Saving for College
, 2004
A New Law Means 529 Plans are Here to Stay - With more Options than Ever
If you are like more parents, you no doubt look at your kids with love - and maybe an occasional anxiety that peaks with every new report about the rising cost of college.
The average cost of yearly tuition at a public institution rose 6.3% from 2005-06 to 2006-07 to $5,836 a year, the College Board says. A year at a private college cost an average $22,218, up 5.9% from 2005-06.
Parents should take heart. When it comes to college costs, there's strength in numbers - specifically, the number 529.
Planning to Succeed
Named for a section of federal tax law, 529 College Savings Plans let parents, grandparents an others establish investment accounts to help pay qualified higher education expenses1 for children. Most plans let benefactors make deposits over the years until the child is ready to tap the fund. Other plans let investors lock in today's tuition rates for a future education at a specified college.
And the 529 plans are growing faster than the typical teenager. Deposits in 529s (including savings plans and prepaid-tuition plans) jumped from $15.6 billion in 2001 to more than $97.4 billion in 2006, the Investment Company Institute reports.
“Don't worry that a hefty 529 plan could disqualify your child from financial aid”
Several factors are driving that growth, says Joe Hurley, founder of the savingforcollege.com web site. Perhaps most important, last year Congress made 529 plan withdrawals permanently free of federal taxes (the tax break was set to expire in 2010). Contributions to 520 plans also are deductible on some state tax returns.
And Hurley says the plans, once known for high fees and limited investment choices, are getting better. "We have improvements in the investment options, including more investment options at lower costs," he notes.
Picking a Plan
Like any investment choice, 529s mst fit into the broader financial plan, Hurley says. "I agree with the majority who say retirement is a higher priority than college," he adds, "but I also feel that just about anyone can find at least $25 per month to put toward college."
Shop around for a good place to put that money. Investing in your own state's plan may have advantages, such as tax deductions, "but look for plans that have the investment options that appeal to you, including the quality of the investment manager, the level of fees and expenses, the flexibility of the program and whether it has any restrictions on how you use the account," Hurley says.
Investors also should consider their investment objectives and risk tolerance. When a child is young, most people will focus on stock investment options for maximum growth potential. But as the child gets close to college age, it's wise to switch to more conservative fixed-income investment options that limit risk.
Unlike some other investment options, such as Uniform Gifts to Minors Act (UGMA) accounts, the benefactor retains control over 529 plan assets. And if the child decides not to go to college, you can transfer the assets to another family member of the original beneficiary.
Don't worry that a hefty 529 plan could disqualify your child from financial aid. Hurley says if parents own the account, it's assessed at the same rate as their own savings. In most cases, colleges consider 5.6% of parents' assets available for college spending.
More Plan Pointers
There are some pitfalls, though. Investment choices, while better, continue to be somewhat limited. "You cannot have a self-directed 529 account, but there are a lot of investment choices out there," Hurley says.
Gift taxes could be a concern for some investors. Contributions to a 529 are treated as gifts to the beneficiary, and the limit on nontaxable gifts is $12,000 a year per person at the federal level. The revised 529 law allows investors to use five years of gift-tax exclusions at once, averaging the amount over five years of tax returns and depositing up to $60,000 per donor without tax consequences. Some states have individual limits on contributions, however.
Hurley also advises caution when withdrawing from 529 plans. Investors can use the money for purposes other than college, but they'll pay tax on the earnings plus a 10% penalty.
It's best to keep it for the kids - and avoid the anxiety attacks once and for all.
1: Qualified expenses include tuition fees, room and board and other supplies needed for attendance of a student at an institution of higher education. In addition to income taxes, a 10% federally mandated penalty on the earnings withdrawn for nonqualified expenses will apply. Earnings and withdrawals may be subject to state income tax. Please consult your tax advisor for more information. This communication is intended to provide general information about the subject matter covered or an idea that is discussed on this web site, with the understanding that HPHA is not rendering legal, accounting, or tax advice. Your should consult appropriate counsel or other advisors on all matters pertaining to legal, tax, and accounting obligations and requirements.