A recent comic in Barron’s showed a map of the U.S. labeled “You” with a hurricane spinning toward the east coast called “College Costs.” Unfortunately, the cost of a college degree continues to escalate faster than inflation. According to the College Board, the 2009-2010 estimated tuition, room and board will grow by 5 percent.
How can you keep the hurricane from wreaking havoc on your personal finances? A 529 college savings plan can build college savings AND provide significant growth from sheltered tax benefits. The flexibility of the 529 plan has quickly made it the preferred method of saving for college.
Here are some of the notable advantages to 529 plans:
Taxes: The growth inside a 529 plan is not only tax deferred, but the proceeds are tax free as long as the funds are used for educational purposes, so the growth itself will not be subject to federal taxes. When saving over a long period of time, the tax savings can be substantial.
Control: The donor or owner has complete control over the funds. Your child is not in a position to make decisions over how that money will be spent. Alternative plans, such as UGMA (Uniform Gift to Minors Act) accounts, require that the accumulated assets transfer to the child when he or she reaches legal age –– usually 21. In a 529 plan you don’t have to worry that Junior will be rolling up the driveway in a new sports car on the day he hits the legal drinking age.
Transferability: Additionally, the 529 plan owner has the ability to transfer that account to a qualified family member. This is most helpful if one child defers college or if there are funds left over after college that can be used for another child.
Funding: You can fund the plan in a variety of ways. Contributions can be turned on or off at any time. And you can make continual deposits on a monthly, semi-monthly, or annual basis, which is helpful for parents who want a ‘set it and forget it’ funding plan. Front-end funding with large deposits is most beneficial as it allows for a larger portion of the proceeds to come from tax-free growth.
Parents aren’t the only concerned parties when planning for college. A survey commissioned by Fidelity Investments found that nearly two-thirds of grandparents were willing to contribute to their grandchildren’s college savings accounts. In addition to having the fulfillment of contributing, grandparents can also use college funding as an estate planning vehicle. The unique advantage with the 529 plan is that the value of the account is removed from your taxable estate, yet you maintain full control over the account.
With the annual gift tax exclusion at $13,000, a set of grandparents can make an annual contribution of up to $26,000 per beneficiary. The law also permits that a contribution that would normally take place over a five- year span, can be completed all up front for up to $65,000 per beneficiary coming from a single grandparent (up to $135,000 if coming from both grandparents).
Investments: 529 Plans are continually evolving. The better investment firms offer a variety of mutual funds and give you the flexibility of choosing the style of investment: age-based, aggressive, conservative, domestic and international.
Although it seems daunting, paying for higher education is within your reach. It comes down to starting early, saving consistently, and using a well executed plan with sound investment options.
Sheehy Associates can help you set up a 529 College Savings Plan and allocate a portfolio that matches your investment horizon.
Prior to investing, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
Bill Sheehy is owner of Sheehy Associates Inc., which specializes in Retirement Planning for individuals and corporate 401(k) plans. He is a Certified Financial Planner, a Certified Employee Benefits Specialist, a Certified Fund Specialist, and a Chartered Retirement Plan Specialist. He can be reached at bill.sheehy@lpl.com or by calling 609-586-9100.
Sheehy Associates. 3812-B Quakerbridge Road, Suite 208, Hamilton. 609-586-9100. bill.sheehy@lpl.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC
