How the South Carolina 529 Plan Works

As financial planners, we meet with many parents concerned about how they will pay for their child’s college education. These parents often ask about the Future Scholar program, the 529 college savings plan for residents of South Carolina. We created our educational savings guide below to explain how a 529 program works, the benefits of a 529 plan and the disadvantages of a 529 plan, and help you determine whether or not the SC Future Scholar Program is right for your family.

What is the South Carolina Future Scholar program?

​Paying for college can feel like a monumental task for any family, no matter how financially comfortable they may be. Although tuition inflation in higher education has slowed in recent years, the price of a four-year college degree is still very high.
 
State governments have developed a special type of savings plan designed to help families save for this significant financial expense: the 529 college savings plan. In South Carolina, the plan is called the Future Scholar program, and it includes tax benefits designed to ease the burden of college tuition and encourage regular contributions.

How does a 529 Plan work

Any U.S. citizen can open a 529 savings account for a child regardless of their income level or their relationship to that child. There can even be multiple accounts for the same child as long as all combined contributions across these accounts do not exceed $520,000 in South Carolina.  The maximum aggregate contribution limits vary by state.
 
Most 529 plans allow participants to deduct part or all of their contributions on their income taxes and contributions to the SC Future Scholar Program are tax-deductible on the state level.
 
And like any savings account, the money in a 529 account grows over time through additional contributions and interest earned. Unlike other savings accounts, however, the interest earned and the withdrawals you make are also tax-free.

Money can be withdrawn from a 529 college savings plan for tuition and fees, room and board, books, computers and other supplies required to attend any eligible institution offering post-high school education: two and four-year colleges, graduate and professional programs, and even certain vocation/technical schools. 

Benefits of a 529 Plan

• State Income Tax Benefits
  The first benefit listed is by far the best. For South Carolina residents, contributions to the SC Future Scholar Program can be deducted on their state income tax return. With most South Carolina income taxed at 5% or 7%, you could potentially save $50 to $70 per thousand dollars of taxable state income. (If you itemize your federal income taxes, your net savings will be smaller as itemization results in smaller federal deductions for state income tax payments.)
  
  The state income tax deduction is a valuable. Even if you decide not to use the SC Future Scholar plan as your child’s college savings account, you can still use it as a pass-through account while your student attends college just to claim this significant tax benefit. This deduction may be taken in any taxable year for contributions made during that year and up to April 15th of the succeeding year.
  
  There is no requirement that the funds stay in the plan for set amount of time. If your student attends college in the fall, you can open an SC Future Scholars Plan, contribute your share of your child’s tuition to the plan, and then immediately direct those funds to the college or university. In a few simple steps you can give your family a 5% to 7% discount on tuition, fees, and expenses. On a $20,000 annual tuition bill, that translates into up to $1,400 in savings each year.

• Tax-Free Growth
  Your contributions to the SC Future Scholar Program grow tax-free. The distributions used to pay expenses related to education are tax-free also.
  
  
• Estate Planning
  A 529 plan can still be a smart way to shift assets out of an estate for tax purposes. Using the gifting allowance, currently $15,000 per person per year, a couple could move up to $150,000 out of their estate through the 529 Plan’s five-year contribution allowance. (If a contributor dies before the five-year period passes, some funds would be returned to the decedent's estate.)
  
  Although 529 Plan contributions are counted as a gift at the time they are made, the funds can still be reclaimed by the account owner at any time. This flexibility can help older adults with Medicaid planning.

 

• Low Impact on Need-based Financial Aid
  Because the assets in the SC Future Scholar Program are not held in the student’s name, they are considered only as family contribution assets, not student assets. This can make a big difference in financial aid award packages as colleges expect students to use up to 20% of their assets to pay for college but expect families to use only 5.64% of their “unprotected” assets.
  
  
• Portability
  If you open a SC Future Scholars Plan for a child, that child does not need to attend school in South Carolina to access the funds without penalty. No matter which state’s 529 plan you choose, the funds can be used to pay for college expenses at any college or university. Unlike prepaid tuition plans, a 529 plan has no in-state requirement.

Disadvantages of a 529 Plan

• Possible Financial Penalties 
  If you find yourself needing to withdraw money from your 529 Plan for reasons other than educational expenses, it will cost you. You will be charged taxes on any earnings and a 10% penalty on those earnings with your federal income tax return. Should the child you are saving for decide against pursuing any higher education opportunities, you would still be subject to these penalties when withdrawing funds.
  
  We advise clients facing this situation to consider changing the beneficiary of their 529 plan. So, if one child chooses not to go to college, naming another child as the beneficiary protects the tax benefits of the plan.

How Do I Open an SC Future Scholar Program 529 Plan?

The SC Future Scholar Program is managed by a group called Columbia/Threadneedle, created by the merger of Columbia Management Investment Distributors of the US and Threadneedle Investments of the UK. Columbia Management is owned by Ameriprise, a national broker/dealer and financial service firm.


There are two ways to invest in the Future Scholar program. If you are a South Carolina resident, you can open and fund your accounts online directly with Columbia/Threadneedle or you can invest through the broker or your choice. See the sections on fees and expenses to understand the differences between these two approaches.

• INVEST DIRECTLY
  If you are a South Carolina resident you can participate in the Future Scholar program directly online, without the need for a broker/dealer intermediary. This option offers lower expenses and fees. You can view the direct investment funds and expenses here.
   
  Want to setup a SC Future Scholar plan yourself? You can click here to learn more and open an account.

• PURCHASE THROUGH A BROKER
  SC Future Scholar plans are recommended and sold by registered representatives, or brokers—and this can make pricing and expenses higher and much harder to understand. The Future Scholar program offers funds with A, E, and Z share classes. Additionally, there are more mutual funds to select from and many of those choices are actively managed mutual funds. 

 

1. Pricing Alternative A is an upfront charge of 3% or 3.75% depending on portfolio selected up to $399,999 then 0% (Grandfathered A Structure has more breakpoints within the same range, but no charge for amounts above $400,000).
   
2. Pricing Alternative E has underlying fund expenses plus 0.50% (except for legacy Capital Prevention portfolio which is 0.15%).
   
3. Pricing Alternative Z has underlying fund expenses plus 0.16% plus wrap account charge from broker/dealer.
   
   ​Comparing and contrasting these choices is bit of a slog even for experts, so we’ve aggregated the fund expenses by share class based on a current (10-2019) program description. You can find the broker directed investment funds and expenses here. 

What is the Current Ranking for the SC Future Scholar Program 529 Plan?

Each year, Morningstar publishes a ranking of all 529 college savings plans across the country, awarding them gold, silver, or bronze status—or below. The SC Future Scholar plan landed solidly in the middle of the pack this year with a Neutral rank for the direct option.

 If I Want a Gold 529 Plan, What are My Options?

​The younger your beneficiary, the greater the value of lower fees and better fund selections. South Carolina residents can get the biggest bang for their buck by opening and contributing to the SC Future Scholar Program to capture state income tax savings. As their child approaches college age, they can execute a custodian-to-custodian transfer to a better 529 plan, such as the gold rated Utah Educational Savings Plan. Because a custodian-to-custodian transfer is not taxable, you can have your cake and eat it, too.

How Do I Get the Most Out of My SC Future Scholar Program Plan?

• Start Early
  Like any savings plan, the key to maximum success is to start as early as you can to give interest more time to grow. 
• Contribute Often
  Ask your financial planner to estimate the monthly contribution you will need to make to reach your college funding goals and start making that contribution today.

How Do I Calibrate My Investment in a SC Future Scholar Program Plan to Maximize My Investment or Manage My Risk?

Because you can only change the investments in a 529 plan twice each calendar year, many investors choose to select an age-based or a risk-based portfolio that is rebalanced by the plan administrator. The SC Future Scholars Program plan offers the following asset allocation portfolios:

​Portfolio	% Equities​	% Bonds and Cash
​Aggressive Growth	90	10
Growth	80	20
Moderate Growt	60	40
Moderate	50	50
Moderately Conservative	30	70
Conservative	15	85
​In College		100

 
The age-based portfolios are divided into Aggressive, Moderate, and Conservative tracks. Different asset allocation portfolios can be used at different ages to create a glide path toward your child’s college entrance date.
If you purchase share through a broker, there are some small differences in the allocation portfolios because they offer some actively managed fund choices not available to direct buyers.

Ready to take advantage of significant state income tax savings while creating future educational opportunities for a child? Talk to Oak Street Financial Advisors about the best way to set up and calibrate your SC Future Scholars Program 529 Plan today.