The Utah Educational Section 529 Savings Plan

The Utah Educational Savings Plan (UESP) is a special college expense savings plan authorized under Section 529 under the Internal Revenue Code.  A parent or a grandparent (for example) can open an account for the benefit of a child or grandchild.  Even though the account owner controls the funds, the contribution to the account is treated as a gift qualifying for the annual $13,000 (in 2011-2012) gift tax exclusion amount.  A special election permits up to five years of gifts to be front-loaded.  For example, if a grandfather contributed $65,000 to the account in 2011, the grandfather could not give any more to that grandchild for the years 2011-2015 without consuming part of the his lifetime exemption from gift and estate tax or incurring some gift tax if the exemption was previously utilized.  If the grandfather died during the five-year time period, the portion of the gift relating to future years would be taxable in his estate.

A Section 529 plan has special income tax benefits.  Income and gains in the account are not taxable.  Account withdrawals are not taxable if used to pay for qualifying higher education expenses, such as tuition, fees, books, room and board.  Withdrawals not used to pay qualifying college expenses are subject to income tax.  The portion of the withdrawal attributable to account earnings is included in the account owner's income tax return and also subject to a 10% penalty.  In addition to following the Federal tax benefits, Utah permits a 5% income tax credit on the first $1,740 (single filer) or $3,480 (joint filer) of contributions for 2011 if the account owner is a Utah resident and provided that the beneficiary was under age 19 when named as the account beneficiary.  The dollar limit is indexed for inflation each year.  The credit can be claimed for more than one qualifying beneficiary.  The credit can be claimed even after the beneficiary turns age 19 or older provided the beneficiary was originally named beneficiary before age 19.

The UESP has been highly rated over its low expenses and investment selection.  More information and enrollment can be made at www.uesp.org.