College Savings and 529 Plans

With higher education becoming ever more expensive, parents need all the help they can get!  For many families, a 529 Plan is an excellent way to provide for higher education.  A 529 Plan is a formal tax-advantaged savings plan designed to offer flexibility, tax benefits, and relative ease in providing educational opportunities for loved ones.  

Is this Plan right for your family?  Let’s take a closer look at some of the benefits.

Income Taxes.  A 529 Plan offers tax-deferred growth on earnings.  In other words, no federal taxes are due until funds are withdrawn.  In addition, qualified distributions are free of Federal income tax.  

Gift and Estate Taxes.  As a general rule, money contributed to a 529 Plan is considered to be outside of the donor’s estate, an important benefit for individuals and families with higher net worth.  These plans may be funded via annual exclusion gifts.  One particularly advantageous benefit is that these plans allow one to make five years of annual exclusion gifts all at once.  That translates to $65,000 for individuals and $130,000 for couples.  Imagine the estate planning opportunities for a wealthy family with multiple children and grandchildren! 

Ownership and Control.  Typically a parent, known as the participant, creates and funds the account and therefore controls it.  A child is deemed to be the beneficiary.  Since the parent controls the account, he or she can transfer the account at any time to benefit another member of the original designated beneficiary’s family (i.e. sibling).  These accounts are intended exclusively for college-related expenses such as books, tuition, and so forth.  Funds may be withdrawn at any time;  however, unqualified distributions will be subject to federal income taxes and a ten percent penalty. 

Contribution Limits and Other Considerations.  As a general rule, low initial investments are permitted.  Some plans may permit as little as $15 per month.  Lump-sum contributions are also possible.  Level of parental income does not restrict the ability to contribute to these plans.  Interestingly, there are no age restrictions for beneficiaries, so an individual can establish a 529 Plan for an older individual such as an adult family member. 

Are there disadvantages associated with a 529 Plan?  That depends.  As a general rule, the wealthier you are, the less sense this arrangement makes.  Wealthier individuals and families often have the ability to easily cash flow higher education needs for loved ones.  In addition, some individuals prefer to fund a trust in order to be able to ultimately use the funds for higher education and/or other purposes (i.e. to purchase a home or business) – and use it without penalty. 

With regard to funding a trust, there is a strong case for investment control.  In a trust, the donor (creator) often has complete control over the selection of investments…and…virtually an unlimited menu of investment possibilities as opposed to a predetermined menu of options. 

Conclusion.  For most families, the benefits of a 529 Plan are strong and undeniable, and that makes it an excellent choice!


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