529 College Savings Plans

Transcription

1 529 College Savings Plans Features, costs and Piper Jaffray compensation When choosing a 529 college savings plan ( 529 savings plan ), you should examine many factors, including the expense structure of the plan and the federal and state tax features that may be favorable to you. Before you proceed further, it is important to review some fundamentals of 529 plans. Types of 529 plans Named after the section of the federal tax code that governs them, 529 savings plans are tax-advantaged, qualified tuition programs. There are two types of 529 plans: college savings plans and prepaid tuition plans. 529 savings plans are offered in every state. Prepaid plans are offered in some states and by some private colleges and universities. Prepaid tuition plans are not offered by Piper Jaffray. Investors may, in most states, purchase 529 savings plans direct with the sponsoring state. Another option is to use the services of a financial intermediary such as Piper Jaffray. Piper Jaffray offers several of the state-sponsored 529 savings plans, but it does not offer all of them. What is a 529 savings plan? A 529 savings plan is a state-sponsored investment program designed to ease the burden of paying for college. By opening a 529 savings plan, you can contribute money to an investment account set up for a specific beneficiary. Federal taxes on the earnings are deferred, and your money can be withdrawn free of federal taxes (and in some cases state taxes) for qualified educational expenses. This federal exemption sunsets Dec. 31, 2010, which will alter many of the federal tax consequences unless action is taken by the President and Congress to extend the provisions.

2 Are all 529 savings plans the same? 529 savings plans vary a great deal from state to state. Each state has broad discretion in setting up plan rules, contribution limits and state tax treatments and in choosing investment managers and investment options. Home state tax advantages The first step in considering a 529 savings plan is to review your home state plan, since this plan may offer more favorable tax treatment or other benefits. State tax treatment of 529 savings plans varies. Some states offer their resident investors state tax deductions for contributions and may also offer other benefits such as matching contributions or scholarships. Several states impose taxes on qualified withdrawals from out-of-state plans and a few tax earnings on out-of-state plans. Investors purchasing an out-of-state plan may be forfeiting tax and other benefits only available from their home state plan. Basic features of 529 savings plans Investment risk Your investment in a 529 savings plan is subject to investment risk. States do not back or guarantee the investments. The investments that you choose may lose money or the investments may not grow enough to pay for college. Investment options Investment options vary greatly, from higher risk stock funds to funds that contain a mix of stocks and bonds to conservative investments that contain money market or conservative shortterm bond funds. Plan owners may change their investment options within the plan once every calendar year or anytime the plan has a change of beneficiary. New contributions can be designated to new investment options. Expense structure Like most investments, fees and expenses will reduce investment returns. 529 savings plans typically are managed by mutual fund companies and will incur underlying fund expenses such as

3 management fees, 12b-1 fees and other fund expenses. Some plans may have administrative fees, enrollment fees and annual maintenance fees. You should carefully examine the plan costs that are disclosed in the plan documents before investing or sending money. Share classes and sales charges Most 529 savings plans are managed by mutual fund companies. The fund company generally offers several share classes in which to invest. Each share class represents a similar interest in the plan s portfolio but has different fees. Your financial advisor can assist you with understanding the sales charges and selecting appropriate share classes. The following publications also offer additional information: Understanding mutual fund and annuity pricing and marketing and Understanding mutual fund classes. Both documents are located at in the mutual fund section. Sales charge discounts 529 savings plans with front-end sales charges or commissions (also called a load) may offer a breakpoint discount to reduce this fee. The amount of the discount is based on the size of your investment, and the discount increases as the size of your investment increases. Be sure to inform your financial advisor of any mutual funds or other 529 savings plans you may hold at other firms or directly with a fund company. You may be able to combine these assets with your 529 savings plan purchases to reach certain breakpoint discounts. Complete information on sales charge discounts is available in the plan s offering documents. The NASD investor publication, Mutual Fund Breakpoints: A Break Worth Taking, is also available to you at Rollovers (transfers) The assets of a 529 savings plan can be transferred free of federal taxes to another 529 savings plan or beneficiary, as long as the new beneficiary is a family member of the existing beneficiary. Family members include the beneficiary s spouse, son, daughter,

4 grandchild, niece, nephew and first cousins. Plan owners considering a plan rollover for the same beneficiary should understand that such rollovers are limited to once every 12 months. There may be state tax implications when you roll over assets from one plan to another, especially when transferring from a home-state plan to an out-of-state plan. Important tax benefits may be lost and you may be subject to tax payment. Some states may recapture taxes if the contributions received state tax deductions. You should contact your tax advisor before you consider making a rollover. Some 529 savings plan managers allow investors who have redeemed shares of another plan to buy class A shares in the new plan without incurring a sales charge, which is called a net asset value ( NAV ) transfer. NAV transfer is a significant cost saver that is only available with certain plans and is subject to certain conditions. The plan s offering documents will provide detailed information regarding rollovers and NAV transfer policies. Non-qualified withdrawals Money withdrawn from a 529 savings plan that is not used for qualified education expenses is generally subject to federal and state income tax, and an additional 10 percent federal tax penalty is imposed on earnings. States may also impose an additional 10 percent penalty on the earnings. Exceptions are made under certain circumstances, such as the death or disability of the beneficiary or if the beneficiary receives a major scholarship. Tax implications of non-qualified withdrawals should be reviewed with your tax advisor. Resources and tools you can use to learn more about 529 savings plans College Saving Network, a coalition of state-sponsored college savings plans offering college planning resources: or toll free Information Web site: NASD Investor Publications (College Savings Plans) and 529 Plan Expense Analyzer available at:

5 How Piper Jaffray and your financial advisor are compensated for sales of 529 savings plans Each time you purchase a 529 savings plan through Piper Jaffray, the plan manager pays Piper Jaffray based upon the amount of your investment and the share class that you have selected. We pay a portion of these payments to your financial advisor based upon our standard compensation formulas. Sales charges vary from plan to plan and some plans impose higher sales charges than others. The 529 savings plan and the share classes that you choose to purchase will affect the compensation paid to your financial advisor. For front-end load share classes, we receive most of the initial sales charge that you pay. For back-end load share classes, we are paid a selling fee at a rate set by the plan manager. We may also receive 12b-1 fees for the funds invested in 529 savings plans. Piper Jaffray and its financial advisors may also receive nominal non-cash compensation from 529 savings plan managers and their affiliates. We may also receive contributions or reimbursements for financial advisor training, educational meetings or client business meetings that have an informational or educational component. Revenue sharing arrangements We also receive payments, generally called revenue sharing from some 529 savings plan managers and their affiliates. We provide these companies with increased access to our firm s sales force and greater visibility for their products. This fact could in turn lead our financial advisors to focus on those products when recommending a 529 savings plan. Plan managers that do not provide revenue-sharing fees may have less access to our sales force. Our financial advisors do not receive any portion of the revenue-sharing payments or any additional compensation as a result of selling products offered by a company that pays revenue sharing, and you do not incur any extra sales charges.

6 Revenue-sharing payments are not made from 529 savings plan assets, but instead are paid by a fund s investment advisor or other affiliate. Such payments are generally based on sales volume and/or assets held in 529 savings plans. The following plan managers have revenue-sharing arrangements with Piper Jaffray for the 12-month period ending Sept. 30, As of that date we have received a maximum of 0.13 percent (13 basis points) on sales and up to 0.04 percent (4 basis points) on total plan assets, depending on the specific arrangements. The following plan managers have made revenue-sharing payments to Piper Jaffray and are listed starting with the largest payment during the specified period. American Funds* Van Kampen* Pacific Life AIM* *Mutual fund companies on the Piper Jaffray mutual fund partner s list. Companies on the partner s list are provided with the hightest level of access to our sales force, which gives their products the greatest visibility with our financial advisors. Piper Jaffray may receive compensation in the form of commissions and other fees for providing traditional brokerage services, including related research to funds in which the 529 savings plans invest. We prohibit accepting brokerage commissions in exchange for marketing a 529 savings plan, and we do not allow brokerage commissions to be used to offset revenue-sharing arrangements. 529 college savings plans are sold by official statement. The official statement and the mutual fund s prospectus contains more complete information, including investment objectives, risks, fees and expenses, which you should carefully consider before investing. Please contact your financial advisor for an official statement and mutual fund prospectus. Please read it carefully before investing or sending money. Piper Jaffray does not provide tax advice. Since Member SIPC and NYSE Piper Jaffray & Co. 2/05 PC piperjaffray.com