An Overview of Section 529 Plans Douglas Chittenden VP Institutional Product Management TIAA-CREF

Cost of Higher Education *Source: Trends in College Pricing, published by the College Board FS-3

College Funding Opportunities Qualified Tuition Programs – “529” –Prepaid Tuition Plans –College Savings Plans

Prepaid Tuition Plans n Allows for the purchase of future tuition at today’s prices. n Approx. 20 states operate pre-paid programs for public universities in those states. n Typically funds may be used tax-free for tuition and room and board. n A program for independent colleges and universities is available through the Tuition Plan Consortium with TIAA-CREF as the program manager.

College Savings Plans n Federal tax deferred growth and federal tax free withdrawals for qualified higher education expenses n Some states offer additional state tax incentives n Funds can be used at any eligible school for tuition, fees, room and board, books, supplies and required equipment such as computers n No income limits for participation or benefits

College Savings Plan Program Design n Programs typically offer a range of investment options. –Aged based models –Asset based options, fixed income, equity –Fund specific options n Account owners can change options yearly n States set contribution maximums set to allow for full funding of four years of college

College Savings Marketplace  529 Assets have grown to over $90 Billion industry wide  Federal Tax Permanency enacted – “Sunset Provision” eliminated  Broker-Driven Growth, 70-80% of assets are invested through Advisors and Brokers  Confusing 529 Landscape  Pre-Paid vs. Savings vs. Other College Savings Options such as UGMA accounts  Large number of 529 programs to choose from

College Savings Programs – Market Overview  Programs are maturing and assets are growing, driving down costs and leading to product innovation – affinity programs etc..  State market is segmenting as larger states accumulate more assets  Industry Groups are Pushing for State Tax Equity – more attention to suitability

Principles for Successful College Savings Strategy n Start Early and make continuous, on-going contributions –Typical Re-contribution Rate – 60% n Use a diversified portfolio of investments –Age Based Allocation Options typically hold 60% - 70% of program assets n Take advantage of federal and state based tax incentives n Minimize expenses

Take Advantage of Tax Incentives * $6,000 invested each year for 15 years. 6% investment return. Account owner in 27% federal and 5% state income tax brackets. Beneficiary child is in the 10% federal and 5% state income tax bracket. 35% of proceeds are dividends taxed at 27% federal and 5% state income tax rates. 30% are short-term capital gains and 35% are deferred capital gains taxed at a 20% rate (10% for UGMA). FS-19

Minimize Expenses Assumes a $10,000 deposit at birth and allowed to grow for 18 years in the same plan, with different annual asset-based fee charges. Assuming a 7% return.

TIAA-CREF – College Savings Programs n TIAA-CREF is program manager for 10 state programs MichiganConnecticut IdahoKentucky TennesseeMississippi GeorgiaMinnesota VermontCalifornia

TIAA-CREF College Savings Program - Independent College (I-529) Pre-Paid Program n I-529 program provides for the pre payment of tuition at Independent Colleges and Universities, it is operated by the Tuition Plan Consortium (TPC) n Approximately 275 Member Private Colleges and Universities, including Princeton, Stanford, University of Notre Dame and Johns Hopkins (new member.) n Pre-paid tuition can be applied to any member institution n If child does not attend member institution, account owner receives a refund with a nominal rate of investment return