Waddell & Reed

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    Education Funding Options

    Features 529 Savings Plan Coverdell ESAs
    (formerly known as Education IRAs)
    Income limitations None Adjusted Gross Income (AGI) limits apply None
    Maximum yearly contribution per beneficiary Varies by state - InvestEd Plan maximum account value per beneficiary is $350,000 for 2011-2012 academic year. $65,000 can be donated per contributor in the first year of a five-year period without exceeding the annual federal gift tax exclusion.1 $2,000 $13,000 without exceeding the annual federal gift tax exclusion.
    Taxation of account earnings and qualified withdrawals Account earnings grow federal income tax-deferred until withdrawn. Withdrawals are federal income tax-free if used for qualified higher education expenses.2 Account earnings grow federal income tax-deferred until withdrawn. Withdrawals are federal income tax-free if used for qualified education expenses. Earnings are taxable on a current basis at the child's and/or parent's rate, depending on the amount of income earned. Withdrawals of contributions are not subject to income tax.
    Ability to change beneficiaries Yes Yes, if designated on the CESA Simplifier No
    Ability to change owners Yes Yes, if designated on the CESA Simplifier No
    Investment options Age-based, Static and Individual fund portfolios available with many 529 plans. Wide range of securities Wide range of securities
    State tax deduction Varies by state No No
    Control of withdrawals Owner of account Transfers to child when child reaches legal age unless otherwise designated on the CESA Simplifier. Transfers to child when child reaches legal age.
    Qualified use of proceeds Any post-secondary school accredited in the U.S. & has Financial Aid School Code - www.ope.ed.gov/accreditation (Includes overseas schools as long as they have U.S. accreditation.) Any qualified K-12 or accredited post-secondary school expenses in the U.S. Not applicable. Custodian may make withdrawals for a variety of uses for the minor's benefit.
    Penalties for non-qualified withdrawals 10% Federal penalty on earnings. 10% Federal penalty withheld on earnings No
    Ownership of assets for financial aid purposes Account Owner3 Responsible Individual- if the Responsible Individual is the parent3 Student
    Age Restrictions None No contributions after the beneficiary's 18th birthday. Distributions must be taken within 30 days after beneficiary's 30th birthday unless rolled over to a new beneficiary. Except in the case of a special needs beneficiary. Account transfers to the child when child reaches legal age.

    1 You may elect to treat contributions as having been made over a five-year period for federal gift tax purposes. The $65,000 limit for gift tax purposes includes all gifts made to the beneficiary during the five-year period. As of the 2011-2012 academic year, the maximum account value limit per beneficiary for the InvestEd Plan is $340,000. Maximum account balance amounts may change periodically). Prior to 2002, contributions by the same person to both a 529-Plan and a Coverdell ESA (formerly known as an Education IRA) for the same beneficiary were subject to an annual 6% excise tax.
    2 Please consult your tax advisor regarding the impact of state and local taxes. The 2001 tax law created by the Economic Growth and Tax Relief Reconciliation Act, or EGTRRA, approved the Federal tax-free treatment of qualified 529-Plan withdrawals. This tax treatment was scheduled to expire in 2010. The Pension Protection Act of 2006 was passed and signed into law on August 17, 2006. The Sunset provision (set expiration date of 2010) of the tax-free treatment of qualified 529-Plan withdrawals was removed, making the tax-free treatment of 529-Plan qualified withdrawals indefinite.
    3 A 529 account or Coverdell ESA is considered an asset of the account owner for financial aid purposes. 529 accounts or Coverdell ESAs owned by a dependent student were excluded from the Free Application For Federal Student Aid (FAFSA) form through the 2008-2009 school year. The law as previously written permitted dependent students owning 529 plans and ESAs to exclude those assets from the FAFSA form. Beginning with the 2009-2010 school year, dependent owned 529 plan accounts and Coverdell ESAs will be accounted for on the FAFSA form as being an asset of their parents. Grandparent-owned 529 plan assets that name the student as beneficiary are not reportable on the FAFSA form.

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