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Cents and Sensibility Guy Steele |
529 plan can help you cope
with kids’ college costsIn a few weeks, the school year will be coming to an end. If you have young children, you're that much closer to the day when they head off to college. And if you want to help them pay for their schooling, the time to start saving is now, because college costs are moving in only one direction -- up.
Just how high are the costs of higher education? Consider these figures from the College Board: In 2003-04, the average annual total for charges including tuition, fees, room and board at a four-year public institution is $10,636. The corresponding figure for a four-year private school is $26,854.
And if college expenses continue to rise faster than the general inflation rate, you can expect much higher costs in the future.
Fortunately, you've got some attractive college savings vehicles available. One of the best of these is the Section 529 plan, named after that part of the Internal Revenue Code authorizing these accounts.
You can choose from two types of Section 529 plans: A pre-paid tuition program or a savings plan.
In a pre-paid tuition plan, you buy future tuition credit -- at today's prices -- at an in-state, public school. If your child or grandchild decides not to attend your state college, you can transfer the value of your contract to private and out-of-state schools.
In a Section 529 savings plan, you put money in specific investments. All withdrawals will be free from federal income taxes, as long as the money is used for a qualified college or graduate school expense for the beneficiary you've named, typically, your child or grandchild. (Note: The money will appear as income on the child's tax return.)
Withdrawals for expenses other than qualified education expenditures may be subject to federal, state and penalty taxes. This tax benefit is effective through 2010, unless extended by the U.S. Congress.
Section 529 plan benefits
Of the two types of 529 plans, the savings plan is far more popular. In many ways, it offers more freedom than the pre-paid tuition plan, and, of course, it has tax advantages. Other key benefits include:» High contribution limits. Section 529 plan contribution limits are typically more than $200,000 per beneficiary, but they vary by state. And special gifting provisions apply. As with many investments, before investing in a 529, you should consult your tax professional.
» No residency requirements. You can generally contribute to the Section 529 plan of any state you choose, even if you don't live there. However, if you participate in your own state's plan, you may receive additional tax benefits.
» Investment flexibility. If you want to move your investment around, you can generally change to a different option in a 529 savings plan once a year. You can also transfer your account to a different state's program as often as once every 12 months.
» Estate planning advantages. If you're a grandparent, you may be especially interested in the 529 savings plan. Because you can contribute large amounts of money to the plan, you'll be able to reduce the size of your taxable estate. Plus, even though the assets are out of your estate, you retain control of them. You decide who will get the money and when they'll get it. You can even change the beneficiary to another family member.
Those are some reasons to consider investing in a Section 529 plan. If this plan is appropriate for your individual needs, it can be a great way to help boost your college savings. As for your children's grades -- well, that's up to them.
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Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688