George Chiu Insurance & Financial Services

What is a 529 Plan? 

It's an education savings plan operated by a state or educational institution intended to help families save for future college costs. The federal tax law provides special tax benefits to the plan participant as long as the plan satisfies a few basic requirements. (Section 529 of the Internal Revenue Code).
There are 2 types of 529 plans; either prepaid or savings, although some have elements of both. Each state now has at least one 529 plan available. It's the state’s decision whether it will offer a 529 plan (or possibly more than one), and how it will appear. Educational institutions can offer a 529 prepaid plan but not a 529 savings plan (the private-college Independent 529 Plan is the only institution-sponsored 529 plan thus far).  

 

How Much Will College Cost When My Kids are Ready to Go?  

According to the U.S. Department of Education, the average cost of a four-year education at a public university is currently $34,000, and almost $90,000 for private colleges. Over the past decade, expenses at public institutions have increased nearly 40%, and costs will almost undoubtedly continue to rise.  

 

Many factors must be considered when estimating future college costs, including public vs. private colleges, in state or out-of-state, will the student live at home or in another residence. One thing is certain; tuition rates have been increasing at more than twice the rate of inflation for over thirty years and will continue to rise in the future.

 

Why is a 529 Plan so Great?

Here are four advantages:

•  Income tax breaks. Investments grow tax-deferred, and distributions used to pay for the beneficiary's college costs come out free of federal tax. This applies to distributions in the years 2002 through 2010. Qualifying distributions made after 2010 will be taxable to the beneficiary (earnings portion only) unless Congress decides otherwise. In addition to the federal tax break, its possible the owner’s or the designated beneficiary's home state offers state tax or other benefits that are only available for investments in such state's 529 college savings plan (like an upfront deduction for contributions or income exemption on withdrawals).
• The Donor stays in control of the account. With few exceptions, the named beneficiary has no rights to the funds. The Donor decides when withdrawals are taken and for what purpose. Most plans even allow the donor to reclaim the funds at any time. (However, the earnings portion of the "non-qualified" withdrawal will be subject to income tax and an additional 10% federal penalty tax).

•   Hands-off way to save for college. Once the decision is made on which 529 plan to use, a simple enrollment form is completed and a contribution is made (there is also an option to sign up for automatic deposits). The ongoing investment of the account is handled by the plan, not by the donor. Plan assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager. A Form 1099 will not be received to report taxable or nontaxable earnings until the year withdrawals are made. If there is a desire to move investments around a different option may be chosen in a 529 savings program every year (program permitting) or the account may be rolled over to a different state's program provided no such rollover for the beneficiary has occurred in the prior 12 months. (There is no federal limit on the frequency of these changes if the account beneficiary is replaced with another qualifying family member at the same time.)

•  Everyone is eligible to take advantage of a 529 plan, and the amounts that can be put in are considerable (over $230,000 per beneficiary in many state plans). Normally, there are no income limitations or age restrictions.