ReShelle Barrett, CFP®
Despite rising costs of college and higher education, a degree or certification is more important than ever, but one way to combat those costs are by contributing to a tax-efficient 529 plan account. These plans are for anyone that wants to save for higher education including parents with children of any age (even those in college right now) to grandparents that want to reduce their estate, help pay for college and even get a state income tax deduction. In fact, anyone can contribute to a 529 plan account.
There are many significant advantages to 529 plan accounts compared to other college savings accounts. However, two are more significant. The first is earnings grow tax-free if used for qualifying higher education expenses. Neither you nor the beneficiary will pay taxes on earnings now or when distributions begin. And in recent years, qualifying higher education expenses have been expanded to cover even more expenses including tuition, meal plans, lab fees, laptops, and more. Basically, everything except spending money and travel qualifies. However, if the distributions are not for qualifying higher education expenses there may be 10% penalty and federal income taxes owed on the earnings. Exceptions include a beneficiary’s death, disability or receipt of a scholarship to the extent of the scholarship award. Contributions are always tax and penalty free but earnings on those contributions may be subject to federal income tax.
The second major advantage of a 529 plan account is the owner (parent/grandparent/custodian, etc.) always maintains complete control of the account. Historically, many investors have used “UGMA” or “UTMA” accounts for saving for their children’s college expenses. Unfortunately, in Pennsylvania these assets belong to the child when they reach age 21 which means proceeds can used for whatever they want. In some instances, this may not be the original intention of the contributor. With 529 plans, the account owner determines exactly when and how to make the distributions.
Another advantage is the owner can change the beneficiary at any time so if the beneficiary doesn’t use any or all of the funds, the balance may be rolled over to another beneficiary in the same family. The owner can even make him or herself or their spouse the beneficiary if they expect to have education expenses.
In addition to those advantages, another is the types of schools that are considered qualifying institutions. A qualifying institution is one that is eligible to participate in a student financial aid program under Title IV of the Higher Education Act of 1965. Most community colleges, public and private colleges, universities and technical/vocational schools in the United Stares are eligible educational institutions including some foreign institutions.
Each state offers a different plan and many have different rules so investors should shop wisely when determining which plan to establish and should always consider expenses, investment choices, state tax advantages and flexibility. Remember – college saving does not have to be daunting.