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04.07
529
College Savings Programs
By Larry N. Grogan
With the average cost of four
years at a private college (tuition, room,
board and other expenses) climbing to $118,597
($48,937 for a public university), it is no
wonder that many families are concerned about
college savings.*
529 college saving plans are
investment programs designed to provide families
with an effective method of saving for future college
expenses. All states have a 529 plan of some
sort. Most of these programs are available to
residents and non-residents, so you can select the
plan most suitable for your goals. But did you
know that there are more than seventy different
529 plans to choose from? So, how do you know
which is the most suitable plan for your needs?
This article will outline some basic
characteristics and provide you guidance to aid in
making an intelligent decision.
Anyone can have a 529 plan
529 plans are available to
anyone, regardless of their income level or age
of children or grandchildren. You dont even
need to have children to own a 529 plan. You can
own one for yourself should you wish to go back
to school. But you can also establish accounts
for a nephew, niece or even a friend. Many
plans will allow you to contribute up to
$250,000 into as many accounts as you wish with
no time limit on their use.
Additionally, you can select any
plan you wish. You are not required to
participate in your states plan only.
529 features
Because 529 plans are considered
state sponsored, each 529 plan is different
from the other. Some issues you should consider before
selecting a 529 plan:
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Second, what type of investor are you? Some
plans will allow the investor to select specific
funds they would like to invest their money in.
However, most plans have predetermined
portfolios where are the decisions are made for
you. With those, you simply select an investment style
(e.g., conservative, moderate or aggressive).
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Finally, does your state offer a state tax
incentive? Not all states offer a tax incentive
to invest in their plan. And you must be a
resident of that state to receive the tax
benefit. However, for those plans that do offer
a tax incentive, the amount saved from your
taxes may not be an incentive at all when
compared to other features. So, carefully review
the tax incentive to determine if
it is a critical element of your selection.
Tax advantaged investing
Earnings in 529 plans grow tax
deferred, and now with the passage of the
2006 Pension Protection Act, withdrawals are
now permanently federal tax free. Significant
penalties and taxes are incurred if the money is not used for
higher education purposes.
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Assumes $500 / month
contributions, 8% hypothetical rate
of return,
and a 27% tax bracket for the taxable account. |
Control of assets
There are three key components
to any 529 plan. The account owner, the
successor owner and the beneficiary.
The account owner is the
individual who actually owns the account.
Typically, this is the parent or grandparent. As
the owner, you decide how the money is invested,
when it is distributed and to whom the money is
distributed. You will remain the account owner
until the account is empty, cancelled or you
pass away. At that time the successor owner
becomes the owner and assumes all responsibility
of ownership.
The beneficiary is the one for
whom the money is intended to support for
educational purposes.
The significance of the account
owner is when you compare the 529 to other
saving programs such as UTMAs (Uniform Transfer
to Minors Act) or UGMAs (Uniform Gift to Minors
Act). These
accounts are known as custodial accounts and
have a legal age of transfer attached to them.
When the minor reaches the legal age, all money
in the UTMA or UGMA transfers to the minor. The
adult cedes control of the account and the minor is then free to decide how
that money will be spent. 529 plans eliminate this concern.
Estate Planning
529 college savings plans
provide a very unique estate planning component.
Currently, federal gifting laws allow
individuals to gift $12,000 per year to as many
individuals or institutions as they wish. As a
couple, you can gift $24,000. The benefit of
gifting into 529 college savings plans is that
you are allowed to contribute five (5) years of
gifting in a single year.
In the example illustrated below,
by gifting the maximum, the
grandparents were able to remove $880,000 from
their potential estate taxes, which is a
tremendous
benefit to them. Additionally, they
significantly reduced their children's financial burden
by providing the greatest gift ever to their
grandchildren the opportunity for a great
education.
For illustration purposes only.
Your situation may require other strategies to
be used.
Please consult your tax adviser before enacting
any tax strategies.
With so many differences, how do
you select the 529 plan most
suitable for your needs? Education Financial
Services created the "529 Advisor Questionnaire"
to assist you. The 529 Advisor Questionnaire
uses the client's needs, interests and goals to determine which 529 fits
best. The 529 Advisor Questionnaire is
available online at
www.efs529.com/ieee. Education Financial Services has made
enrollment simple by providing advice,
enrollment, education and research all
available online.
IEEE Financial Advantage has
partnered with Educational Financial Services, a
business unit of Grogan Advisory Service, to
provide this service to members searching for
appropriate College 529 Savings Plans for their
families. To learn more about this and other
IEEE Financial Advantage products and services,
visit us online at
www.ieee.org/fap.
To view a state-by-state
comparison of 529 plans, visit:
www.collegeanswer.com/paying/content/529_plan_statebystate.jsp.
*Calculation estimates using the
College Board 2004-2005 tuition and college
inflation data. Assumes 5 percent per year inflation.
Larry N. Grogan is
president of Grogan Advisory Services, an independent financial
services firm in Malta, N.Y.
Comments may
be submitted to todaysengineer@ieee.org. Opinions expressed are the
author's.
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