PDA

View Full Version : 529 PLANS- INVEST FOR YOUR KIDS FUTURE IN COLLEGE



Bretsky
07-06-2007, 06:41 PM
How Uncle Sam wants you to save for college

With a 529 account, you can save a bundle, watch it grow tax-free and, thanks to the latest action in Congress, withdraw it for educational expenses without a tax bite.

Uncle Sam doesn't usually advise families how to invest their money. But after recent tax-law changes, it's clear that the feds now believe 529 college-savings accounts are the best option for most Americans struggling to keep up with rising educational costs.

Virtually every family with children must now strongly consider putting at least some college savings inside a 529 plan. Here's why:

First, these state-sponsored investment accounts -- offered by nearly all states and the District of Columbia -- allow parents and grandparents to invest large sums (often $300,000 or more per beneficiary).

Moreover, just as with a 401(k), money invested in a 529 is allowed to grow and compound tax-free. That offers parents a huge advantage over traditional brokerage accounts, whose gains, dividends and interest income all are taxed along the way. Finally, 529s are advantageous from a financial-aid standpoint because none of the money held in a 529 is considered the student's asset when calculating aid eligibility.

One key provision that made 529s popular -- the ability to withdraw money from these accounts tax-free for qualified educational expenses -- was to expire in 2010. But the Pension Protection Act of 2006 made withdrawals from 529s permanently tax-free when used for qualified purposes, such as tuition, fees, and room and board.

"Now we can say with confidence that 529 plans are definitely the first place parents should look" when deciding where to put their college money, says Rita Johnson, a financial adviser with the Millstone Evans Group of Raymond James & Associates in Boulder, Colo.

Of course, 529s aren't the only savings accounts that allow parents to shelter their investments from taxes and to withdraw money for college without paying taxes on it. So-called Coverdell education-savings accounts do that, and, unlike funds in 529s, Coverdell money can also be used to pay for primary- and secondary-school costs.

But Congress conspicuously did not extend some attractive features of Coverdells, which are due to sunset at the end of 2010. The benefits include the ability to contribute up to $2,000 a year into these tax-advantaged accounts. After 2010, maximum annual contributions into a Coverdell will fall to only $500. What's more, K-12 expenses will no longer qualify.

As a result, parents now investing their kids' money in Coverdells "need to give strong consideration to the enhancements of 529s," says Elaine Sullivan, the director of education savings for Putnam Investments.

Though the federal government could extend these beneficial Coverdell provisions, there are no guarantees.

But Bruce Harrington, the director of 529 plans for the investment-management firm MFS, still advocates "putting the first $2,000 into a Coverdell and then putting your remaining savings into a 529." That's because under current law, money invested in Coverdells can still be used for K-12 expenses. And unlike 529 assets, Coverdell money is permitted to purchase equipment such as computers for kids between kindergarten and 12th grade. "Why not buy Johnny a laptop with tax-free dollars?" asks Harrington.

If the K-12 option does sunset in 2010 as scheduled, don't worry. The Internal Revenue Service would still allow Coverdell owners, as it now does, to roll over their accounts, free of taxes, into a 529, Harrington notes. Meanwhile, families are not permitted to roll money over in the other direction, from a 529 to a Coverdell. So why not preserve your options by first funding a Coverdell and then putting the bulk of your money in a 529?
Forget those uniform gifts
Though the government ignored Coverdells in its most recent tax package, legislation passed in 2006 actually made yet another college savings option -- traditional custodial vehicles such as Uniform Gifts to Minors Act accounts (UGMAs) and Uniform Transfers to Minors Act accounts (UTMAs) -- much worse.

Before 529s came into existence in 1996, parents often relied on UGMAs and UTMAs to save for college. That's because the custodial accounts allow parents to take advantage of their kids' lower tax bracket. For instance, the first $800 of unearned income for children 13 or younger used to be tax free. The next $800 was taxed at the child's lower rate. And the rest was taxed at the parents' rate -- until the kid turned 14, when all the unearned income would be taxed at the child's lower rate. This allowed parents to give appreciated stock to their kids, have the children sell the stock after turning 14 and then use the proceeds to pay for school.

But in 2006, Bush signed the Tax Increase Prevention and Reconciliation Act, which changed the kiddie-tax rules. Now, the first $850 of unearned income that kids receive is tax-free, the next $850 is taxed at the child's rate, and the rest is taxed at the parents' rate until the child turns 18. Because kids now have to wait until their senior year of high school or freshman year of college to take full advantage of their lower tax rate, custodial accounts are far less attractive for parents saving for school.

"In my opinion, UGMAs and UTMAs are essentially dead as a college savings tool," says Cal Brown, the vice president of planning at the Monitor Group, a wealth-management firm in McLean, Va.
Happy returns from a 529
An analysis by T. Rowe Price seems to back Brown up. Say you put $5,000 a year into a 529 for your daughter, and it earned 8% annually through investments in a blue-chip growth stock fund. After 18 years, you would end up with more than $218,000 for her college bills. By using a home-state 529 plan that offers residents a state tax deduction, you'd be likely to amass nearly $224,000, T. Rowe Price found. (Parents can choose any state's 529 plan; information about which plans offer tax breaks is at Savingforcollege.com.)

Now compare that with what you would save through an UGMA. Under the old rules, a typical parent in the 25% federal tax bracket could expect to accrue about $210,000 in the custodial account, according to T. Rowe Price. But under the new rules, you're likely to save even less: $207,700.

Plus, UGMAs and UTMAs are terrible from a financial-aid standpoint. As a rule of thumb, it's always better to save money in a parent's name because Uncle Sam expects only 5.6% of parental assets to be used to cover college expenses. Starting in the 2007-08 school year, the government now assumes that 20% of the student's money can be used to pay for school.
More from MSN Money and U.S. News & World Report
college fees © Brand X / Getty Images


By law, a custodial account belongs to the child, so having large amounts of savings in an UGMA or UTMA is detrimental for qualifying for aid. Meanwhile, 529 assets are not considered student money for financial-aid purposes, according to federal rulings.

If you've already started saving through an UGMA or UTMA, don't worry. Parents can roll over these accounts into a so-called custodial 529. While the money will still technically belong to the child, the assets will not be counted as student assets for aid purposes, even though the account maintains custodial status, the federal government has said.
Prepaid tuition gets a boost
What about prepaid-tuition plans, which allow parents to purchase units of future education at today's prices?

In 2006, the government gave these college savings vehicles a big boost by improving their financial-aid status. Under the old rules, the value of a prepaid tuition plan would reduce a student's aid eligibility dollar for dollar. But starting in July 2006, the government put prepaids on a level playing field with 529 savings plans. Both savings vehicles now help students qualify for aid since they are not considered student assets.

Even if you intend to use a prepaid plan to save for school, though, you will still probably want to start a 529 savings plan, too. That's because prepaid plans are good only for covering tuition and fees. They don't typically cover room and board. And in recent years, room and board has become nearly as expensive as tuition at many schools.

The bottom line, no matter what type of college savings vehicle you now use, is that you probably need to consider opening a 529. "These recent changes," says Joe Hurley, the president of Savingforcollege.com, "really made the 529 more attractive relative to all other college savings vehicles out there."

mraynrand
07-06-2007, 07:51 PM
Another thing to consider is not sending your kids to school, especially if they have other skills and talents. Many four year colleges are a complete waste of time, particularly if you're getting a sociology, women's study, humanities, etc. degree. I know sometimes you "have" to have the degree, but all you science and engineering guys that have to take these worthless 'distribution requirements' - most of these classes are so much fluff that you're blowing one-two years of your life jumping through worthless hoops. Currently, the way colleges are run, prices are going up and quality is dropping. That's how the market works when you grossly subsidize anything.

oregonpackfan
07-06-2007, 08:20 PM
Bretsky,

That 529 article is very good. One must analyze the particular state 529 programs carefully. Though the 529 is a federal program, it grants states quite a lot of leeway in altering the programs.

For example, my Financial Planner discouraged us from entering the Oregon 529 program because of its college limitations. With the Oregon 529, your child has to enter a sanctioned university within the state of Oregon. The funds accumulated cannot be used for college expenses if a child wishes to enroll in an out of state college.

We elected instead to use the Coverdale Education Savings Account(ESA). We are glad we chose that route as my oldest daughter chose to attend Pacific Lutheran University in Tacoma, WA. Had we saved in the Oregon 529 plan, we could not have been able to apply her funds to PLU.

Keep in mind that if you do enroll in a state 529 program, you do not necessarily need to choose the program offered by your particular state. For example, you can choose the Utah 529 even if you are not a resident of that state.

Consumer advocate Clark Howard recommends the Utah 529 as the best of the state 529 plans. For more info, go to his website at:

www.clarkhoward.com

Bretsky
07-06-2007, 09:45 PM
Bretsky,

That 529 article is very good. One must analyze the particular state 529 programs carefully. Though the 529 is a federal program, it grants states quite a lot of leeway in altering the programs.

For example, my Financial Planner discouraged us from entering the Oregon 529 program because of its college limitations. With the Oregon 529, your child has to enter a sanctioned university within the state of Oregon. The funds accumulated cannot be used for college expenses if a child wishes to enroll in an out of state college.

We elected instead to use the Coverdale Education Savings Account(ESA). We are glad we chose that route as my oldest daughter chose to attend Pacific Lutheran University in Tacoma, WA. Had we saved in the Oregon 529 plan, we could not have been able to apply her funds to PLU.

Keep in mind that if you do enroll in a state 529 program, you do not necessarily need to choose the program offered by your particular state. For example, you can choose the Utah 529 even if you are not a resident of that state.

Consumer advocate Clark Howard recommends the Utah 529 as the best of the state 529 plans. For more info, go to his website at:

www.clarkhoward.com


Great advice; I didn't know you could do a 529 in any state either. Also did not know some states restricted the whereabouts of the college. I don't think Wisconsin does.

AND EVERYBODY SHOULD GO TO clarkhoward.com

WEALTH OF LEARNING AND INFORMATION THERE

the_idle_threat
07-07-2007, 04:00 AM
Wisconsin's 529 plan does not restrict use of the funds to in-state colleges, and neither does Oregon's.

OPF, your Financial Planner was either mistaken, or perhaps he/she was talking about a prepaid tuition plan rather than a 529 plan.

From www.oregoncollegesavings.com:

Does the money have to be used at a college in the State of Oregon?

No, the money from your account can be used to pay for Qualified Higher Education Expenses at any accredited public or private post-secondary institution in the United States and abroad. This includes most two-year and four-year colleges and universities, vocational and technical schools, graduate schools, professional, medical and law schools.

I once worked for the financial company that administered the Oregon 529 plan, and there was no in-state restriction then, just as there is none now.

This is the same rule as applies to Wisconsin's plan, by the way:

From www.edvest.com:


Using Your Money

The money in your account can be used to pay for qualified higher-education expenses at any eligible college, university, vocational school, or other post-secondary institution in the country (as well as some outside the U.S.). Eligible expenses include tuition, fees, supplies, books, and required equipment. In addition, certain room and board costs are included. You can make a contribution and use it for qualified college expenses in the same year. The beneficiary must be enrolled at least half-time in order for room and board expenses to qualify, and there are limits on the total room and board costs per academic year.

oregonpackfan
07-07-2007, 10:17 AM
This is interesting, Idle Threat. Either the Oregon 529 has changed or our FP was indeed mistaken.

Bretsky
07-07-2007, 10:25 AM
This is interesting, Idle Threat. Either the Oregon 529 has changed or our FP was indeed mistaken.


Dang Financial Planners, they are all Full of Shit.....right....Retailguy :lol:

LL2
07-07-2007, 10:45 AM
I've been told one should fully fund a Roth IRA before funding a 529 plan. The idea is to take care of your retirement first and then take care of the kids, but also the reason to fully fund a Roth is that you can withdraw finds from a Roth to pay for college too. Anyone know if that financial advise is correct?

Bretsky
07-07-2007, 11:08 AM
I've been told one should fully fund a Roth IRA before funding a 529 plan. The idea is to take care of your retirement first and then take care of the kids, but also the reason to fully fund a Roth is that you can withdraw finds from a Roth to pay for college too. Anyone know if that financial advise is correct?


We need to recruit a stock broker for this place :lol:

I'm not sure about this; I'd guess Retailguy would be the best source.

I do remember my accountant suggested a ROTH IRA for college savings, but then after meeting with the Edward Jones guy we went with a 529 instead.

Tarlam!
07-07-2007, 12:01 PM
We need to recruit a stock broker for this place :lol:



Even better, we need Donald Trump!! :oops:

the_idle_threat
07-07-2007, 06:18 PM
I agree with the premise that a Roth IRA should be funded before a 529 college savings account, because---as Clark Howard has noted---there are many alternative means to pay for college, including scholarships, grants and loans. There are no such alternatives to fund a comfortable retirement, especially if you are younger and believe---as I do---that social security is not gonna be there as it has been for previous generations. Of course, pensions and other such retirement assets play into the equation as well.

As a general rule however---if you have to choose between saving for retirement and saving for your childrens' education---consider that you (and your kids) might prefer that you pay for your own retirement and be financially independent from them in your later years, rather than spend your resources on their education and then be financially dependent on them later.

It's true that Roth IRAs allow distributions for educational expenses, but I'm fairly certain that taxes on the earnings will still apply. You only get a waiver on the 10% penalty that normally applies to earnings withdrawn for non-qualified (e.g. non-retirement) purposes. This cuts into the advantage of having a Roth IRA, since the idea behind it is that your earnings should be completely tax and penalty free if used for qualified purposes. (The aggregate amount of your contributions, of course, can be withdrawn at any time and for any reason without taxes or penalties.) In any case, the use of your Roth IRA for education rather than your retirement cuts into the tax benefits of having a Roth IRA, and just as importantly, takes money away from your retirement savings, because you can't "replace" that money in your Roth IRA later by putting it back in later years (i.e. you can't "borrow" from your IRA).

That being said, if you have retirement covered and are putting other money away that is specifically for the purpose of college savings, a college savings plan (such as a 529 plan or Coverdell ESA) is usually superior to a Roth IRA for that money. Under current law, distributions (which include all contributions and all earnings) are both tax and penalty-free when used for qualified education expenses, and the definition of qualified expenses is usually very broad, although it varies by state for 529 plans. Of course, it pays to research your own state's 529 plan to know its particular idiosyncracies.

In addition, many 529 plans offer a state tax deduction on some portion of your contributions, which is basically free money from the state if you are saving for college anyway.

The downside of college savings accounts vs. Roth IRAs is if the beneficiary (child) does not go to school after all. Of course, your Roth IRA money is unaffected by this occurrence, as you will simply use it instead for your own retirement. College savings, however, must be assigned to a different beneficiary who does use it for school, or otherwise the money must be taken out with taxes and penalties on the earnings (still no taxes or penalties on contributions).

There are different rules for different plans regarding who can be assigned the money as an alternative beneficiary, but in all cases I've seen, a sibling will qualify. Thus, there is far less risk of having to take money out unqualified if you have multiple children where you can figure at least one will go on to some kind of higher education.

Scott Campbell
07-07-2007, 09:11 PM
It's true that Roth IRAs allow distributions for educational expenses, but I'm fairly certain that taxes on the earnings will still apply.


Ok, so dip into the principal instead of the earnings. Taxes were already paid on the principal.

Anyone know if you can do that?

the_idle_threat
07-07-2007, 10:33 PM
Yes, you can. Contributions (e.g. principal) are after-tax money and they can be withdrawn---penalty and tax-free---at any time.

There is sometimes confusion about the "5-year rule," where some think that contributions have to be in for at least 5 years. This is not true for regular out-of-pocket contributions. It is true for Roth conversion contributions, which come from converting dollars from Traditional IRAs to Roth IRAs.

the_idle_threat
07-08-2007, 03:26 AM
We need to recruit a stock broker for this place :lol:


Check the Memberlist. The 3rd-newest member of PR---"brewcitybroker"---is apparently a Financial Advisor. You gotta get that guy (or gal) talkin'. :idea: