What kind of man invests in the 529 plans of 32 different states? Our very own College Money Guru, for one, who lives and breathes 529 plans. Sharing his insights into 529 plans, author and CPA Joe Hurley discusses their pros and cons and how to make the most of invested money.
|At a glance|
Who should open an account in a 529 plan?
What should parents take into consideration before opening an account in a 529 plan?
They should definitely try to determine how much it's going to take to pay for college in the future and how much they can save on a regular basis to have those funds available. Then understand what the different options are in saving for college, including the 529 plans, Coverdell Education Savings Accounts, mutual funds and savings bonds. So, there are many choices, and you really have to look at the pros and cons of each choice in making your decision. In some cases, combining different options is a good strategy.
The 529 plans offer outstanding income tax benefits, and they're very flexible in that they allow anyone to use 529 plans no matter what your age or income level .They also have very high contribution limits, with no annual limits. Each plan sets an overall contribution limit, which in many cases exceeds $300,000 per beneficiary. One issue is with large contributions you may be generating a gift tax liability because you're only allowed to gift $12,000 per year to anyone else without filing gift taxes. A special exception with 529 plans allows you to frontload up to $60,000 by using up five years' worth of your $12,000 annual exclusions.
Is a 529 a better way to save than a custodial account, such as the Uniform Gifts to Minors Act (UGMA)?
I think for the most part it is. I think custodial accounts are fine in small amounts because you can save income taxes, but only up to a limit before the kiddie tax kicks in. Another problem with custodial accounts is with financial aid -- it's assessed very heavily. The other big problem is that the child basically takes that money at age 18 or 21 and can do whatever they want with it. Maybe when they're 15 or 16 and find out about that money waiting for them, they'll make some regrettable decisions at that point in their life, because they know they're coming into all this money. That's a potential problem.
|-- Posted: Sept. 17, 2007|