Get Started with College Saving
Paying for college can be very expensive. Given the costs involved, it's not surprising that the challenge of investing for higher education is sometimes met with procrastination. Perhaps it's a natural consequence of confronting a burden now often measured in hundred thousand dollar increments. Fortunately, however, tackling this significant financial challenge has become less daunting thanks to the many benefits of 529 college savings plans.
Section 529 College Education Plan
Congress authorized Section 529 investment plans in 1996. They were designed to complement the already-existing prepaid tuition plans that many states had set up. Prepaid tuition plans offer a guarantee that a regular plan of savings will mature to guaranteed paid semesters of college, no matter what the effect of inflation on future college costs. Recently 529 plans have become even more appealing as Congress repealed a clause in the tax code that would have caused certain tax benefits to expire at the end of 2010. Today, assets invested in 529 plans stand at over $100 billion and will likely triple by 2012.
In spite of being very popular, many investors have a limited understanding of the basic features and benefits of 529 plans. In this article, we'll take a close look at some of the most common questions associated with 529 plans to help you determine their proper place in your long-term financial strategy..
Do you have to invest in your own state's 529 Plans?
The laws establishing 529 plans called for them to be administered at state level. This led to individual states partnering with investment managers to create their own plans. this linking of plans to states has led some potential investors to mistakenly assume that they may only invest in a plan administered by their state of residence. But in fact, investors are able to open 529 accounts with virtually any plan, regardless of their state of residence and/or the state sponsoring the plan.
However, the state-to-plan linkage provides some benefits for those who invest in the plan sponsored by their home state. For example, most states allow investors to take state income tax deduction for their contribution. Then too, a handful of states match a portion of contributions for residents in certain income brackets who contribute to an in-state plan. In some instances, these benefits provide a compelling case for sticking with your own home state plan, but potential investors should consider other options as well since investment options may be limited with their own state plan. As a investor, you should consider investment choices, plan expenses, long-term results and their investment philosophy.
Children want to attend college out of state while you invested in in-state plan This is one of the most common misconception. Most people think that if they invested in a in-state 529 plan, 529 plan will only pay for the college expenses in the sponsoring state. But with the exception of certain prepaid tuition plans, 529 assets can be used to cover qualified expenses including tuition, room and board, book and supplies at almost all public and private higher education institution in the United States, including junior colleges and technical or trade school. Also, 529 assets are not in the name of a child so if you have two or more children, you can easily use these assets for any one of them or as a combination.
Does 529 plan hurts Financial Aid Chances? Most financial aid calculations are complicated and can vary considerably, you should consider federal financial aid formula as a benchmark. In this formula, income and non retirement investment assets(stocks, mutual funds, cash etc.) are used to determine what's known as applicant's "expected family contribution." 529 plans assets are in parents name so they are included with the parental assets considered for the formula, but are subject to a ceiling above which plan assets are not considered for financial aid.
So if you're wealthy or have money to pay for the higher education of your children, 529 plans are only going to help during financial aid application as compared to you show other assets as your regular investment and they are not subjected to a ceiling as 529 assets are. So while any kind of parental assets hurt the financial aid chances, the damage that regular assets can do is far more than 529 plan assets so it makes perfect sense to go ahead and have a 529 plan started. |
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My child doesn't want to go to college and wants a buy sports car instead
Some people worry that their children may not use money for qualified educational expenses and use it to pay for non-educational expenses. While it is true that the control and ownership of certain educational accounts often transfer to the beneficiary once he or she reaches a certain age(18 or 21 in most states), this is not true with 529 plans. Instead, the account owner - in most cases, the parent or grandparent - retain full control of the assets and determines the amount and timing of the distribution. More importantly, the owner has the option of changing the beneficiaries at any time. Doing so carries no tax penalties as long as new beneficiary is a member of the previous beneficiary's family and in 529 world, "family" is broadly defined to include parents, siblings, aunts, uncles, cousins, nieces, nephews and more..
You can also elect to not designate a new beneficiary and instead choose to liquidate the account or withdraw money for purpose untreated to higher education. However, the earning portion of those withdrawals will be subjected to a 10% federal tax penalty as well as state and federal taxes. In addition, any state tax deduction you claimed for the contribution may be subjected to so-called recapture - meaning you may be retroactively taxed on those amounts. If you're not sure who to name as beneficiary but don't want to face tax penalties, you may defer withdrawals of your assets in anticipation of designating a new beneficiary in the future.
Are 29 plans available to all income levels investors? Here is the good news. There are no income limits for 529 plans; you can invest in 529 plans no matter how much you earn. In addition, 529 plans can be used as effective vehicle for gifting assets. For instance, a parent or grandparent can contribute up to $12,000 annually($24,000 per married couple) for each beneficiary with no gift-tax implications. And if a parent or grandparent wishes to put more assets to work more quickly, they can accelerate five years' worth of giving by investing up to $60,000 ($120,000 for married couple) per beneficiary in a single year. Naturally, investors seeking to use 529 accounts as estate-planning or wealth transfer vehicle need to be aware of the rules and limitations governing such practices, but a financial advisor or tax advisor can help navigate the process.
Our Child got a Scholarship. What now? If a beneficiary receives financial aid in the form of scholarship, account withdrawals(to the extent of the scholarship amount) are exempt from 10% federal tax penalty but earnings are subjected to regular state and federal income taxes. Of course, 529 assets can also be used to cover certain expenses that scholarship may not cover. And plan assets can always be use for graduate school, certain type of technical training and continuing education. In addition, you have the option of switching the beneficiaries.
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