“Life would be infinitely happier if we could only be born at the age of eighty and gradually approach eighteen.”
Congratulations to all graduates and their families, school is officially out for summer. If you know someone who’s graduated from middle or high school, and one of your investment goals is to help that someone pay for a college education, then please read on to learn about 529 College Savings Plans. This is a valuable tool provided by the Internal Revenue Service under Code Section 529 which offers several benefits to students and those helping them finance their educations.
Education costs have been rising so dramatically that Congress used tax incentives in 1996 to encourage families to save for college, passing legislation that created Section 529 of the Internal Revenue Code. You can make a huge difference by helping to save for the higher education expenses for our children, grandchildren and those we care about, including ourselves by taking advantage of this option.
Among the benefits of 529 Plans are:
• Earnings in the account can grow free from federal and state taxes, and withdrawals are free from federal tax if used for qualified higher education expenses.
• Assets may be used for higher education, including undergraduate and graduate school, community college and technical and professional training. Tuition, fees, room and board, books and supplies, and certain other fees and expenses are all qualified higher education expenses.
• For 2009 and 2010 computers and certain computer-related expenses such as internet service are qualified higher education expenses.
• Adults can establish accounts for themselves and use assets to pay for their own schooling, including professional, vocational and technical training. Great news if you are thinking about a career change?
• Assets can be transferred — in whole or in part — among 529 accounts of different family members.
• For 2009, account owners may move assets among funds twice during the year when they change beneficiaries.
• You can contribute up to $13,000 a year ($26,000 for married couples) without gift-tax consequences. Or you may invest $65,000 ($130,000 for married couples) at one time by accelerating five years worth of investments. If you’re lucky enough to have 10 grandchildren, you could ultimately gift $650,000 as an individual or up to $1,300,0000 for a married couple in one year.
• There are no income limits, so 529 accounts are available to people of all income levels.
• Save for anyone — your child, your grandchild, a niece or nephew, a friend, or yourself. You may also change the beneficiary to another member of the beneficiary’s family.
• You control the asset, which means you decide on the amount and timing of withdrawals. You can change the investment mix once a year and when you change the beneficiary. However, special IRS rules allow you to move your assets among funds twice during calendar year 2009 and when you change the beneficiary.
Control and Flexibility
• The account owner has control of the account and contributions.
• Anyone age 18 or older regardless of income may be a donor or an account owner.
• The account owner, which is typically a grandparent or parent, is considered the owner of the account for financial aid purposes which is more favorable than the asset being considered the child’s.
Gifting and Estate Tax Advantages
• Accelerating gifting allowed; an individual can contribute up to $65,000 ($130,000 per couple) per beneficiary in a single year without gift tax consequences provided that donor does not gift any more to that beneficiary over the next five years. This is an excellent estate planning tool for those with tax concerns. You may move assets out of your taxable estate yet still maintain control.
• Assets are removed from the account owner’s estate as long as the account owner does not die within electing the “five year spread” of a contribution.
Other important information about 529 savings plans:
• If you withdraw money from a 529 college savings plan for purposes other than higher education, your earnings will be subject to federal income tax and possibly a 10 percent federal tax penalty.
• Your 529 Plan holdings could reduce your beneficiary’s ability to qualify for grants and student loans.
• Some states give taxpayers a deduction or credit on their state tax bills for contributions to 529 savings plans sponsored by their state.
Section 529 Savings Plans, since their inception in 1998, are probably the most popular choice for education savings. There are more than 10 million 529 accounts with total asset values of over $75 billion. So whether you’re looking out for the future of a newborn, the recent kindergarten graduate or are interested in higher education for yourself, the first step is educating you on all the benefits of 529 savings plans.
Darcie Guerin, Financial Advisor & Branch Manager, Raymond James & Associates, Inc. located at 606 Bald Eagle Drive, Suite 401, Marco Island, and FL 34145 provides this article. If you have questions please contact Darcie Guerin via e-mail at Darcie.Guerin@RaymondJames.com. Phone (239) 389-1041, toll free (866)-343-0882 or at RaymondJames.com/Darcie. Past performance may not be indicative of future results.