| |
College Savings Plans
by Robert V. Lally
Does the thought of saving for college send shivers
up and down your spine? Have we got a plan for you ...
Prior to 2002, the options for saving for college were cumbersome
and wrought with limitations. The recent tax bill made significant
changes to the 529 college savings plans, moving them to the top
of our list for recommendation to our clients.
There are two types of 529 plans: “prepaid college tuition
plans” and “college savings plans.” While for
some people, the prepaid college tuition plans make sense, our
focus is on college savings plans.
College savings plans are investment vehicles offered by individual
states, whereby your investment grows tax-free for as long as
your money stays in the plan. Distributions used for the beneficiary’s
post-secondary school costs are not subject to federal (and sometimes
state) income tax.
Unlike most of the college tax breaks, the plans are open to anyone
regardless of income, and many of the plans let you contribute
more than $100,000. Some allow as much as $250,000. Funds can
be transferred to other family members without penalty, should
the beneficiary decide not to go to college.
Unlike “Uniform Gift to Minors” accounts, the donor
stays in control of the account. If necessary, donors can reclaim
the contributions and pay income tax and a 10% penalty on the
earnings portion of the “non-qualified” withdrawal.
This feature makes these plans a great option for grandparents.
Money contributed to the plan is out of their estate, but still
within their control.
Contributions to college savings plans are subject to gift taxes
and generation-skipping transfer tax. Currently, a person is limited
to giving an individual $12,000 each year before triggering gift
tax. A provision in the 529 regulations allows a person to contribute
$60,000 to any beneficiary and count it as five years of gifts.
That means a married couple who chooses to “gift split”
can contribute $120,000 to any one child.
So, what’s the catch?
First, having a 529 plan can impair a student’s eligibility
for financial aid. Secondly, picking the right plan can be tricky.
Each state has set up a different investment vehicle with different
investment mixes, fee structures, investment limits and state
tax benefits. You need to do your homework to see which one is
best for you. In most cases, you don’t need to live or have
the child attend school in the state where the plan is set up.
To add variety, you can set up plans in more than one state for
the same child.
It is important to treat the college savings plan as part of your
overall investment strategy. Just like saving for retirement,
the type of investment, fees involved, and risk levels must be
considered. Another significant variable is the amount of time
before the funds will be needed.
The State of Connecticut offers their College Savings Plan, called
CHET, (www.aboutchet.com),
through TIAA-CREF Tuition Financing, Inc. It currently offers
three investment choices: a Managed Allocation Option, a Principal
Plus Interest Option, and a High Equity Option. The funds can
be used at any eligible higher education institution in the nation,
as well as many abroad, and contributions can be made up to $235,000
for each beneficiary. Distributions are free from Connecticut
income tax and U.S. income tax.
So, remember, college expenses will be here before you know it.
Adding a College Savings Plan to your overall investment plan
is a great way to help ease the burden of saving for college without
relinquishing control and flexibility.
|
|
