How can parents juggling their own retirement funding needs with college savings make the most of a 529 plan?
|Understanding 529 plans|
Most financial planners will agree that retirement is a higher priority than college because you can't borrow for retirement and you can borrow for college. If your employer is offering a match in your 401(k), you really ought to be taking full advantage of that incentive because it's very valuable. But if you are taking full advantage of your 401(k), and know that you're going to be shelling out some dollars for college, then I think you ought to be looking to put money into a 529 plan. Even if you're not maxing your retirement plan contributions, I still encourage families to at least open up a 529 account with a minimum amount of money and try to put in some amount each month through an automatic contribution plan. That way, they see that account growing over time, and it keeps that college-saving goal in front of them as these statements come in every month or every quarter. It's a good practice to have. In many plans, the minimum is only $25 per month.
What lies ahead?
Looking to the horizon, can we expect to see any rule changes that affect 529 plans?
We'll see some rule changes when the IRS comes out with new regulations, either later this year or next year, but those will just tighten up some of the rules that are not very well defined right now. For example, what happens when a third party makes a contribution to the account for gift tax purposes? Is that a gift from the third-party donor directly to the beneficiary or is there some sort of indirect gift first to the account owner, followed by a gift from the account owner to the beneficiary? There's some technical things in there they might make some clarifications and changes to, to make it more understandable.
Also, the ability of states to restrict their deduction to the in-state 529 plan may be challenged, based on a court case the Supreme Court is scheduled to hear soon. It has to do with the constitutionality or unconstitutionality of municipal bond interest and how that's treated for state purposes. If the decision goes against the states, there's the potential that states won't be allowed to restrict the deduction just to their in-state 529 plan.
Finally, if the Higher Education Access Act of 2007 is made into law, the loophole regarding the financial aid treatment of student-owned 529 accounts will be closed. A 529 plan in the child's name will be treated the same as an account in the parent's name, which is still a good deal.