529 Plans

 
Exchange Traded Products (ETPs)

Characteristics

BFE offers 529 education savings plans and 529-ABLE plans, which are both types of “529 plans”. 529 plans are tax-advantaged and state-sponsored investment programs named after the section of the Internal Revenue Code that authorized them.

529 Plans for Education

There are two general types of 529 plans that are used for education: savings plans and prepaid tuition plans. Savings plans are investment accounts that allow investment earnings to grow tax-deferred, and withdrawals are exempt from federal taxation when used for qualified educational expenses. Education savings plans generally operate through state-sponsored trusts and permit investors to allocate contributions to one or more trust portfolios or “investment options” offered in the plan. Prepaid tuition plans allow investors to “lock in” tuition rates at certain specified educational institutions. Every state offers at least one type of these 529 plans, and some states offer both types of 529 plans. The remainder of this section discusses 529 education savings plans.

There are also two general types of 529 education savings plans: direct-sold and advisor-sold. If you invest in a direct-sold 529 education savings plan, your contributions are sent directly to the state that sponsors the plan. An advisor-sold plan offers investments through a financial advisor. Not all states offer advisor-sold plans. In addition, a financial advisor may not have the ability to offer every state’s advisor-sold plan. A state may choose to sponsor a direct-sold education savings plan, an advisor-sold education savings plan, or both. Advisor-sold plans typically have different investment menus than the direct-sold plans.

Contributions to a 529 education savings plan are not deductible on your federal income tax return. However, making contributions to the 529 education savings plan sponsored by your state of residence may provide you with a state income tax deduction or credit. Deductions or tax credits vary from state to state and sometimes are only available if the contributions are made to the resident’s state-sponsored 529 plan. Contributions to a 529 education savings plan are subject to annual gifting limits ($15,000 in 2020) and provide special rules for making five-year advanced gifting to enable larger amounts to be contributed in a single year. Income limits do not apply to 529 plans. Age limits do not apply to 529 plans.

Education savings plan contributions are generally invested in certain underlying investment options, such as mutual funds. Investment menus are chosen by the state’s investment committees. The contributions will fluctuate in value as the underlying investment options increase or decrease, and there is no guarantee that the amount contributed to the 529 education savings plan will equal the amount necessary for future education expenses. Although similar to mutual funds in certain ways, 529 education savings plans are issued by state governments, and are not directly regulated or registered under the federal securities laws. Account owners are limited to changing investments twice per year. Account owners make investment decisions in education savings plan on behalf of the beneficiary/student.

An important step to take prior to investing in a 529 education savings plan is to carefully read the offering document (often called a program description or “official statement”). Each program description contains important information that will help you make an informed decision about an investment in a 529 education savings plan. In deciding whether to invest in a 529 education savings plan, you should consider several different factors, including each investment option’s past performance, investment objective, investment strategy and risks, the investment adviser responsible for advising the state issuer, and the fees and expenses associated with an investment in a particular investment option. While past performance of an investment option is not indicative of future results, an investment option’s long-term performance record may be an important factor in deciding to invest.

Withdrawals from a 529 education savings plan that are used for qualified education expenses are exempt from federal income taxes. Qualified education expenses include tuition, fees, books, supplies and equipment that is necessary for enrollment or attendance at a post-secondary education institution such as a college or university. In addition, for federal income tax purposes, qualified education expenses also include up to $10,000 a year in K-12 tuition, fees, books, supplies and equipment costs for registered apprenticeship programs, and repayment of up to $10,000 in student loan debt for the beneficiary/student and any siblings of the beneficiary/student. Although most states also treat college-related qualified education expenses as tax-free, they may not treat K-12 tuition, apprentice program expenses and student loan debt repayment as qualified expenses for state income tax purposes. Withdrawals that are not used for qualified education expenses have tax implications. For federal income tax purposes, any earnings distributed in a non-qualified withdrawal are included in taxable income and subject to a 10% tax penalty. For state income tax purposes, non-qualified withdrawals can be subject to a recapture of previously received state income tax credits or deductions. Consult your tax professional for additional information specific to your tax situation.

529 Plans for Disabled Individuals (529 ABLE)

529 ABLE (Achieving Better Life Experience), or 529-A plans, are another type of 529 plan. 529-A plans are state-sponsored savings plans for disabled individuals that offer similar tax advantages to 529 education savings plans. 529-A plans are investment accounts that allow investment earnings to grow tax-deferred, and withdrawals are exempt from federal taxation when used for qualified disability expenses. The savings in a 529-A plans have no effect on needs-based aid programs such as Medicaid and Supplemental Security Income (SSI) for accounts up to $100,000.

Most, but not all, states offer 529 ABLE plans. 529-A plans can be national plans or resident-only plans. National plans are open to anyone, regardless of residency. With a resident-only plan, you must reside in that state to participate in the plan. 529-A plans can also be direct-sold or advisor-sold, similar to 529 educations savings plans discussed above. A state may choose to sponsor a direct-sold 529-A plan, an advisor-sold 529-A plan, or both. A financial advisor may not have the ability to offer every state’s advisor-sold plan.

Contributions to a 529-A plans are not deductible on your federal income tax return. However, making contributions to a 529-A plan sponsored by your state of residence may provide you with a state income tax deduction or credit. Deductions or tax credits vary from state to state and sometimes are only available if the contributions are made to the resident’s state-sponsored 529-A plan. Income limits and age limits do not apply to 529-A plans.

529-A plans can be established for any individual who became blind or disabled from a condition diagnosed before the age of 26 if they are also eligible for Supplemental Security Income, Social Security Disability Income, or otherwise meet a disability certification requirement. Contributions can be made by anyone, but the account owner is the beneficiary/disabled individual. If the individual cannot or chooses not to establish and manage the 529-A plan account, a parent, legal guardian, or legally authorized representative may open and manage the account. Contributions to a 529-A plan are limited to the annual gift limit ($15,000 in 2020). However, certain employed disabled individuals may also make contributions from their own income up to the higher of their earned income or the federal poverty limit for a one-person household.

529-A contributions are generally invested in certain underlying investment options, such as mutual funds. Investment menus are chosen by the state’s investment committees. The contributions will fluctuate in value as the underlying investment options increase or decrease, and there is no guarantee that the amount contributed to the 529-A plan will equal the amount necessary for future expenses. 529-A plans are issued by state governments and are not directly regulated or registered under the federal securities laws. Account owners are limited to changing investments twice per year.

An important step to take prior to investing in a 529-A plan is to carefully read the offering document (often called a program description or “official statement”). Each program description contains important information that will help you make an informed decision about an investment in a 529 ABLE plan. In deciding whether to invest, you should consider several different factors, including each investment option’s past performance, investment objective, investment strategy and risks, the investment adviser responsible for advising the state issuer, and the fees and expenses associated with an investment in a particular investment option. While past performance of an investment option is not indicative of future results, an investment option’s long-term performance record may be an important factor in deciding to invest.

Withdrawals from a 529 ABLE plan that are used for qualified disability expenses are exempt from federal income taxes. Qualified disability expenses include education and training, housing, transportation, basic living expenses, health and wellness, financial management, employment training, assistive technology and personal support services, and legal fees. Withdrawals that are not used for qualified disability expenses have tax implications. For federal income tax purposes, any earnings distributed in a non-qualified withdrawal are included in taxable income and subject to a 10% tax penalty. For state income tax purposes, non-qualified withdrawals can be subject to a recapture of previously received state income tax credits or deductions. Consult your tax professional for additional information specific to your tax situation.

Fees and Costs

529 plans may have application fees (typically $50 or less), annual maintenance fees (generally ranging from $10 – $25) which are often waived for state residents, in addition to the expenses associated with the investment selection.

Most 529 plans offer multiple units (often called share classes), similar to the share class structure offered by many mutual funds. Though there are several types of 529 plan share classes, the most common share classes available to you are Class A and Class C. Each class typically has different fees and expenses, and therefore investment performance results will differ as those fees and expenses reduce performance differently across the various share classes. You should also note that the amount of time you expect to hold your investment in a 529 plan will play an important role in determining which share class is most appropriate for you, and you should discuss this consideration with your financial advisor.

When you invest in an advisor-sold 529 plan with us, you will typically pay a sales charge. We receive a portion of this sales charge for the sales and related services we provide to the primary distributor of the 529 plan.

In addition to these sales charges, 529 plans typically deduct certain ongoing fees and expenses from each investment option, such as program management fees, from assets in the investment options. Although these ongoing fees and expenses may vary based on your 529 plan, some of the more common ones are set forth below:

Program Management Fee 529 plans generally deduct a program management fee to pay the program manager for providing investment advisory, accounting, and other services to the plan. This fee is typically charged annually as a percentage of your assets and is reflected in the NAV of the plan’s investment options.

Maintenance Fee Most 529 plans charge an annual maintenance fee. This fee, which compensates the plan sponsor for costs of maintaining the plan, may be waived in certain circumstances, such as when your plan assets exceed certain thresholds.

Underlying Mutual Fund Expenses Most 529 plan investment options invest in one or more mutual funds and bear a portion of the fees and expenses of these underlying funds. The underlying mutual fund expenses are deducted from fund assets and reflected in the NAVs of the underlying mutual funds, which means they are also reflected in the NAV of the 529 plan’s investment options. More information on the mutual funds that underlie the plan’s investment options is available in the 529 savings plan’s offering document. In addition, more information on the underlying mutual funds, including their ongoing fees and expenses and overall expense ratio, is available in the funds’ prospectuses.

You pay these fees and expenses indirectly as they are deducted from your investment option assets, or the assets of underlying mutual funds, on an ongoing basis.

While there are no standard definitions for share classes, and each 529 plan defines its share classes in its offering document, set forth below are some basic descriptions of the most common share classes available to you:

Class A This share class usually carries a front-end sales charge, which is typically assessed as a percentage of each contribution. The net amount of your contribution after the deduction of the sales charge is invested in shares of the 529 plan investment option(s) that you select. Class A shares also typically have ongoing fees and expenses, which sometimes include fees commonly referred to as 12b-1 fees, and these 12b-1 fees are intended to finance distribution activities intended primarily to result in the sale of additional shares of the mutual fund. Despite these ongoing fees and expenses, Class A shares typically have lower operating expenses compared to the other share classes of the same investment option. This means that ongoing costs will typically be lower than ongoing costs associated with other share classes of the same investment option. Many 529 plans also offer “breakpoint” discounts for large investments in Class A shares of investment options, which means that the front-end sales charge decreases as the investment increases. These breakpoints are described in the 529 plan’s offering document and explained further below.

    • For example, if you purchase $1,000 of Class A shares of an investment option for a 529 savings plan that assesses a 3.5% front-end sales charge on your investment, then you will pay a $35 front-end sales charge and the remaining $965 of your contribution will be used to purchase Class A shares of the investment option. An ongoing annual operating expense fee of 0.60% on a value of $965 would equate to $5.79 that would be paid out of your holdings of the investment.

Class C This share class is characterized by a level asset-based sales charge that you pay annually as a percentage of your assets in an investment option. It does not have a front-end sales charge like Class A shares but does have a contingent deferred sales charge (also known as a CDSC) and a higher ongoing operating expense fee. The CDSC means that you may pay a sales charge when you sell your investment. The amount of the CDSC is typically assessed as a percentage of your investment, and it declines over time and eventually is eliminated the longer you hold your shares. Most Class C shares generally eliminate the CDSC after one year.

    • For example, if you purchase $1,000 of Class C shares of an investment option of a college savings plan with a 1% asset-based sales charge, you will not pay a front-end sales charge, so the entire $1,000 investment will be used to purchase Class C shares at the time of purchase. An ongoing annual operating expense fee of 1.35% on a value of $1,000 would equate to $13.50 that would be paid out of your holdings of the fund. Additionally, if you needed to sell the fund while the 1% CDSC was still in place, a sale of $1,000 worth of the fund would result in you receiving $990.

More Information

More information on the sales charges and ongoing fees and expenses is available in the 529 plan’s offering document, which you can request from your financial advisor.

You can also access information available from the Municipal Securities Rulemaking Board’s 529 Resource Page which has investor guides and FAQs. The Electronic Municipal Market Access (EMMA) database (emma.msrb.org/search/plan529.aspx) will allow you to search, by state, for program disclosure documents for both 529 education savings plans and 529 ABLE plans. Not all states have submitted their program disclosures to the MSRB. Offering documents for 529 savings plans can also be found online through the state’s website, typically through the Office of the Treasurer.