What's new in college savings plans
Switching from another type of accountIf you have savings in another type of account and want to switch to a 529, your best bet is to liquidate the old account and place your money in a new 529 or add it to an existing one, says Greg Merlino, president of Ameriway Financial Services in Voorhees, N.J.
In general, he says, 529 plans can only be funded with cash. You can't simply reclassify a different type of account.
Still, it can become more complicated if you want to shift funds from a custodial plan, an account for a minor who takes over ownership of the account upon reaching adult age -- 18 or 21 -- depending on the plan. These would include accounts set up under the Uniform Gifts to Minors Act or Uniform Transfer to Minors Act.
In such cases, you have two choices:
- Move the custodial account into a 529. That is, fund the new 529 with the old account instead of cash. The new plan will gain the 529's advantage of tax-free withdrawal for higher-education expenses, though not the option to change beneficiary, Merlino says.
- Withdraw funds from the custodial account, which becomes taxable, and promptly reinvest in a 529 in your own name but with the same beneficiary. The IRS can levy penalties if it thinks you've spent the custodial funds for yourself or some other noneducational purpose. You can, however, change the beneficiary later.
New contribution methodsThere are some new ways to contribute to 529 plans. "Some 529 vendors offer affiliated credit cards, so a percentage of every purchase goes to the fund," says Julie Murphy Casserly, a planner at JMC Wealth Management in Chicago and author of "The Emotion Behind Money: Building Wealth from the Inside Out."
"It's like collecting mileage points," she says.
She also highlights Upromise.com, the Web program that puts a portion of qualified purchases into a designated college savings plan, using multiple credit cards and even certain store memberships to earn credits.
A greater need than ever, and greater rewardsMore corporate sponsorship of college savings plans may be in the works, Hurley says. Congress is considering giving employers a tax break for contributions to employees' 529 plans.
There's also a bill that would give low- to moderate-income individuals a federal income-tax credit for contributions to 529s, as is now available for IRA contributions, under what's called the Saver's Credit, a program that allows nonrefundable donation s to qualified plans with a dollar-for-dollar reduction in tax payments, Harmon says. Both measures remain active in Congress, but it is unclear if either will reach a vote in the current session.
Glazer says that should counter one troubling aspect of the credit crunch: the increasing difficulty of securing student loans.
Is a 529 plan right for you and your child? For more information, see "When not to use 529 plan."