by Jason Pryor
Did you know that college bills for children born in 2005 could exceed $183,365 for a public university or $375,966 for a private institution? In Virginia, the average annual cost for state-supported schools is $16,833.* However, with the right planning, you can potentially achieve success in saving for one of life’s most costly undertakings.
There are many savings plans out there aimed at helping with education expenses including Coverdell education savings accounts, custodial accounts, 529 college savings plans, trusts and personal savings accounts. Here we are going to focus on 529 plans, a state-sponsored education savings program. Almost every state offers at least one plan. While parents and grandparents are the most frequent contributors to this kind of savings vehicle, anyone can contribute to a 529 plan, regardless of relationship to the beneficiary. And unlike other educational savings plans, 529s have tax and estate planning benefits that may make saving for a child’s education a smart investment strategy for you as well.
Tax Advantages: The earnings in your 529 plan accumulate tax free. That means that when you withdraw assets and use them for qualified expenses at a participating college or university, your earnings are not subject to federal taxes. If you invest in your own state’s plan, you may also enjoy certain state tax benefits. But remember, if you need to withdraw proceeds for non-educational expenses, the IRS will tax your earnings at your ordinary income tax rate plus a 10 percent IRS penalty.
Estate Planning Advantages: When it comes to your estate plan, the amount of your gift placed in a 529 plan – and any future appreciation – is taken out of your taxable estate. In addition, if you are married, you can invest up to $130,000 per beneficiary in a single year in a 529 plan without incurring the federal gift tax. If you’re single, the limit is $65,000. Keep in mind that this strategy utilizes five years’ worth of your annual gift tax exclusion amount (which is $13,000 per recipient for 2011), so you would not be able to gift to that same beneficiary again for another five years without incurring gift tax consequences. In addition, the funds will take five years to become completely excluded from your taxable estate; each year, an additional $13,000 will be removed. A portion of the gift may be subject to recapture if the donor dies before the 5-year period has passed.
You Get Control: Although 529 plan contributions are immediately excluded from your taxable estate (unless you use the five-year accelerated gift option, in which case it will take five years to be fully excluded), you maintain ownership and control of the account. As the account owner, you – not the beneficiary – approve all investments and withdrawals and you also have the freedom to change your beneficiary to a relative of the original beneficiary without penalty. Additionally, you can name a successor owner on the account so that control passes at your death to that successor owner who would then have the same control over the assets that you had.
Getting Started: Many 529 plans require only an initial investment of $250. After that, you can generally make additional contributions of as little as $25 or $50 at a time. Once you begin setting money aside for your child’s education in a 529 plan, you can leave the investment decisions to the experienced professionals that manage the plan in the state that you choose. Depending on your plan, the investment options may include individual mutual funds, age-based portfolios with asset allocations that change over time, or set portfolios in which the investments stay the same for the duration of your holdings. An investment in a 529 plan will fluctuate such that an investor’s shares when redeemed may be worth more or less than the original amount.
If you begin now when your child is still young, and save on a consistent basis, you will reduce the amount you must pay out-of-pocket and make education costs less of a financial burden in the future. You can utilize www.archimedes.com to calculate how much you will need to save on a monthly or yearly basis.
* SCHEV 2010-11 Tuition and Fee Report
This article was provided courtesy of Jason Pryor, Registered Representative, Dominion Capital Partners Wealth Management, in Norfolk & Richmond, VA at 804 986-1121
Accounts carried through First Clearing, LLC, Member NYSE / SIPC.
Securities offered through Prospera Financial Services Inc., Member FINRA / SIPC
