Unlocking the Mysteries of 529 Plans
By: Kate Hennessy
As a parent I appreciate the saying “they grow up so fast.” When I was on maternity leave in 2010, I remember how excited I was to fund our daughter’s 529 plan and plan for her future.
Selecting the right 529 plan can be as intimidating as determining how much to contribute each year. In working with my clients, I have identified several types of 529 plans and funding schedules to meet their needs.
First let’s define what a 529 plan is - a college savings account that's exempt from federal taxes. The concept of a 529 plan was introduced in 1996 as a way to help taxpayers save for college expenses.
There are two types of 529 plans - prepaid tuition plans and college savings investment plans. The advantage of a prepaid tuition plan is that it allows taxpayers to lock in the current costs of tuition for use in the future. The downside is the prepaid plan may only be applied to tuition and certain fees at in-state public colleges and universities.
The second type of 529 plan is the college savings investment plan. Pay close attention to the one offered in your state as it may offer you a state tax credit or deduction for participating. If your state doesn’t offer a tax credit, don’t limit yourself to just your state’s 529 plan as many states allow non-residents to invest in their plan. Pay attention to the investment options offered as well as the expenses associated with the 529 plan.
College savings plans have grown in popularity relative to prepaid tuition plans. This growth can be attributed to the fact that funds invested in prepaid tuition plans may only be applied to tuition and fees, whereas money invested in college savings plans can be applied to tuition, fees, room, board, books and other expenses.
One of the major benefits of a 529 plan is that many people can contribute to your child’s college savings plan. Multiple donors (mother, father, grandparents, etc) may contribute. The maximum amount a donor can contribute in 2017 is $14,000 without incurring any gift-tax consequences. There are also lump sum contributions of much more if spread evenly over a 5 year period. This is a great estate-tax planning strategy for grandparents.
If your child decides not to go to college, the money saved can be allocated to one of your other children.
Saving for your child’s future doesn’t have to be overwhelming. The key is to start thinking about it early, create a funding schedule that fits your needs and choose a plan that works best for you.
For more information about saving for your child’s future please contact me at email@example.com or 312-515-0067.