Education Funding Print
Summary: Learn about the major features and benefits of 529 plans, the most widely used education funding vehicle.

Education Funding

The section 529 plan is quickly becoming the preferred and most recommended way to save for college. 529 plans have always had significant tax benefits; however, there was concern because many of those benefits were scheduled to expire after 2010. However, the Pension Protection Act of 2006 made many section 529 plan provisions permanent. Thus, if you are looking form a way to fund your children’s or grandchildren’s college education, you should definitely consider 529 plans. Consider these basic facts:

  • There are two basic plan types: Savings Plans and Prepaid Tuition plans are both forms of section 529 plans. Many states offer prepaid tuition plans which allow you to pay a fixed amount to a specific state institution now for a guarantee that your child’s tuition will be covered at that state institution when they attend in the future.
  • College savings plans are more commonly used. The savings plans enable you to invest money to be used for the beneficiary’s higher education expenses in the future. Your money is typically invested in mutual funds offered by the plan, with no guarantee as to how much will be available when the beneficiary enters college. The savings plans allow you to use the account value at any accredited institution of higher education and are generally considered more flexible than prepaid tuition plans.
  • The tax benefits of section 529 plans are significant. Earnings in the plan are withdrawn tax free as long as they are used to pay for qualified higher education expenses.
  • Significant sums can be saved through section 529 plans. Individuals can take advantage of the annual gift tax exclusion by contributing up to $13,000 ($26,000 for married couples) per beneficiary, per year. A special rule applicable only to 529 plans allows an individual to accelerate up to five years worth of annual exclusions by contributing up to $65,000 ($130,000 for married couples) in one calendar year. While no gift taxes are payable, the donor can only take advantage of this special rule by making an election on a federal gift tax return, IRS Form 709. If you take advantage of this rule, additional contributions or gifts to the beneficiary may exceed the annual gift exclusion. Grandparents can set up accounts for grandchildren, transferring large sums from their estates while providing for their grandchildren’s education.
  • Section 529 plans are treated favorably for financial aid purposes. Section 529 plans are no longer considered the child’s asset. If the plan is set up by the parent, up to 5.6 % of the value will be counted toward the expected family contribution. Withdrawals from the plans are no longer considered income for financial aid purposes. This includes prepaid tuition plans, which prior to July 2006 reduced financial aid on a dollar-for-dollar basis.
  • Funds aren’t lost if the beneficiary does not go to college. A significant advantage of section 529 plans is that you remain the account owner. Thus, you can change the beneficiary or even take the money back, if permitted by the plan. If you take the money back, you will owe ordinary income taxes on earnings and the 10% federal tax penalty. The money can be withdrawn without penalty if the beneficiary dies or becomes disabled.
  • Many plans are now available. There are over 80 different 529 plans available as many states offer more than one plan. You can invest in any state’s plan. Some states offer state income tax benefits to residents who contribute to their state’s plan. Each plan has different investment options and fees, so talk to your financial advisor before making a choice.

Disclosure

Each investor should consider the investment objectives, risks, and charges and expenses associated with municipal securities before investing. This information and other information can be found in the issuer’s official statement and should be read carefully prior to investing. Additionally, you should consider whether or not your home state or designated beneficiary’s home state, offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Past performance is no guarantee of future results, and like all investments, may gain or lose value upon redemption.

For More Information:

If you have questions or comments about this or other financial issues, please contact Jeremy Kisner, CFP at (480) 272-7116. Mr. Kisner is the President of SureVest Capital Management (www.svwealth.com), a fee based financial planning and wealth management firm with offices in Las Vegas, NV and Phoenix, AZ.