Next to saving for retirement, your biggest financial challenge is probably saving for your child’s college education. College costs have skyrocketed! People wonder how they will afford the cost of a college education in the future. A 529 College Savings Plan is a very simple way to save money for your child’s college education. The benefits are tremendous. Here are some highlights of the plan:
- For qualified distributions, you pay no taxes on the account’s earnings.
- The child doesn’t have control of or access to the account—you do.
- If the child doesn't want to go to college, you can roll the account over to another family member.
- Anyone can contribute to the account.
- There are no income limitations that might make you ineligible to establish an account.
- Most states have no age limit for when the money has to be used.
The 529 Plan (named after its section number in the IRS code) is a savings plan for college education. All of the account's earnings are exempt from federal tax when they are withdrawn if they are used for qualified higher education expenses. This means that, unlike the taxes you have to pay on earnings from regular investments, you won't pay any tax on the 529 account earnings. If you have to withdraw the money for reasons other than to pay for qualified higher education, then you pay tax on the earnings, (at your rate) and a ten percent penalty.
In most states, qualified education costs include tuition, books, room, board, and transportation. Your child can go to any accredited degree-granting educational institution, whether it is public, private, two-year, or four-year.
The 529 Plan is a state-sponsored investment program. That is, the state engages a financial services company of its choice. You won't deal directly with the state, but rather with the financial services company. You are the owner of the account, and the child for whom the account is set up is the beneficiary. Each beneficiary must have his/her own account. Siblings cannot share an account. You can, however, roll any remaining portion of an account over to another child once the account's beneficiary has completed college.
Although you are the account owner, 529 Plan accounts are considered gifts and are, therefore, not calculated as part of your own estate assets.
ACTION ITEM: Consider the benefits of a 529 Plan if you need to save for college costs.
Thomas F. Scanlon, CPA, CFP®
