Money Management
FOR
IMMEDIATE RELEASE: September 17, 2007
THE INS
AND OUTS OF 529 PLANS
Whether your children are toddlers or teenagers, 529 college
savings plans are an option worth investigating, according
to the North Carolina Associations of CPAs. All states offer
some form of 529 plan, an investment that makes it possible
to set aside money for college that will grow tax deferred
while in the plan but is also tax free when withdrawn to pay
for qualified education expenses. Parents, grandparents or
family friends—anyone, in fact—can set up a 529 plan.
529 PLANS
DEFINED
529 plans allow families to save money for college without
paying tax on their distributions. If, for example, in 2007
you make a $10,000 distribution from the plan, it is
excludable from income to the extent used for qualified
educational expenses. This means that taxes on earnings
within the plan are not only tax-deferred while in the plan,
but also are tax free when withdrawn.
HOW THEY
WORK
All of the states and the District of Columbia offer 529
plans. Many people mistakenly believe they can only be used
to pay for colleges in the plan’s home state or for a
specific state university. In fact, there are no such
restrictions for 529 savings plans. You can use all
the money in your account at any eligible institution.
Another 529 option, a prepaid tuition contract, makes
it possible to lock in the current tuition at a specific
public university (and some private colleges). You can also
use your prepaid tuition contract funds at other schools,
but some restrictions may apply.
EVALUATE
YOUR OPTIONS
With most 529 plans, you can select stock or bond funds
offered by investment companies that are chosen by each
state. Contributions can be made by parents as well as
grandparents or other relatives or family friends. If the
account is opened by someone other than the student, the
money is not considered the student’s asset. That’s an
advantage if the student applies for federal financial aid,
because the fewer assets the student has, the more aid he or
she is likely to receive.
You can invest in any state’s plan, but you may miss out on
state tax advantages if you pick a plan outside your state.
At the same time, each state plan’s performance will differ,
so an out-of-state choice may be a better investment. It can
be tough to compare your choices, because all of the states’
plans have different investment options and fees. Your CPA
can help you pick the best one.
A FEW
CAVEATS
What happens if your child does not go to college? There is
a 10% penalty on earnings that are withdrawn from a 529 plan
but not spent on qualified expenses. The amount you withdraw
is also subject to federal and possible state income taxes.
The penalty is not applied to withdrawals of your original
deposits, but only to any interest or income earned on that
amount. The penalty also doesn’t apply if the intended
beneficiary receives a scholarship and the withdrawal is not
more than the amount of the scholarship, or if the
beneficiary dies or is disabled. Finally, you can change the
beneficiary to any other qualifying family member. If one
child decides to postpone college, you can transfer the
account to another child, for example.
Of course, while plan fees may have fallen, you should
investigate administrative and other expenses when choosing
a 529 plan, as you would with any investment.
KNOW YOUR
OPTIONS
529 plans are a good vehicle for college savings, but they
aren’t the only one. Other tax-advantaged choices include
Coverdell accounts and custodial accounts for minor children
(also know as UGMA and UTMA accounts). Your CPA can explain
each one to you and help you decide which is right for your
situation.
Produced in cooperation with the AICPA.
©2007 The American Institute of Certified Public Accountants
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