The
new 529 College Savings Plan is a part of the Tax Reconciliation
act of 2001. The 529 College Savings Plan is by far the most
favorable college savings plan enacted to date. The tax reconciliation
act of 2001 will be repealed in 2011. The main benefits of
the 529 College savings plan is it gives more flexibility,
tax benefits, and control over withdrawals to the contributor
(parent, guardian, friend or relative).
There are currently four different college plans available.
They are as follows; the newest 529 College Savings Plan,
the second newest 529 Pre-paid plan, then the Education IRA,
and the older UGMA/UTMA. I will outline some highlights of
each plan, starting with the newest 529 College Savings Plan.
529 College Savings Plan:
-There are no income limits for parents who participate.
-There are no federal taxes
-Account earnings grow tax-deferred.
-You can change beneficiaries if the designated child decides
not to go to college.
-The CONTROL of the withdrawals are with the parent or guardian.
-Parents, relatives or friends can make the contributions.
-The proceeds can be used for tuition, fees, books, room
or board at any post-secondary school in the country.
-Can be funded with a mutual fund.
-There is a 10% penalty withheld on earnings for nonqualified
withdrawals (that is, money not used for college).
-The earnings are taxed at the beneficiaries' rate.
-You can make a yearly maximum contribution per beneficiary
of $50,000 in the first year of a five-year period without
exceeding the annual federal gift tax exclusion.
-You choose your investments with a brokerage firm or mutual
fund company.
-An account holder who takes an early withdrawal for purposes
other than education must pay a 10% penalty and ordinary
income tax.
State Run Tuition Pre-payment plans:
-State-run plans, allows parents or others to lock in tuition
costs at today's level.
-The contributions to the plan are lump sum or regular installments,
and the state figures out how to invest the money so it will
cover future tuition costs.
-The money can be used for both in-state public and in-state
private schools.
-Your state Treasurer's office can tell you where to sign
up.
-Money grows tax-deferred
-Parents, relatives or friends can make contributions
-Some plans allow a lump sum contribution of $50,000 in the
first year of a five-year period without exceeding the annual
federal gift tax exclusion.
-High-income families can apply
-Returns may be low
-Some plans only cover tuition expenses
-If you can't use the money for education, you may lose the
interest accrued (but not the principle).
-Some states will charge penalties if the money is not used
for school.
-May affect your child's ability to qualify for financial
aid.
Education IRA:
-After-tax contributions are made to the account
-Withdrawals are not taxed at the federal level if they are
used for college tuition, fees, room, board, or books.
Contributions in one year cannot exceed $500. a year, soon
to be $2000. per year.
-Parents, friends or relatives can make contributions.
-You can only contribute if your adjusted gross income is
less than $160,000 for a joint return, single parents must
have an adjusted gross income of less than $110,000.
-Can be funded with a mutual fund
-May affect the child's financial aid
UGMA/UTMA: (The older plan)
-There are no income limitations for the contributor
-The maximum yearly contribution without exceeding the federal
gift tax exclusion is $10,000.
-Account earnings are taxable
-Cannot change beneficiaries
-Control of withdrawals transfers to the child when he/she
reaches legal age
-Uses of proceeds are unlimited (can use for anything)
-There are no penalties for nonqualified withdrawals (no
penalties if not used for college)
-A portion may be Federal tax-exempt; some or all may be
taxed at the child's rate
-Can be funded with a mutual fund
-May affect child's financial aid
Mutual Funds
Some people just purchase a no-load, low-cost, low-tax mutual
fund. This way the money is always in the control of the
contributor.
Use Our Monthly Deposit Savings Calculator[click
here]:
These are hypothetical figures that can
be applied regardless of the college plan or mutual fund
you select. Contribute $100 per month at 10% interest (compounded mutual
fund interest). Start with just $100; do this every month
for 15 years and you will have approximately $42,000. If
your child does not plan to go to college you can use the
money for something else without the 10% penalty.
Start with a $2000. gift and you will end up with approximately
$50,700.
529 Plans are subject to change anytime.
Verify the current rules with your advisor.
Lois Center-Shabazz is the founder of MsFinancialSavvy.com
and author of the 3-time award-winning personal finance
book, Let's Get Financial Savvy! ISBN #0971979502.
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