State Bar of Wisconsin

Vol. 73, No. 8, August 2000

New Legislation Expands EdVest College Savings Program

• Recently Passed Legislation

by Marty Olle

Wisconsin is taking bold action to improve its state-sponsored "Section 529" college savings program. With unanimous support by the legislature, 1999 Wis. Act 44 creates a new tax deduction, additional savings and investment opportunities, and protection of financial aid eligibility for EdVest participants. The legislation makes sweeping changes to the three-year-old program, making it significantly more attractive to potential investors.

EdVest began operations in July 1997. Wisconsin was one of the early states to offer a college savings program, and state legislation authorized a conservative, low-risk investment consistent with the regulatory environment at that time. Since then, key federal legislation and IRS rules have clarified the tax benefits and operating parameters for "Qualified State Tuition Programs," or "Section 529 Programs." Several states responded by initiating full-range college savings programs covering tuition, room and board, books, and other qualified educational expenses. They also ventured into the stock market to maximize potential yields for investors willing to assume more risk. Act 44 gives EdVest the authority to take advantage of the benefits and flexibility now allowed under federal law.

This is a good time to take another look at what EdVest has to offer:

Expanded Eligibility and Coverage. Parents, grandparents, aunts, uncles, legal guardians, and trusts may open an EdVest account. Individuals can open an account for their own use as well. The program now covers undergraduate and graduate tuition, fees, certain room and board costs, books, and equipment required for attendance at any eligible public or private institution nationwide. The U.S. Department of Education maintains a list of eligible schools on its Web site.

Higher Maximum Contribution. Participants may invest enough to pay for five years of undergraduate enrollment at the highest-cost institution allowed by the program. The current maximum contribution is $135,850, and it can be made in a lump sum or in amounts as low as $25 at a time.

No Income Limits. There are no income limits for participation in the program.

Additional Tax Benefits. Beginning Jan. 1, 2001, contributions to an EdVest account may be deducted from state taxable income up to an amount of $3,000 per year per dependent beneficiary. This is an exclusive deduction available only through EdVest, and only to parents and individuals with an EdVest account for their own use. Investment earnings have always been exempt from state income tax. Federal tax on earnings is deferred until funds are withdrawn, at which time the earnings are taxed as ordinary income to the student. EdVest investors are eligible for the federal HOPE and Lifetime Learning tax credits - up to $2,000 per year. Special gift tax and estate tax benefits also apply.

More Investment Options. The program is authorized to contract with a private vendor to offer additional investment options to EdVest participants. A vendor should be selected by early fall. Likely investment choices include:

• Current system - Bonds, fixed return. Low risk.
• Equities - Mutual funds, stock index fund, and so on. Moderate risk.
• Combination - Combination of fixed and variable investments. Purchasers may be able to "mix" as deposits are made.
• Age-based system - The mix of fixed and variable investments is automatically adjusted as the beneficiary gets closer to college enrollment.

IRS rules prohibit participants from moving funds from one investment option to another over time unless it is done automatically by EdVest as in the "age-based" option above. The program will build in as much flexibility as possible within these restrictions. The additional investment options should be available in early 2001.

No Residency Requirement. The program no longer has a residency requirement. Neither the purchaser nor the beneficiary is required to live in Wisconsin to open an EdVest account.

Financial Aid Eligibility. EdVest account balances will not affect eligibility for state financial aid. The legislature wishes to encourage families to save in advance for college costs without jeopardizing potential financial assistance.

Minimum Investment Period. The program's minimum investment period will be reduced from four years to two years, beginning Sept. 1.

Refunds. Amounts not used by the beneficiary for qualified higher education expenses may be transferred to another eligible person's account or may be refunded to the initial purchaser. IRS rules require a penalty, currently 10 percent of investment earnings, if the funds are not used for educational expenses, unless the beneficiary receives a tuition waiver or scholarship, dies, or becomes permanently disabled. Persons receiving refunds are also liable for taxes on investment earnings.

Conclusion

This is truly an exciting time for anyone interested in the EdVest program and saving for college. The higher investment limit and option of saving for room and board expenses will be in place by Sept. 1. The new state tax deduction is effective beginning Jan. 1, 2001, and the new variable investment options will be offered early in 2001.

Wisconsin Lawyer