 10% additional federal tax. Not applicable for accounts opened under a Uniform Gifts/Transfers to Minors Act registration.
4 Unless extended, certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 will expire after Dec. 31, 2012, resulting in certain changes affecting Coverdell ESAs. These changes include an excise tax that would apply if a contribution is made to both a Section 529 account and a Coverdell ESA in the same year for the same beneficiary.
5 This is based on current interpretation of federal financial aid rules. Financial aid rules may change, and the rules in effect at the time the beneficiary applies may be different. Distributions from Section 529 accounts owned by a party other than the parents or the student may be treated differently when calculating the EFC. For more complete information, please go to the Department of Education’s Web site at www.ed.gov.
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