WOW – August already! Where has the summer gone? I can’t believe that it is time for school and college to get cranked up again in a matter of weeks. I personally have two going back to college this year. They are both attending Baylor, as I did, and it is great to be able to share the Baylor of my college years and the Baylor they are experiencing. The expense of putting two through college can be a serious budget killer though. Thankfully my wife and I had planned for paying for their college in advance. We used what I believe to be one of the best financial planning opportunities available to us as investors.
This month I would like to discuss the 529 Plan.
I feel like this applies to all of us in our roles as parents (young or old) or grandparents.
What is a 529 Plan?
It is a state sponsored educational savings plan that allows for TAX FREE growth of assets that are set aside for education of a specific beneficiary. These plans are also commonly known as “qualified tuition plans”.
529 Plans can be used to meet costs of qualified colleges nationwide and are not limited to the plan sponsored by your state of residence. You can be a resident of Georgia and participate in a 529 Plan sponsored by Virginia and your beneficiary can attend college in New York. (However, please evaluate the benefits of using the 529 Plan sponsored by your resident state as many times there are state specific advantages.)
The top benefits of the 529 plan are:
A. Tax Benefits
– While your contributions are not tax deductible on your federal income tax return, your investment grows tax deferred and distributions for college costs of the beneficiary are distributed TAX FREE thus the investment gains are never taxed if used for college expenses.
-Many states offer tax breaks in the form of up front tax deduction or credits against your state income tax obligation.
B. Donor Retains Control of the Funds
– The donor controls the decisions of the account in regard to investment choices or distributions.
– You have the ability to reclaim the funds should you decide the funds aren’t needed for the beneficiary. (Please be careful as there are special income tax consequences if the funds are withdrawn and returned to the donor.)
– The donor has the ability to change the beneficiary to another qualifying family member if needed.
C. Donor Reduces Taxable Estate
– The money in the 529 Plan is not included in the donor’s estate. This is especially important if you have a taxable estate (i.e. total net worth over $5M)
– 529 Plans are portable and can be transferred between plans and rolled over much like an IRA. If you believe another state sponsored plan provides better options you can transfer without penalty.
E. Substantial Funding Permitted
– Anyone is eligible to participate in a 529 Plan and the contributions limits, which vary from state to state, can allow for up to $300,000 in contributions per beneficiary. There are no income or age restrictions.
If you want to get started, please research if your state has its own state sponsored plan and then evaluate the benefits of that plan. Next, compare those benefits to other plans sponsored by other states. Typically, the large investment companies partner with individual states to provide 529 plan solutions. (I believe that almost every state has at least one 529 Plan solution available.) This would include funding limits, investment options and state tax benefits.
I strongly encourage you to consider using the 529 Plan as a solution to save and fund college education for your children and grandchildren. The benefits outlined above are just a sample of the planning opportunities these plans provide.