By Werner Maiwald, CFS
Renaissance Advisory Services, LLC
With the new school year around the corner, college costs are certainly at the top of parents concerns. Between tuition, books, and other costs, private colleges can run as much as $45,000 and up per year. Not everyone receives a four-year scholarship, and student loans create a financial burden on the student long after they have graduated.
The rules
If your child is still many years away from graduating from high school, the 529 College Saving Plan* may be the answer to pay for these huge expenses.
Here’s how it works; an investment program is set up under the parents name for the benefit of the child (beneficiary). You can make deposits up to $14,000 per year per beneficiary without incurring federal gift tax. Under a rule unique to 529 plans, you can gift a lump sum up in a given year up to $70,000 for individual gifts and $140,000 for joint gifts – and avoid the federal gift tax by making a special election to treat the gift as if it were made evenly over a five year period. Lifetime gifting rules apply to determine if you are liable for out of pocket payment for the gift tax. There are plan limitations that no contributions can be made once the plan assets reach $350,000 (some plans are lower)
*Grandparents are major contributors to these plans!
The investment
The various investment companies that offer 529 plans have unique options and investment choices that take into consideration the level of risk and return, the costs, the quality of the program and servicing the accounts as distribution options are set up. The money in the plan grows tax deferred and is distributed tax-free as long as the distribution is qualified. Age based portfolios are popular with many parents as the investment risk is automatically adjusted to a more conservative position as the child nears the distribution phase.
Keep in mind that the funds are always in the control of the parent. If the child doesn’t use all the funds or doesn’t go to college, the parent could potentially have supplemental funds for retirement (some taxes and penalties may apply).
The goal
When thinking about 529 plans and college funding in general, there are a couple of decisions that need to be made. One is whether a 529 plan is a better way to save than other options – such as an Education IRA, a custodial account under the Uniform Transfers to Minors Act, or U.S. Savings Bonds. Custodial accounts have always been popular as a way for parents and grandparents to hold taxable securities and shift any taxable income to the minor child. Problems arise when the child becomes the owner of the funds at 18 or 21 years of age; the parent loses total control of the account and perhaps that Corvette becomes more important to the child than college costs.
An education IRA limits contributions to $500 per child and places age and income limits on participants. Even worse, the tax-exempt withdrawal of funds from an education IRA prevents you from claiming the Hope Scholarship or lifetime learning credit. The 529 plan may be treated more favorably in determining eligibility for federal financial aid.
The other decision is which state 529 plan to use. Most states sponsor a 529 plan, however, you do not have to live in that state to have an account in that state. Again, specific state tax benefits, plan costs and performance may help you in the decision process.
So, what’s the goal?
Start the process now! College costs are rising every year and if educating your child is one of your priorities the time to save is now! For more information about 529 plans, check out www.savingforcollege.com
Werner Maiwald, CFS is the managing director with Renaissance Advisory Services LLC, a totally independent advisory firm. Securities offered through Investors Capital Corporation, Member FINRA/SIPC Advisory Services offered through Investors Capital Advisory 6 Kimball Lane, Lynnfield MA 01940, 1-800-949-1422.
An investor should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer's official statement. The official statement should be read carefully before investing.
Maiwald specializes in portfolio modeling, risk analysis, and wealth management services. His office is located at 733 Chapin Street, Suite 202, Ludlow, MA 01056. Contact Maiwald at 413-589-1400 or via email: wmaiwald@renadvisorysvcs.com
