Thursday, October 8, 2009

A 529 Plan With A 300% Return

Caught your attention, didn't it!  The best part is that it is true.  More info below the fold-

Most people are familiar with 529 plans.  They are sponsored by states and most states have two types:
  1. Pre-paid plans that offer a fixed price for a semester of tuition in the future, and 
  2. Investment/savings plans that allow you to contribute money a small amount at a time to an investment account.  You choose what actual investments your money is invested in (from the available choices in the plan), typically mutual funds.  The money grows in your account and is tax-free at withdrawal if used for an educational purpose.
You can invest in any state's 529 investment plan (not just the state of your residency) and use withdrawals from any state's 529 investment plan to make a payment to any school in the country.  Some states offer a state income tax benefit to residents of the state that invest in the state's plan, but people from other states can still choose to invest - they just won't get the state income tax benefit.  You do have to be a U.S. Citizen to be in a 529 plan.

In this regard, take a look at the Ohio 529 savings plan.  Until December they are running a Refer-A-Friend program where if an account holder opens a new account for someone else, then the account holder gets $50 in their account and the new account gets $25.  The good part is that you can open an account with as little as $25. 

So here's the scenario assuming Dad already has an 529 account in the Ohio plan:
  • Dad opens new account owned by Dad with Kid as beneficiary
  • Dad deposits $25 in Kid's account
  • Dad's account gets $50 in bonus money
  • Kid's account gets $25 in bonus money (plus the $25 deposit for a total value of $50)
  • Dad's $25 contribution has provided $100 of value - a 300% return.
Now that's nice and all, but $100 is not a lot of money.  However, one great thing about 529 accounts is that the beneficiary can be changed to anyone who is a "Member of the Family" of the original beneficiary.  The term “Member of the Family” is defined by IRC Section 529.  Under current law a Member of the Family of a Beneficiary is a person related to the Beneficiary as follows: (i) a son or daughter, or a descendant of either; (ii) a stepson or stepdaughter; (iii) a brother, sister, stepbrother or stepsister; (iv) the father or mother, or an ancestor of either; (v) a stepfather or stepmother; (vi) a son or daughter of a brother or sister; (vii) a brother or sister of the father or mother; (viii) a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law; (ix) the spouse of the Beneficiary or of any of the other foregoing individuals; or (x) any first cousin of the Beneficiary. For this purpose, a child includes a legally adopted child and a brother or sister includes a brother or sister by half-blood.

It is acually really easy to change the beneficiary, it only takes one form, although the form does require an identify verification stamp from your financial institution (but that is typically free - just go to your bank).

Thus, if Dad opens an account with Mom as a beneficiary, Dad can later change the beneficiary to Kid with no problem.
  • Dad deposits $25 in Mom's account
  • Dad's account gets $50
  • Mom's account gets $25 in bonus (plus the $25 deposit for a total value of $50)
  • Dad's $25 contribution has provided $100 of value - a 300% return.
  • Total bonus money: $150
  • Total account value: $200
But wait!  Mom realizes that she can do the same thing.  Mom opens 1) an account with herself as the beneficiary (using Dad's account as a referring account), 2) an account with Dad as the beneficiary, and 3) an account with Kid as the benecifiary.
  • Additional Bonus: $75*3 = $225
  • Total bonus for all accounts:$375
  • Total value for all accounts: $500
But wait, again! If Kid is over 18, then Kid can open accounts with Kid, Mom, and Dad as beneficiaries. (see page 7).  That's another 3*$75 =$225 in bonus money.

Now the real fun begins - Grandpa opens accouts with himself, Mom, Dad, and Kid as beneficiaries.  The beneficiary can later be changed to Kid (see above).  That's 4*75=$300 in bonus money.  Also, Mom, Dad, and Kid each open accounts with Grandpa as beneficiary (another $225).  This can also be repeated for Grandma (another $525), and Grandma and Grandpa can open accounts for each other that can also be transferred to Kid (another $150).

You can repeat the scenario above for anyone who would qualify as a "Member of the Family" - the other set of grandparents, Uncles, and any first cousins, etc..  Recognize also that the account owner need not be a member of the family - just the beneficiary that you are going to transfer from.  If you have a good family friend, they can open accounts for all of Mom, Dad, Kid, Grandma and Grandpa, the Uncles/Aunts and the cousins - and then later have the beneficiaries of all the accounts changed to Kid.

It appears that you can even do this program if you are in school right now.  There does not appear to be any requirement that the bonus money sit in an account for any length of time.  If you have $200, talk with Mom and Dad and turn it into $800 - that's real money. 

OK, so what's the catch?  Three things:
1) It does require a little time to open each account.  However, I opened accounts earlier this year and once you get going, it really only takes about 5-10 minutes.  Also, it will take time to fill out the beneficiary change form, get the stamp from the bank, and mail it in later, but you can do many accounts at the same time, so the time committment per account is not huge. 
2) The person opening the account enters their Social Security Number (SSN) and the SSN of the beneficiary.  You may have some family members that you don't want to trust with this information, so they will not be able to participate.  However, usually there is at least sufficient trust in the immediate family and the grandparents on both sides - and between those relatives, you can open many accounts, (something like 40 accounts if my math is right - enough to turn $1000 into $4000.)
3) You need to know someone in the Ohio 529 plan in order to get their referral code to open the first account.  That means, that the first account that is opened will not get the $50 referral bonus, but will get the $25 new account bonus.  In the scenario above, you will note that we did not identify Dad opening an account with Dad as the beneficiary - that will be the base account that Dad opens with $25 and is matched with $25 in bonus money.

Actually, I guess you don't NEED to have a referral code - you can just open an account without listing a referral account, but then the $50 referral account bonus is simply lost.  Conversely, if you list my referral code when opening that first account, then I will get the $50 - which is a nice thank-you from you for clueing you in on this program.  Thanks!

Here's my referral code for Dad to use when opening the first account - 2482410.  When Dad opens the next accounts, Dad should use the account number of his first account as the referral code - and should stop using my referral code on the substequent accounts or else the referral bonuses will be going to me rather than to Dad.

I had pretty good success ($1000+) using a predecessor program that the Ohio 529 plan had this spring, although the new program is more generous in that it offers $50 for referring accounts instead of the $25 offered in the predecessor program.

Good luck, and I hope that I have helped make paying for school a little easier!

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