Scholars Choice 529 College Savings FAQs

 


General FAQs

 

What is a 529 plan?

A 529 plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code, which created these types of savings plans in 1996.

There are two types of 529 plans, the Prepaid Tuition Plan and the Education Savings Plan.

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Who is Scholars Choice?

Scholars Choice is an advisor-sold plan established under the CollegeInvest Section 529 College Savings Program. To establish an account, you must consult with a financial advisor or discuss with your existing advisor thoughts on opening a Scholars Choice College Savings account.

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Who can be an account owner?

One of the many benefits of the Scholars Choice 529 Plan is its versatility. Any U.S. resident (plus residents of Puerto Rico, Guam and the U.S. Virgin Islands) — parents, grandparents, relatives, even friends of the family — can open accounts for the benefit of anyone. You can even open an account for yourself and change the beneficiary at any time to another qualified family member.

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What is the initial deposit requirement? How much can be deposited each year? What is the maximum contribution limit?

The initial minimum contribution is $250 for all the Scholars Choice investment options. The minimum can be waived if a systematic automatic fund transfer is established when the account is opened.

Subsequent minimum contribution is as low as $50. This is waived if the account owner is a participant in a Corporate Employee Plan.

Maximum Contribution LimitOnce the balance reaches $400,000, no additional contributions can be made to the account.

Five-Year Forward Gifting ElectionIf, in one year, contributions are more than $15,000 ($30,000 per married couple), the contributor may elect, for federal gift tax purposes, to treat contributions up to $75,000 ($150,000 per married couple) as having been made ratably over a five-year period without incurring gift taxes or reducing unified estate and gift tax credits.

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Do I retain control of the money?

Yes, the account owner retains control of the account. Unlike certain other types of college vehicles, Scholars Choice allows you to maintain ownership and control over your account. The beneficiary of the account cannot make a withdrawal without your consent.

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Who can be a beneficiary?

The person for whom you’re opening the account (the beneficiary) must be a U.S. citizen or resident alien with a valid Social Security number or other taxpayer ID number.

The beneficiary doesn't have to be related to you and doesn't have to live in the same state as you or the program’s sponsor state.

The account owner can name themselves as beneficiary and use the money for their own education.

The following individuals meet the IRS definition of “Member of the Family” for purposes when naming the beneficiary:

  • Son or daughter or descendant of either
  • Stepson or stepdaughter
  • Brother, sister, stepbrother or stepsister
  • Father or mother or ancestor of either
  • Stepfather or stepmother
  • Nieces or nephews
  • Aunts or uncles
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law
  • Spouses of any of the above
  • First cousins
  • Child includes legally adopted child
  • Brother or sister includes brother or sister by the half-blood

*Note: There is no federal limit on the frequency of these changes, if you change the account beneficiary with another qualifying family member at the same time.

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How can the money be used?

Qualified withdrawals are intended to pay for qualified higher education expenses at an eligible education institution that occurred after the account was initially established. Reimbursement for qualified expenses should be submitted to Scholars Choice no later than December 31st of the calendar year that the expenses were paid/incurred.

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What constitutes a qualified withdrawal for higher education?

Qualified withdrawals are intended to pay for qualified higher education expenses at an eligible education institution that occurred after the account was initially established.

The following items would be considered qualified expenses: (if the expense is associated with an eligible educational institutions – in both the United States and abroad – occurred after the account was initially established. For a list of eligible institutions, go to https://fafsa.ed.gov/

Tuition, books, fees and equipment associated with attendance at an eligible educational institution in the U.S. or abroad.

Computers, peripheral equipment, software and Internet access are now considered a qualified expense if they are used primarily by the beneficiary in any of the years that the beneficiary is enrolled at an eligible educational institution.

Room and board charges.

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Does a 529 plan affect financial aid?

Assets in accounts owned by a dependent student or one of their parents are considered parental assets on the FAFSA. When a school calculates the student's Expected Family Contribution (EFC), a maximum of 5.64% of parental assets are counted. This is quite favorable compared with other student assets, which are counted at 20%. Higher EFC means less financial aid.

Being the account owner or beneficiary of an account may adversely affect the ability to receive financial aid or other benefits under government programs or from a school. Account owners should consult a qualified advisor to determine how an account may affect financial aid eligibility. 

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Is financial aid impacted if the 529 plan is held by a grandparent or anyone else?

Assets held in a 529 account owned by a grandparent, other relative or anyone else besides a dependent student or one of their parents will have no effect on the student's FAFSA eligibility to receive financial aid.

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How are distributions by grandparents treated?

When a grandparent withdraws the funds to pay for their grandchild's college expenses, it will be counted as student income in a future year's FAFSA (currently, the FAFSA process has a 2-year look-back). Student income is assessed at 50%, which means if a grandparent pays $3,000 of college costs it would reduce the student's eligibility for aid next year by $1,500. Remember, higher EFC means less financial aid.

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What if the beneficiary does not attend college?

If the beneficiary does not attend college the account owner can change the beneficiary to another member of the family (see below) or even take the money back.

Remember: Because there is no age or time restriction for Colorado-sponsored 529 plans, the account owner can leave the money in the account in perpetuity.)

Examples of Members of the Family

  • Son or daughter or descendant of either
  • Stepson or stepdaughter
  • Brother, sister, stepbrother, stepsister, half-brother or half-sister
  • Father or mother or an 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, sister-in-law
  • Spouse of the beneficiary or of any individual listed above
  • First cousin
  • A legally adopted child is treated as a child by blood for purposes of determining family member status

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Can different people open separate accounts for the same beneficiary?

Yes. For example, a father, mother, grandparent, and uncle can each open a separate account for the same beneficiary and can also open separate accounts for other beneficiaries.  However, all accounts for the benefit of the same beneficiary, in the same state-sponsored plan, are aggregated and cannot exceed the state’s maximum contribution limit. Please refer to the most recent Program Disclosure Statement (PDS) for the most up-to-date maximum aggregate balance limits. 

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What if the beneficiary gains a scholarship?

529s are flexible. If the beneficiary receives a scholarship, money – up to the amount of the scholarship – can be withdrawn without the customary 10% federal penalty; however, ordinary income tax (at the distributee's tax rate) is applied to the earnings portion of the distribution.  Please refer to what constitutes a qualified withdrawal for examples of what 529 funds can cover.

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Can I have 529 plans in multiple states?

Yes. All 529 college savings plans have no state residency requirements. The client can decide to contribute to their in-state plan to capture to the state tax deduction (if applicable) for their in-state plan (e.g., NY).  If the client opens an in-state plan, they can contribute up to the amount of their home state tax deduction, and then open a Scholars Choice account with the remainder of the money. Please visit our website to see our comparison tool: https://sites.savingforcollege.com/legg-mason/529-plan-comparison/.  Please discuss this option with your financial advisor or tax advisor. 

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How do I enroll for electronic delivery of client documents?

Electronic Delivery of Client Documents: Account owners at BNY-serviced firms may consent to electronic delivery of Quarterly Account Statements, Confirmations, Tax Form 1099-Q and the annual Program Disclosure Statement (PDS) and any PDS Amendments. Regardless of the account owner’s electronic delivery preference chosen, these documents will be viewable online by any client who has set up account access online.

To sign up for electronic delivery, account owners can follow the steps below:

Step 1: Go to www.scholars-choice.com/gopaperless and log into their online account (first-time users will need to create a user ID and password),

Step 2: Select “e-Delivery” under “Account Options.”

Step 3: Choose from the four e-Delivery options (all documents may be delivered electronically, or some may continue to be delivered via US Mail).

(Note: An account owner must first register for on-line account access before she can sign up for e-delivery.)

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What are the various ways to contribute to Scholars Choice? Can I roll money over from a different 529 plan, Coverdell IRA, Savings Bond, etc.?

A client can contribute several different ways.  Please see the below funding choices:

  • Personal check made payable to Scholars Choice College Savings Program
  • Automatic Funds Transfer (AFT) Service 
  • Direct Deposit or Payroll Deduction
  • Rollovers 
  • Electronic Purchase Service (EFT)

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What are the Tax benefits to Colorado residents?

Colorado is the home state of the Scholars Choice® College Savings Program. Colorado state taxpayers enjoy an annual state income tax deduction to the extent of the contributor’s Colorado taxable income for that year on contributions to a Colorado 529 plan.

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What are the tax benefits if I purchase the Scholars Plan and I live in another state?

Depending on your state of residence you may be able to deduct your contributions.  Please refer to Understanding State Tax Deductions.  This document will provide a broad overview of tax limits and explains the terms tax parity, tax neutral, and tax considerations.

Please refer to the document below for the explanation of tax treatment by state:

Map of the U.S.A.

Is there a penalty for a non-qualified withdrawal?

The earnings portion of non-qualified withdrawals is subject to federal and state taxes, at the beneficiary’s tax rate, if applicable, plus an additional 10% federal tax. The withdrawal can only be made payable to either:

  • the account owner and sent to his/her address on record
  • to an address specified on a court order
  • to his/her bank of record
  • the beneficiary

For further tax advice or guidance, please consult your tax professional.

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Take three simple steps toward achieving your investment goals. 
Our products cover a variety of strategies for diverse investment needs.

 

STEP 1

Download our Scholars Choice New Account Application Form.

STEP 2

Review Scholars Choice Product Overview materials and investment options.

STEP 3

Provide your completed account application to your financial advisor.

 

 

All investments involve risk, including loss of principal. Past performance is no guarantee of future results.

IMPORTANT INFORMATION: An investor should consider the Program's investment objectives, risks, charges and expenses before investing. The Program Disclosure Statement, which contains more information, should be read carefully before investing. If an investor and/or an investor's beneficiary are not Colorado taxpayers, they should consider before investing whether their home states offer 529 plans that provide state tax and other benefits benefits such as financial aid, scholarship funds, and protection from creditors that are only available to state taxpayers investing in such plans.

Investments in the Scholars Choice College Savings Program are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution.  Investments are not guaranteed by the State of Colorado, CollegeInvest, QS Investors, LLC, Legg Mason Investor Services, LLC, or Legg Mason, Inc., or its affiliates and are subject to risks, including loss of principal amount invested.

Legg Mason, Inc., its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Scholars Choice® is a registered service mark of CollegeInvest. CollegeInvest and the CollegeInvest logo are registered trademarks.  Administered and issued by CollegeInvest, State of Colorado. QS Investors, LLC is the Investment Manager and Legg Mason Investor Services, LLC is the primary distributor of interests in the Program; together they serve as Manager of the Program.  QS Investors, LLC, ClearBridge Investments, LLC, Brandywine Global Investment Management, LLC, Western Asset Management Company, and Legg Mason Investor Services, LLC are Legg Mason, Inc. affiliates. Thornburg Investment Management, Inc. and Templeton Global Advisors Limited are not affiliated with Legg Mason, Inc.

Audited financial statements for the Scholars Choice® College Savings Program, including balance sheets, income statements, cash flow statements, and the Management's Discussion and Analysis (MDA), may be viewed at https://www.collegeinvest.org/about-us/financial-statements or a hard copy may be obtained by calling Scholars Choice at 1-888-572-4652.