Saving funds for education
We all have seen college costs rising faster than both wages and inflation year after year, so it’s not surprising that thousands of parents have seized the tax advantages of 529 savings plans to ease the strain of educating their children. But parents aren’t the only ones. Thousands of grandparents are finding that 529s provide both an efficient estate-planning tool and a way to help their loved ones surmount one of life’s greatest economic challenges.
I think you will find the idea behind 529 plans to be simple. Similar to a 401(k) retirement plan, a 529 is an investment account in which savings can grow on a tax-deferred basis until they are needed. The difference between 529s and IRAs, though, is that 529s enable you to designate a beneficiary who will ultimately use the money for educational expenses.
When the money is withdrawn, there are no federal income taxes, as long as the money is used for qualified expenses, such as tuition, room and board, or textbooks.
Many states offer tax breaks as well. However, Nevada does not have an income tax. Legislation allowing for the plans was enacted in 1996 by the federal government but the plans are sponsored by state governments and available through brokers or direct.
Many grandparents are finding that 529s allow a convenient and tax-effective way to pass money along to their descendants ” money that might otherwise have remained in their estates and been subject to hefty estate taxes before their descendants could inherit it.
One of the primary advantages of 529s is that the person setting up the plan (donor), not the person who will receive the money (the beneficiary), maintains control of the assets. With a trust, a child assumes complete control of the assets at a predetermined point in time.
If the beneficiary decides not to go to college, the 529 plan assets can be transferred to a new beneficiary. In fact, there are no restrictions on the number of times the plan can be transferred to a new beneficiary. If a donor ultimately decides not to use the money for education, capital gains must be paid, plus a 10 percent penalty, but only on the gain, not the principal.
“One widespread misperception about 529s is that they must be used at specific universities, such as a state college,” says Sheryl Colyer, Smith Barney Private Client Group. In fact, many 529 savings plans are administered through individual states and can be used at any approved educational institution.
While all plans offer relief from federal capital gains taxes, some states further sweeten the pot by offering reductions in state taxes. Also, each state has a different cap on the total that can be invested in a single plan. Donors can purchase plans offered by any state, whether they live there or not, and can buy plans for as many beneficiaries as they like.
So I say why stop at the grandkids? After all, there’s no limit on when the plans can be used. A beneficiary may use the money at any time, as long as it goes toward qualified expenses, Colyer says. With retirees living longer and more vibrantly than ever before, donors might even want to establish a 529 to go back to school themselves.
Have a great Super Bowl Sunday.
– William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial services firm serving Northern Nevada at 6005 Plumas Street, Ste. 200 Reno, NV 89509. Contact him at 689-8704 or william.a.creekbaum@smithbarney. com. The views expressed herein are those of the author and do not necessarily reflect the views of Smith Barney or its affiliates.