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529 Plans – Saving For Kids College

A 529 Plan is simply an education savings plan managed by a state or educational institution. The main purpose of the 529 plan is to help families save money for their kids’ college. Paying for a child’s education is certainly one of the greatest gifts you can give. But the costs of higher education have been rising at a shocking rate.

With in-state expenses at a public school averaging just below $20,000 per year, you may be wondering what you can do.One excellent solution to ease the financial challenge of paying for college is the 529 College Savings Plan. These are state sponsored savings plans that allow for tax-free earnings. Contributions are not deductible for federal income tax purposes, but are deductible in many instances for state tax purposes.

529 Plan Basics: What you need to know before joining the plan

Huge Tax write-off. Every five years, account holders can write off up to $55,000 from their estate per beneficiary without having to pay federal gift tax. For married couples, the limit is $110,000.

  • As an example, a wealthy couple with 5 grandchildren could deposit $550,000 ($110,000 x 5) towards their grandchildren’s education and eliminate that amount from their estate. They could do that every 5 years until the maximum is reached ($300,000+ per beneficiary in many instances).

You maintain control of the assets. If you decided to close the account, you would have to pay a 10% penalty and income tax on any earnings. The balance is yours to do with as you wish.

The beneficiary can be changed. If your son decides that he’s not going to college, the account can be reassigned to someone else. The account must be transferred to an eligible individual within the same family.

Different states, different plans. Each state has its own plan(s), and some are much better than others. But you can invest in nearly every other state’s plans.

  • In theory, you could be an Arizona resident, invest in a Connecticut 529 plan, and send your child to school in Florida. A lot of flexibility is available, so be sure to shop around before you open an account.

The fees associated with the various plans are also important to consider. Some will be much higher than others. In fact, many experts consider the extra charges to be the most important criteria when choosing a plan. Some fees are incurred when opening the account; there are also annual maintenance charges.

If you know for certain where you want to send your child to school, many universities offer prepaid 529 plans. This would allow you to lock in the cost of future credit hours at the current rate. Unfortunately, there are penalties should you decide to later send your child somewhere else. So if you choose this option, be very sure where you’ll be sending your kid to college.

On the down side, investment options are rather narrow, and the ability to switch between available investment options is also limited. The tax code currently curtails changes to once per calendar year.

Like any investment, 529 plans may or not be right for you. There are numerous other options to finance a college education, each with their own benefits and limitations.

However, if you’ve evaluated your investment options thoroughly, you may find that a 529 plan is an excellent option to ease the burden of paying for a college education. The tax benefits are considerable, and you always maintain control of your account. With the rising cost of college, your kids will thank you for investing in their futures.

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