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	01/12/2001

529 College Savings Plans

There is a great deal of new financial information every day making it very hard to keep up with what is appropriate for you. This article will address a relatively new financial option that you may have overlooked -- the 529 College Savings Plans and to inform you of new twist becoming available for these Plans. The Plans have numerous advantages. So, if you are saving for college for yourself, your kids and/or your grandchildren these Plans deserve your consideration.

As part of the 1997 Taxpayer Relief Act states were empowered to develop Qualified Tuition Savings Programs. These savings programs have become to be known as 529 savings Plans for the IRS code number. The State of Connecticut responded with their version known as CHET --- the Connecticut Higher Education Trust. Now individual mutual fund companies are opening up their own 529 Plan offerings (under the auspices of state trust programs) giving investors much greater options and control within the Plans.

In this article, I want to explain in general terms how 529 Plans work and some of the advantages over other college savings programs. Please remember, that within the parameters of the legislation each state program will vary to some degree. This article will only address how they work in general. I am making the assumption for simplicity sake that you -- as the parent -- are the owner of the account and your child is the beneficiary.

The Plan - Contributions

529 Plans have many advantages. One of the most enticing is the tax advantage. All investment earnings accumulate tax deferred until the day of withdrawal! We all want to save for college, but doing it completely tax deferred is great. Yes, you can put money into an IRA or Roth IRA and use the money for qualified higher educational expenses and have the same tax deferred advantage. However, as you know, IRA's limit the amount of money you can invest per year.

Most 529 Plans allow maximum contributions to exceed $125,000 per year. Now that allows for some serious college savings. Technically speaking, a contribution to the Plan for your child is a gift. Therefore, you may want to consider potential gift tax consequences. You can contribute up to $10,000 per child or $20,000 for those married and filing jointly before triggering any gift tax consequences. So much for the large lump-sum up front payment you say. Not true, the Plan will allow for a contribution of $50,000 ($100,000 for couples filing jointly) to a single account and prorated for a five-year period without triggering federal gift taxes if no other gifts are made to that beneficiary.

You are now asking what happens to the money in the Plan. In most cases, the funds are placed into a diversified portfolio of mutual funds. If you use the CHET Plan, the assets are placed in TIAA-CREF funds and the investment mix is determined for you according to the age of the child. As the child grows older, the portfolio of funds is re-balanced for increasingly less risk. One of the nice opportunities in the market place that has recently developed is the possibility for you to use any mutual fund family that has created a 529 option. This allows you much greater choice over initial investments. Furthermore, some fund companies will allow you to direct future contributions to the Plan giving you more control over how aggressive or non-aggressive you want to be.

The Plan - Withdrawals

Proceeds from the Plan may be used at any accredited post-secondary school in the United States. Upon withdrawal, the earnings that are used for qualified education expenses are taxed at the beneficiary's tax rate. That means that the money has grown tax deferred and upon withdrawal it is now taxed at your child's rate not yours! This may be as low as 15% -- the child/beneficiary is required to file. What happens if your child does not go to college and you need the money for a new car. Simple, the earnings portion of these "non-qualified withdrawals" are generally taxed at your (owner's tax rate) and in addition, is subject to a 10% penalty.

The Plan - Other Considerations

With any Plan there is of course the fine print. In the case of 529's the fine print is mostly favorable, but you need to know all the details before investing. Here are some general 529 Plan guidelines that you should be aware of:

A person making a contribution to a college savings Plan cannot make a contribution to an Education IRA in the same year. Remember that you can place up to $500 per child per year into an Ed. IRA from which qualified withdrawals are tax free.

Proceeds from a 529 Plan may be used at any accredited post-secondary school in the United States for part or full-time education. (Some Plans allow the funds to be used for graduate school.)

Beneficiaries receiving 529 income remain eligible for the HOPE Scholarship and Lifetime Learning Credit in the same year.

The owner (if you) retains control over the withdrawals! This is a big consideration. Remember those UGMA/UTMA accounts - as soon as your child reaches majority age he/she gets control of the money. That is a real negative feature for many parents. You do not have to worry with the 529 Plan -- you as the owner will always have control over the money.

The account should have less adverse affect on financial aid packages than money held in a child's name. At last check anyway, colleges were counting 529 Plan assets on the parent's side of the ledger, because the parent is the owner and controls withdrawals. (Remember - assets held in the child's name reduce financial aid packages by a greater amount than money held in the parent's name.) If colleges continue to see the money as in the parent's name that is another excellent advantage of the 529 Plan.

With many Plans you can change beneficiaries, provided they are related. (Check the definition of related before investing.) You can even name yourself.

Most Plans only take cash investments -- no transfers from current UGMA Plans, stock transfers, etc.

Since you control withdrawals from your account, you have several options if the beneficiary decides not to attend college. Change beneficiaries (must be related to the original beneficiary) Leave the assets invested in the Plan for later use. Withdraw the assets and pay a 10% penalty.

Contributing to a 529 Plan account may also provide important estate planning benefits to families whose estates exceed the estate-tax exemption. The Plan's high contribution limits provide a convenient way to effectively lower the taxable value of your estate. With federal estate taxes starting at 37%, the ability to reduce your taxable estate could save a substantial amount of money for your heirs.
A final reminder -- the above describes a generic 529 Plan -- but they all differ. From investment options, and withdrawal penalties, to beneficiary changes all the rules seem to vary.
As you can see, 529 Plans have numerous advantages and I didn't even mention what a great tool they are for grandparents to use in helping fund college.
Please send questions or comments to dcoffin46333@wradvisors.com.
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