The best gift of all is a good education. So before you start shopping for holiday gifts for your children or grandchildren, consider opening a 529 College Savings plan account. These tax-sheltered college savings incentives are easy to open, require no major investment decisions, and this gift will be appreciated far into the future.
Here are five things you should know about 529 plans.
1. Any plan, any state, no taxes, no minimums. The law was written to allow each state to open a 529 plan, but all follow the same basic federal rules. Money invested in any state’s plan can be used for any child in the family, at any college or university in any state, for approved educational costs, such as tuition, room and board, and books.
The money invested within the plan grows tax-free. And when it is withdrawn in the future to pay for college education expenses, there is no tax on the money withdrawn. Investment choices are few and easy; most choose age-based plans that move into more conservative investments as college draws closer.
There is no federal tax deduction for contributions, but some states do offer a limited deduction from state income taxes for those making contributions.
2. How to Choose a Plan. There are two great websites that will give you performance comparisons: www.SavingforCollege.com and www.Morningstar.com. Each has recently posted performance ratings for the past year, and previous 3 and 5-year periods. The results consider costs as well as gains. You can easily choose a plan and click the link to the plan website to open an account online, or using the toll-free number. A financial advisor may help you choose a plan without incurring additional costs.
Note: If you have several children in the family, you might want to open separate accounts for each since there are no additional costs — or all children in the family can “share” a plan.
3. Who can contribute, and how much? Most plans allow you to open an account with a very low minimum – some as low as $50. Then you can set up a regular plan of automatic monthly contributions from your checking account. Other family members or family friends can also contribute to the same plan.
Special note: some 529 plans are linked to spending rebate offers, such as UPromise. Ask relatives to link up their credit cards so their spending will generate automatic contributions.
4. Generous Estate Planning Deal! Most parents and grandparents will contribute far less than the allowable $14,000 a year gift (above this amount a federal gift tax return must be filed). But there is a special exception for 529 plans. Givers can contribute up to 5 times the allowable annual gift tax amount in one year. That means a wealthy grandparent could give $70,000 to each grandchild, getting the money out of his or her taxable estate! (And if the grandchild doesn’t attend college, or the grandparent needs the money at a future date, the gift can be rescinded by paying accumulated taxes and a 10 percent penalty).
5. Impact on Financial Aid. Assets held in the 529 plan are considered parental assets in the financial aid formula, and therefore have far less impact on the aid process than assets held directly in by a student or in a custodial account. And when money is withdrawn to pay for college, it is not considered parental income, so does not impact the next year’s financial aid.
Assets held in a plan “owned” by a grandparent are not considered in the aid formula, but when money is withdrawn to pay for college it is considered “student income” – and has a far greater impact on the next year’s aid. One strategy is to use these assets only in the last two years of college. (Note: 529 plan assets cannot be used tax-free to pay down student loans!)
Opening a 529 college savings plan is one of the easiest investment decisions you can make. Your gift will appreciate – and be appreciated. That’s the Savage Truth.