IRS Form 1099-Q is issued to an account owner whenever distributions are made from a 529 plan account during the previous tax year.
A 529 plan is a specialized college savings program structured to meet the requirements of a qualified tuition program under Section 529 of the Internal Revenue Code. 529 plans offer tax and financial aid for deposits to accounts used to pay for qualified higher education expenses. Also refer to 529 savings plan.
An ABLE account is a savings account that is similar in design to a 529 plan, but is used to save for the future costs of a special needs beneficiary.
The person who establishes a 529 plan account. The account owner controls the investments in and distributions from such account and may change the beneficiary.
A portfolio is actively managed when the portfolio manager dynamically changes the investments in the portfolio from time to time, with the goal of outperforming one or more benchmarks.
A fee charged by the state that sponsors and administers the 529 plan.
An advisor-sold 529 plan is a 529 plan in which accounts are sold by a financial professional, often with various fees and charges not applied to accounts in a direct-sold 529 plan.
The age of majority is the age at which a child becomes an adult. It is typically an age from 18 through 21, depending on the state.
An age-based asset allocation portfolio is a portfolio offered as part of an age-based investment option.
The annual rate of return is the return on investment expressed as a percentage of the investment’s assets.
An asset is property with financial value that can be bought and sold.
Account assets invested in an age-based investment option will be allocated initially to an age-based asset allocation portfolio which corresponds to the age of the account’s beneficiary. The allocation of each age-based asset allocation portfolio’s assets reflects the time horizon of the portfolio’s beneficiary population (based on the age and likely time until enrollment). Account assets in a portfolio are redeemed when the beneficiary attains an age greater than the age range that corresponds to such portfolio, and are reinvested in another portfolio that corresponds to the beneficiary’s age. The asset allocation strategy for this investment option becomes increasingly conservative with each successive age-based asset allocation portfolio.
An asset class is a type of investment. Examples include equities (stocks), fixed income (bonds), money market (short-term) and cash.
ACH is a form of electronic funds transfer that is popular with direct deposit for payroll and tax refunds.
An AIP periodically transfers money from a bank account or through payroll direct deposit to a 529 plan account.
A balanced fund is a mutual fund that seeks both growth and income, often through a mix of stocks and bonds.
A beneficiary is the recipient of the benefits from an investment. Each 529 plan account has a beneficiary. See also: Family Member.
A bond is a loan to a corporation or government entity that pays interest until a maturity date. The maturity date is the date the issuer must repay the face amount (principal) of the bond.
A bond fund is a mutual fund that invests in different types of bonds. Bond funds may also be called fixed-income funds.
A company’s capitalization is the market value of the company’s total outstanding securities minus the company’s liabilities. Companies are divided into one of three groups, based on capitalization: small-cap (less than $2 billion), mid-cap ($2 billion to $10 billion) and large-cap ($10 billion or more).
A CD is a savings certificate that pays a fixed interest rate over a fixed period of time. CDs are usually issued by banks. A penalty may be charged for early withdrawal before the CD reaches maturity.
General term for an account used to save for college, like a 529 account or an education savings account (ESA).
Compounding intensifies the power of investment growth and earnings by adding the growth and earnings to the principal balance of the account. For example, reinvesting interest and dividends in a mutual fund is a form of compounding. Compounding increases the rate of growth of an investment.
A contribution is a transfer of funds to a 529 plan account, by the account owner or by others such as family members and friends. A contribution is considered a gift for tax purposes.
A college’s COA is the total cost of attendance for one year. It includes tuition and fees, room and board, books, supplies and equipment, transportation and miscellaneous/personal expenses. The cost of attendance may also include disability-related expenses and dependent care costs.
A Coverdell ESA, formerly known as an Education IRA, is an education savings account. Coverdell ESAs allow a family to save for K-12 and college costs. Various rules limit the amount that can be contributed to such an account as well as the timing of distributions.
A custodial account is a savings account that is controlled by an adult until the beneficiary reaches the age of majority, at which point control of the account transfers to the beneficiary. UGMA and UTMA bank and brokerage accounts are examples of custodial accounts. The custodian of such an account may establish a 529 plan account on behalf of the beneficiary. See also: UGMA and UTMA.
A custodian is an adult who controls a custodial account.
A direct-sold 529 plan is sold directly by a state rather than by a financial professional.
A distribution from a 529 plan is a withdrawal of funds by an account owner from an account in the 529 plan. Distributions can be qualified or non-qualified, which determines whether the earnings portion of the distribution must be reported as taxable income and whether it is subject to a tax penalty.
A dynamic investment portfolio changes its asset allocation over time. A year of enrollment portfolio is an example of a dynamic investment portfolio. See also: Year of Enrollment Portfolio.
EFT is the digital (electronic) transmission of funds from one bank account to another account (such as a 529 plan account) over a computer network.
An eligible educational institution is an accredited college, university or other school that is eligible for Title IV federal student aid. This includes thousands of U.S. colleges, universities and vocational schools as well as some foreign schools.
The assets and debts of a person who has died constitute an estate.
An ETF is a collection of securities that are traded on a stock exchange, like stocks. ETFs are usually pegged to a particular market index, such as the S&P 500 or a total stock market index. Some ETFs may be actively managed.
The expense ratio is an asset-based fee charged by an investment fund – such as a mutual fund or ETF. It is expressed as a percentage of the assets of the fund.
A member of the family of a beneficiary includes the beneficiary’s spouse, the beneficiary’s child or descendant of the beneficiary’s child, the beneficiary’s brother, sister, stepbrother or stepsister, the beneficiary’s father or mother or an ancestor of the beneficiary’s father or mother, the beneficiary’s niece or nephew, the beneficiary’s aunt or uncle, the beneficiary’s son-in-law, daughter-in-law, father-in-law, mother- in-law, brother-in-law or sister-in law, the spouse of one of these family members, or a first cousin of the beneficiary. See also: Beneficiary.
The FDIC provides insurance for bank deposits in U.S. banks, protecting them against bank failure.
Financial aid is money to help a student pay for college costs. Financial aid includes scholarships, grants, work/study and loans. These can be referred to as gift aid if they do not need to be earned or repaid.
A financial professional provides financial advice, information and financial products to clients. Financial professionals are typically registered with the SEC and/or state securities regulators.
A fixed-income fund is a bond fund.
Under a funding agreement, assets are deposited with the funding agreement provider, and principal and a rate of interest are guaranteed to the depositor by the provider.
Gift tax is a tax charged to the giver of a gift to another person. There is an annual gift tax exclusion of $17,000 per recipient or $34,000 for married couples for 2023.
529 plans provide 5-year gift-tax front-loading, where a gift that is greater than the annual gift tax exclusion is treated as being given proportionately over a 5-year period. This allows contributors to give up to $85,000 per beneficiary as a lump sum contribution to the beneficiary’s 529 plans. It’s excluded from gift tax as long as the giver does not die before the end of the 5th year.
A grant is a form of aid that is often based on the student’s financial need.
Growth refers to the appreciation of an asset in value.
A growth fund is a collection of stocks that have the potential for growth in revenue or earnings. Growth stocks often have above-average prices compared with earnings because of the expectation that the earnings will increase.
A high-yield bond, sometimes called a junk bond, has high risk, but also pays a higher yield to compensate investors for the higher risk.
An index fund is a passively managed mutual fund that tries to track the performance of a market index, such as the S&P 500. See also: Passive Management.
An Individual Retirement Account (IRA) is a retirement plan for investors. There are two types of IRAs. The traditional IRA invests either before-tax money or after-tax money, deferring taxes on the before-tax contributions and earnings until the individual reaches age 59-1/2. Distributions from a traditional IRA are taxable except for return of any after-tax contributions. The Roth IRA invests after-tax money, with tax-deferred earnings. Distributions from a Roth IRA are tax-free if they are a return of contributions or if the individual has reached age 59-1/2.
The IRS is the Internal Revenue Service of the United States, responsible for collecting taxes and enforcing U.S. tax law.
Many 529 plans, such as The Education Plan, do not charge a maintenance fee. Others charge a fixed annual maintenance fee, typically $10 to $25, for maintaining the 529 plan account.
The aggregate balance of all 529 plans for a particular beneficiary must be lower than the state’s maximum account balance limit. Maximum account balance limits are set by each 529 plan and are typically several hundred thousand dollars. (For the New Mexico plan, this amount is currently $500,000.) Once the aggregate balance reaches this limit, no further contributions may be made until the balance drops below this limit.
A mutual fund invests in a group of assets, such as stocks, bonds, and money market investments. Mutual funds are typically priced once each business day, unlike ETFs.
The NAV, also known as the share price of a mutual fund, is the market value of an asset minus the liabilities, divided by the number of shares outstanding.
A non-qualified distribution is a 529 plan distribution that was used to pay for non-qualified expenses, such as distributions that are not used to pay for college. Such distributions are subject to taxation on any earnings distributed plus a 10% tax penalty.
A passively managed investment typically tracks the investment holdings of a securities index (often called its benchmark) such as the S&P 500.
A 529 plan document or disclosure statement provides detailed information about the 529 plan, including a description of the plan, risk factors, options for contributing to a 529 plan account, available investment portfolios (including past performance), plan fees and expenses, tax considerations, the rules concerning distributions, as well as limitations and penalties.
A plan management fee is paid to the plan manager to cover the cost of providing services to the 529 plan.
The plan manager for a 529 plan is a financial institution or other entity that contracts with a state to provide investment management, distribution, administrative and other services to the state in connection with the 529 plan.
A portfolio is an investment consisting of a collection of stocks and/or bonds or other assets.
A qualified distribution is a withdrawal of funds from a 529 plan that are used to pay for qualified expenses. Qualified distributions are tax-free.
Qualified higher education expenses for a 529 plan include tuition, fees, the cost of required textbooks, supplies and equipment, room and board costs (if the student is enrolled at least half-time), a computer, peripherals, software and internet access. It also includes special needs expenses. It does not include transportation, dependent care costs or personal/miscellaneous expenses.
Recapture refers to the recovery of state income tax benefits attributable to a non- qualified distribution or a rollover to another state’s plan.
A rollover is a distribution from one 529 plan that is reinvested in another 529 plan for the same beneficiary within 60 days. A rollover is allowed once per 12-month period without incurring federal income tax. Some plans treat a rollover to an out-of-state plan as a non-qualified distribution for state tax purposes, resulting in state income tax on the earnings portion of the distribution, plus recapture of state income tax benefits previously received (In New Mexico, you are required to pay back previous tax deductions if you roll funds over into another state’s 529 plan).
A sales charge is a commission on the purchase of an advisor-sold 529 plan. Direct-sold plans, like The Education Plan, do not have sales charges.
A savings bond is a government bond, such as a Series EE or Series I bond.
A scholarship is a form of financial aid that is based on the student’s academic, artistic or athletic merit.
Section 529 of the Internal Revenue Code of 1986 is the section of U.S. tax law that defines 529 plans and specifies their requirements.
Self-help aid includes money that must be earned or repaid, such as student employment and student loans.
A static investment portfolio does not change its asset allocation over time.
A stock is a security that represents ownership rights in a company.
A stock fund is a type of mutual fund that invests in company stocks (also called “equities”).
A student loan is money borrowed for school that must be repaid with interest. Loans may come from the government, banks, financial institutions or other organizations.
The successor account owner is a person designated on the account application as the new account owner upon the death of the current account owner.
Superfunding refers to the use of 5-year gift-tax front-loading to make a lump sum contribution to a 529 plan account. See also: Gift-Tax Front-Loading.
Tax advantages include federal tax-deferred earnings and tax-free distributions from a 529 plan, as well as any state income tax deduction or tax credit for contributions to the state’s 529 plan.
A tax credit is a direct reduction in a tax liability. Some states have 529 tax credits.
A tax deduction is a reduction in taxable income. Some states have 529 tax deductions. (In New Mexico, 100% of contributions to your 529 account with The Education Plan are deductible from your New Mexico state taxable income each year.)
When taxes are deferred, they are paid at a future date instead of when the income or gain was originally earned. This can shift the taxes to a time when the taxpayer has a lower tax bracket or a situation when the tax liability is disregarded, such as a qualified distribution from a 529 plan.
A tax penalty is additional federal tax that serves as a disincentive for certain activities, such as non-qualified distributions from a 529 plan.
The total return on an investment is the percentage change in the investment’s net asset value, assuming that all dividends and capital gains distributions are reinvested.
A trust fund is a set of assets that are held by a trustee for the benefit of one or more beneficiaries.
The Uniform Gift to Minors Act (UGMA) allows assets to be held by a custodian for the benefit of a minor. When the minor reaches the age of majority (typically 18 or 21), control shifts to the beneficiary.
The Uniform Transfers to Minors Act (UTMA) is a custodial account similar to a UGMA, but it also allows the custodian to hold other types of property, such as real estate, fine art, patents and royalties, and for the transfers to occur through inheritance.
Withdrawal is another term for distribution. Distributions may be qualified or non- qualified.
A year of enrollment asset allocation portfolio is a dynamic asset allocation portfolio that changes over time with the age of the beneficiary. Usually, a year of enrollment portfolio will shift the mix of investments automatically to a lower risk mix as the beneficiary approaches the year of expected enrollment in college.