Have you checked college costs lately? Well, if you have not, then you either are past the college years in your family ... or you think you have plenty of time to prepare.
If in the former camp, then congratulations. If in the latter camp, then pay heed.
College funding will set you back more than a bit. It can set you back a lot a lot.
To make matters worse for middle-income households, college loans can be complex and pricey. Plus, paying for college out of cash flow will force it to compete with other important household expenses.
Accordingly, 529 college savings plans are an option to begin early, and often.
Consider a recent article in The Legal Intelligencer.
The article, titled “529 College Savings Plans: How They Work,” explains that 529 college savings plans are great financial tools to help you save and set aside money specifically for the purpose of funding higher education.
Even better, 529 plans are "tax advantaged" when used for qualified education expenses. In addition to tax advantages, the benefits include flexibility and control.
And, a 529 college savings plan is not restricted to the parents of a future scholar.
No, indeed.
Grandparents, a favorite uncle or anyone can make contributions for qualifying higher-education expenses without income limits.
The 529 owner keeps control of the assets and is allowed to choose how much and when money can be withdrawn. T
he owner also can change the beneficiary to a different family member related to the original beneficiary (see your estate planning attorney for the rules on this) whenever they like, and the investment allocation can be adjusted once a year.
So, what about federal income tax savings? While the 529 plan account can grow tax free, the contributions are not deductible. However, any withdrawals from the 529 plan expressly for qualified higher-education expenses are also federal income tax free.
What about non-qualified withdrawals?
They will be socked with regular federal income taxation, plus a 10% penalty.
Ouch.
I guess you could say the law has "carrots and sticks" to encourage and discourage various taxpayer behaviors.
One other feature of a 529 plan is that it can be an effective estate planning tool.
A 529 savings plan can decrease future estate taxes by lifetime gifting. As much as up to $14,000 of the annual gift tax exclusion per contributor can be taken when transferring assets to a child or grandchild (or up to $70,000 with a five-year election).
How is that? I thought the 529 plan contributor was the "owner," too.
True, however, when the contribution is made to the 529 plan, the law says they are viewed as being removed from the account owner's estate, even though that owner still has control over the distribution of the plan itself.
Sweet.
Now for the fast-talking-disclaimer-that-always-accompanies-some-too-good-to-be-true radio advertisement:
Your participation in a 529 plan does not guarantee that contributions and investment returns will be enough to cover higher education expenses. Contributors assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals. Your state may offer state tax advantages to residents who participate in the in-state plan.
Be sure to contact an experienced estate planning attorney to explore the many options available. Chances are if he or she does not have all of the answers, then he or she will know someone who does.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
Reference: The Legal Intelligencer (March 3, 2015) “529 College Savings Plans: How They Work”
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