Editor's note: This is part three of our three-part series on 529 plans — Caroline's interview with Sarah Henriksen, a vice president with Wells Fargo Funds Management. You can read part one here and part two right here.
CH: How much money do you need to start a 529 plan?
Sarah Henriksen: Typically you can open an account with as little as $250. And, many 529 plans waive this minimum if you set up an automatic investment into the account of as little as $15 per month. A program of regular investment cannot assure a profit or protect against a loss in a declining market.
CH: How much can an individual contribute to a 529 plan per year?
SH: We talked about the low limits for starting a 529 plan. On the other end, 529 plans have very high contribution limits. There is not a specific annual limit as long as you don't exceed the 529 plan maximum, which can be over $300,000 depending on the plan. One thing to keep in mind is 529 contributions are considered completed gifts to the beneficiary, subject to the annual gift limits. For 2009, the annual exclusion amount is $13,000 (or $26,000 for married couples), which means any contribution over that amount may be subject to gift tax. If you are looking to make a larger contribution in one year, you can contribute up to five times the annual limit without incurring gift tax by prorating that contribution over the next five years. This is a unique benefit of 529s, which is not available through any other investment vehicles.
CH: Is there a total contribution limit?
SH: Most 529 plans set their contribution limit with the goal of allowing families to invest enough for five years of college, plus graduate school. As you can imagine, this means the total contribution limit for most 529 plans is quite high. Depending on the plan, the limits can be $300,000 or more.
CH: How is the money withdrawn to make college payments?
SH: Another benefit of 529 plans is that the account owner controls when and how a payment is made. This means you can ensure your funds are used for school expenses and not concert tickets or the latest video game. And, most 529 plans offer a lot of flexibility for withdrawing the funds. You can choose to have funds sent directly to the school, to the beneficiary or even to yourself if you want to get reimbursed for expenses paid out of pocket.
CH: Can participants continue to contribute to the plan while the student (beneficiary) is in college and making withdrawals?
SH: Absolutely! A recent study from the American Enterprise Institute found that fewer than 60% of new students graduate from college in less than 6 years!* Chances are, your student will be attending school for years, and if he or she decides to attend graduate school, that can increase even more. 529 plans provide the benefit of being able to contribute while students are still in college in order to take advantage of the benefits the plan offers while they are attending.
CH: What is a good source to learn more about 529 plans?
SH: A great place to start would be on the Wells Fargo website at www.wellsfargo.com/investing/education/529.
*Diplomas and Dropouts Which Colleges Actually Graduate Their Students (and Which Don't) by Frederick M. Hess, Mark Schneider, Kevin Carey, Andrew P. Kelly. AEI Online, June 03, 2009.
Remember: 529 plans involve risks, including the possible loss of principal. Consult a program description for additional information on risks.
Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment management and administrative services to certain 529 college savings plans. Shares in these programs are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA/SIPC, an affiliate of Wells Fargo & Company.
INVESTMENT PRODUCTS * NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE

CH: So Sarah, who can start a 529 plan? Does it have to be a parent?

That doesn't mean it's time to panic. It's time to get to a Financial Aid Night, if you haven't already attended one.
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