Investing for College

529 College Savings Plan

Perhaps the most popular education savings and investing vehicle is the 529 College Savings Plan, which was authorized by Congress in 1996 to encourage Americans to save for higher-education expenses. Through this tax-advantaged plan, a parent or other account holder can establish a fund on behalf of a student to cover qualified education expenses. Earnings on and withdrawals from a 529 account are exempt from federal, and sometimes state, income tax as long as the money is used for eligible college expenses. (Withdrawals not used for eligible college expenses may be subject to income tax and an additional federal penalty tax.)

529 plans are administered by individual states and, therefore, the details of each can vary. But in all cases, 529 plans offer professionally managed investment solutions rather than being self-directed. Most offer age-based or risk-based asset allocation options. In an age-based plan, the underlying investments become more conservative as the beneficiary approaches college age. A risk-based plan maintains the same mix of stocks and bonds regardless of the beneficiary's age, based on the model (these generally range from conservative to aggressive) selected by the account holder.

529 College Savings Plan: Points to Remember

• Contributions grow tax-deferred. Distributions are income tax-free when used for qualified education expenses.
• The Pension Protection Act of 2006 made the tax-free treatment of distributions permanent (previously, the favorable treatment was set to expire in 2010).
• Significant contribution limits, determined by the state administering the plan. Note, however, that annual contributions over $13,000 (for tax year 2009) may be subject to federal gift tax.
• Anyone can invest; there are no income restrictions.
• Professionally managed investment portfolio.
• No age limit for withdrawing funds.
• Unused assets can be transferred to another eligible family member.
• Money in a 529 plan is considered the account holder's (not the beneficiary's) when applying for financial aid. This is an advantage in that only 5.6% of parental assets are considered when calculating aid figures, versus 35% of the student's assets. Notably, more and more grandparents are opting to open 529 accounts, and 0% of grandparents' assets are factored into financial aid calculations.
• Non-qualified withdrawals are subject to income tax and a 10% IRS penalty.

529 Prepaid Tuition Plan

Perhaps a lesser-known 529 program is the Prepaid Tuition Plan. Prepaid plans may be administered by states or higher education institutions. Account holders essentially pay an amount up-front based on current tuition costs for a specific in-state college or university. The plan invests this money and, in turn, guarantees that it will cover the cost of tuition when the child ultimately enrolls in the state school.

If the child does not attend the in-state school, most plans will allow the funds to be transferred to a private or out-of-state school, although any difference between the prepaid tuition and the chosen school's present-day tuition will be due to that school.

529 Prepaid Tuition Plan: Points to Remember

• Lump-sum investment covers a certain number of college credits or years of school.
• Geared to in-state public schools.
• States guarantee to at least match in-state college tuition increases.
• Significant contribution limits, determined by the state administering the plan. Note, however, that annual contributions over $13,000 may be subject to federal gift tax.
• Anyone can invest; there are no income restrictions.
• No age limit for withdrawing funds.
• Unused assets can be transferred to another eligible family member.
• Cancellation costs can apply for those who choose to exit the program.
• Accumulated funds may be transferred to an out-of-state or private school, but the difference in tuition must be paid.

Coverdell Education Savings Account (ESA)

The Coverdell ESA is a custodial account originally introduced as an "Education IRA." Coverdell ESAs allow money to grow taxdeferred and proceeds to be withdrawn tax-free for qualified education expenses at qualified institutions. Notably, this currently can include primary and secondary schools, a unique feature not available in a 529 plan. The guidelines for ESA investments are generally consistent with those for an IRA. Balances in a Coverdell ESA must be used for qualified education expenses by the time the beneficiary is 30 years old; alternatively, they may be gifted to another family member younger than age 30 or rolled into a 529 plan in order to avoid taxes and penalties.

Coverdell ESA: Points to Remember

• Contributions grow tax-deferred. Distributions are income tax-free when used for qualified education expenses.
• $2,000 contribution limit per child, per year (through 2010). Income limitations apply.
• Self-directed investment. You construct your portfolio, and buy and sell at your discretion.
• Covers qualified elementary and high school education expenses (through 2010), as well as college expenses.
• Contributions to the account cannot be made after the beneficiary reaches age 18 (except in the case of a special-needs beneficiary).
• Funds must be used before the beneficiary reaches age 30 to avoid penalties and taxes.
• Unused assets can be transferred to another eligible family member under age 30 or rolled into a 529 plan.
• Money in an ESA is considered the account holder's (not the beneficiary's) when applying for financial aid.

Uniform Gift to Minors Act/Uniform Transfer to Minors Act (UGMA/UTMA) Account

Like a 529 Savings Plan and Coverdell ESA, a UGMA/UTMA is a custodial account set up in a child's name. Parents can contribute up to $13,000 annually per child without federal gift tax consequences, making it a cost-effective means for storing funds earmarked for college. Money contributed is considered an irrevocable gift to the child and the income earned is generally taxed at the child's lower tax rate.

Unlike a 529 or Coverdell ESA, the child assumes control of the funds upon reaching adulthood (generally age 18 or 21, depending on the state and whether the account is a UGMA or UTMA). This means the money can be used for education expenses - or for anything else the child chooses. The assets in these accounts are the property of the child for whom the account was established; the funds cannot be transferred to another family member.

UGMA/UTMA Account: Points to Remember

• Offers a means to take advantage of the "kiddie tax" (lower tax rate applied to children) while earmarking funds for your child.
• Flexibility to use assets for needs other than college.
• Control of the account is given to the child at the legal age of majority.
• Money in the account is considered the child's when applying for financial aid, which can impact eligibility.
• Account cannot be transferred to another child.
• Self-directed investment. You construct and manage your portfolio.

Roth IRA

Although not designed for college saving, investors can dip into contributions made to a Roth IRA to cover college expenses. In fact, contributions to a Roth IRA can be withdrawn tax-free at any time, for any purpose. Earnings, when used for education expenses, also can be withdrawn penalty-free, but are taxable until after age 59½. One advantage of using a Roth to save for college is that if the money is not required to cover college expenses, it can continue to work, tax-advantaged, toward the investor's retirement goal. Conversely, unused money in a 529 or ESA account must be transferred to another beneficiary to cover college expenses or it will be subject to taxes and penalties if withdrawn for other purposes.

Mutual Funds

The tried-and-true benefits of mutual funds also make them an effective means for saving for college. You waive the tax advantages of the qualified education savings programs, but you acquire the flexibility to invest in any professionally managed funds you choose, with no income or contribution limits and the ability to access those assets as needed, without penalty.

BlackRock offers a wide range of mutual funds targeted to the risk profile of virtually every investor-from moderate to conservative. BlackRock funds may be purchased within Coverdell ESA, UGMA/UTMA and Roth IRA accounts, and also are available in select 529 programs. Consult your financial professional or call our award-winning Service Center at 800-441-7762 for more information.

Comparison of College Saving/Investing Options

Point to Remember
	529 Savings	529 Prepaid Tuition	Coverdell ESA	UGMA/UTMA	Roth IRA
Funds May Be Used for...	Eligible college expenses	Eligible college expenses at designated school (for maximum benefit)	Eligible secondary (through 2010) and post-secondary education expenses	Funds may be withdrawn at any time for any purpose	Contributions only may be withdrawn at any time for any purpose
Contribution Limit	Depends on state/plan; usually quite high	Depends on plan	$2,000 per student per year (through 2010)*	No limits, but be aware of gift tax consequences for contributions exceeding $13,000 per child (in 2009)	$5,000 in all IRAs each year; higher for those over age 50
Income Limit	No income limitations; anyone can invest	No income limitations; anyone can invest	$110,000 for single filers; $220,000 for joint filers	No income limitations; anyone can invest	$120,000 for single filers; $176,000 for joint filers (in 2009)
Tax Treatment of Withdrawals	Tax-free if used for qualified expenses	Tax-free if used for qualified expenses	Tax-free if used for qualified expenses	Withdrawals are taxable, usually at the child's tax rate	Withdrawals of contributions are tax-free at any time
Investment Options	Professionally managed portfolios; generally age- or risk-adjusted	Assets are invested by the plan administrator	Self-directed and flexible; account holder builds portfolio	Self-directed and flexible; account holder builds portfolio	Self-directed; account holder builds portfolio
Control of Assets	Control remains with account holder/ contributor	Control remains with account holder/ contributor	Control remains with account holder/ contributor	Control transfers to beneficiary at legal age of majority	Control remains with account holder
Transferability/Change of Beneficiary	Account assets may be transferred to another eligible family member of any age	Account assets may be transferred to another eligible family member of any age	Account assets may be transferred to another eligible family member under age 30	Account assets cannot be transferred to another beneficiary	NA
Age by Which Funds Must Be Used	No age limit	No age limit	By age 30	By age of majority or transferred to beneficiary	NA
Impact on "Needs-Based" Financial Aid	Funds are considered the account holder's when applying for financial aid	Funds are considered the account holder's when applying for financial aid	Funds are considered the account holder's when applying for financial aid	Funds are considered the beneficiary's when applying for financial aid	NA
Penalties	Unused money must be transferred to another beneficiary for college expenses or is subject to taxes and penalties if withdrawn for other purposes	Unused money must be transferred to another beneficiary for college expenses or is subject to taxes and penalties if withdrawn for other purposes	Unused money must be transferred to another beneficiary for eligible expenses (or can be rolled into a 529) or is subject to taxes and penalties if withdrawn for other purposes	No penalties if not used for college expenses; unused funds are distributed to child at age of majority	No penalty for contributions withdrawn for any purpose; withdrawals of earnings prior to age 59½ are penalty-free, but taxable, when used for education
* This provision is slated to sunset in 2010, returning the contribution limit to $500.

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This material is provided as an educational tool and is based on current tax laws, which may change in the future. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. BlackRock is not engaged in rendering any legal, tax, accounting or investment advice. Please consult with a qualified professional for this type of advice.

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Prepared by BlackRock Investments, LLC, member FINRA.