Sending you children to college is among the most important goals for parents and grandparents. And for good reason! Very few gifts in life are better than a college education. A college graduate earns on average 50% more per year than non-college graduates!
Saving for College Made Easier Than Ever
| Author: Jaclyn Weitzberg | Posted: 08/03/08 | ||
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Sending your children to college is among the most important goals for parents and grandparents and for good reason! Very few gifts in life are better than a college education. A college graduate earns on average 50% more per year than non-college graduates!
The challenge for more and more parents and grandparents, unfortunately, is paying for a college education. Four years at a private school currently costs $120,000 and costs are rising at twice the national inflation rate. The only real answer for a college education for most parents and grandparents is saving and investing the money on a regular basis.
Investment and Tax Benefits
Fortunately, recent tax law changes have opened up the door for parents and grandparents who are serious about saving for a college education for their children and grandchildren. College funding “529 Plans” – so called because of the section of the tax code they are named after – are simply the best programs ever created to help parents systematically meet the college crunch.
A 529 Plan can help you put to work several tried and true long-term investment strategies, all working together to help save the money for college that is going to be needed. Here are a few of the key benefits of 529 Plans …
- Tax Deferral. The money you invest in a 529 Plan will grow completely free of taxes. Money you would normally lose to taxes each year instead stays invested earning more money for your child or grandchild
- Tax-Free Withdrawals. Under current law, the money you withdraw for the beneficiary from your 529 Plan for higher education expenses is exempt from taxes. (The ability to withdraw money tax-free ends in 2010, although this law may be extended.) This means that you will not pay taxes on any of the interest accumulated over time!
- Dollar Cost Averaging. When you fund your 529 Plan with regular contributions, you are “dollar cost averaging”, which has proven to be an effective method for benefiting from market volatility over time.
- Professional Money Management. 529 Plans (there are over 40 to choose from) offer professional management of your money from some of America’s leading firms. (All 529 Plans are not equal, so please be sure to call to review which plans are best.)
- Diversification. 529 Plans allow to you to diversify among a menu of different investment options, allowing you to build a customized mix of investments for your child or grandchild.
- Portability. Assets in a 529 Plan can be used to pay higher education expenses at accredited universities nationwide. You’re not limited to accredited universities in your state alone or the state that is the “sponsor” of the 529 Plan you select.
Funding And Controlling A 529 Plan
The first piece of good news about opening a 529 Plan is that they are open to all. Unlike other savings programs, there are no income limits on opening a 529 Plan - anyone can contribute. So you’re eligible!
Once you decide that a 529 Plan makes sense, you have a variety of ways to fund your account. You can invest money on a periodic basis (monthly, as an example) or with one lump sum. Here are a few key things to keep in mind about funding a 529 Plan…
- High Investment Limits. Most 529 Plans have very high investment limits, allowing you to accumulate a great deal of money for college, free of federal taxes. Our favorite 529 Plans have investment limits from $230,000 - $265,000, which means you’ll have to stop funding your 529 once the account reaches that value.
- Gift-Tax Free Annual Limit. You can invest up to $12,000 a year without gift tax consequences for each beneficiary. ($24,000 if married) So if you have two children or grandchildren, you can invest $24,000 per year without gift taxes.
- Estate Strategy. 529 Plans even provide an excellent estate planning strategy worth considering. You can even elect to accelerate up to five years’ worth of investments and immediately invest $60,000 into a 529 Plan without gift tax consequences. Again, keep in mind that these limits apply to each beneficiary account. If you have two children or grandchildren, you could move $120,000 out of your estate and into a 529 Plan. And the best news of all is that although these assets are out of your estate for tax purposes, you still control these assets!
It is the “control” of the assets that has many parents and grandparents particularly excited about 529 Plans. The donor at all times maintains control of the account. With a 529 Plan, you don’t have to worry about your child receiving the money at age 18 and not attending college or blowing it on cars and trips around the world! You are the boss and only you decide when to withdraw money from your 529 Plan and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. (However, the earnings portion of the “non-qualified” withdrawal will be subject to income tax and an additional 10% penalty tax). Compare this level of control to a custodial account under the Uniform Transfers to Minors Acts (UTMA). You can even change the beneficiary to another family member whenever you choose.
Jaclyn Weitzberg, Financial Advisor. As a Financial Advisor and Retirement Specialist with Retirement Strategies Group, Inc., Jaclyn is responsible for providing investment and retirement planning advice for business owners and individuals. Jaclyn began her career in the field of finance in order to assist individuals and corporate personnel to understand and reach their individual financial growth goals and retirement objectives. Jaclyn has over 5 years of experience in the financial services industry with an extensive background in retirement planning, management, finance, sales and accounting. Contact
Jaclyn
Weitzberg at (800) 423-4891 x 110 or email at jweitzberg@rsgfis.com.
