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Plan
for College with a 529 Savings Plan
College
costs have been rising so fast since the 1980s that it's hard to imagine how
they could grow any faster. But they did at public institutions, growing 8.4
percent (after adjusting for inflation) for the 2002-03 school year,
the biggest increase in nearly 15 years.1
 Chalk
it up to a slow economy and the cash-strapped state governments that fund public
institutions. Yet a college education is still well worth the investment.
Individuals with a bachelor's degree can expect to earn at least $1 million more
over a lifetime than individuals who have only a high school diploma.2
One way to help tackle the task of accumulating enough money to pay for college
is a Section 529 savings plan.3 Consider how
this tax-advantaged vehicle could help you reach your college savings goals.
Here's the Plan
The exact provisions of 529 savings plans vary from state to state, but all are
based on the same underlying concept. Family members and friends can contribute
after-tax dollars to a student’s account for a number of years before he or
she is ready to go to college. Contributions are placed in a mix of funds that
typically pursue returns from equity investments.
Tax-free withdrawals. Any earnings
are free of federal income tax if spent on qualified higher-education expenses.
Earnings may also be exempt from state taxes, depending on where you invest.
Estate planning possibilities. An
individual can give up to $11,000 ($22,000 for a couple) per year per
beneficiary without paying any gift taxes, or a lump sum of $55,000 ($110,000
for a couple) if no other contributions are made for that student for five
years. Contributions are no longer considered part of the donor's estate, which
can help reduce potential estate taxes.4
Flexibility. Withdrawals can be
spent not only on tuition, but on room and board, books, and even computers.
The rapid growth of college costs doesn't appear likely to abate any time soon.
A 529 plan may help you keep pace so the youngsters in your life can attend
college and worry about good grades rather than tuition bills.
1, 2) The College Board, 2002
3) As with other investments, there are generally fees and expenses associated
with participation in a 529 savings plan. In addition, there are no guarantees
regarding the performance of the underlying investments. The tax implications of
a 529 plan should be discussed with your legal and/or tax advisors because they
can vary significantly from state to state. Most states offer their own 529
plans, which may provide advantages and benefits exclusively for their residents
and taxpayers. The tax-free qualified withdrawal provision of these plans is
scheduled to expire after December 31, 2010, unless new legislation is enacted
by Congress.
4) If the donor dies before the five-year period ends, a pro-rated amount of the
gift will revert back to his or her estate.
©
2002 Emerald Publications
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