Looking for a tax-advantaged college savings plan that has no age restrictions, no income phaseout limits, no residency requirements - and one you can use to pay for more than just tuition?
Most people have heard about the original form 529, the state-operated prepaid tuition plan that allows you to purchase units of future tuition costs at today's rates. The plan assumes the responsibility of investing the funds to keep pace with inflation.
It's practically guaranteed that the cost of an equal number of units of education in the sponsoring state will be covered, regardless of investment performance or the rate of tuition increase. Of course, each state plan has a different mix of rules and restrictions.
The newer variety of form 529 is the savings plan. It's similar to an investment account, but the funds accumulate tax deferred.
Withdrawals from state-sponsored 529 plans are free of federal income tax as long as they are used for qualified college expenses. Unlike the case with prepaid tuition plans, contributions can be used for all qualified higher-education expenses (tuition, fees, books, equipment and supplies, room and board), and the funds usually can be used at all accredited post-secondary schools in the United States.
These savings plans generally allow people of any income level to contribute, and there are no age limits for the student. The account owner can maintain control of the account until funds are withdrawn - and can even change the beneficiary as long as he or she is within the immediate family of the original beneficiary.
A 529 plan is also extremely simple when it comes to tax reporting -at the end of the year when the withdrawal is made for college, you will receive Form 1099 from the state, and there is only one figure to enter on it: the amount of income to report on the student's tax return.
Benefits for grandparents
The 529 plan is a great way for grandparents to shelter inheritance money from estate taxes and contribute substantial amounts to a student's college fund. By accelerating use of the annual gift tax exclusion, a grandparent - as well as anyone, for that matter - could elect to use five years' worth of annual exclusions by making a single contribution of as much as $65,000 per beneficiary in 2010 (or a couple could contribute $130,000 in 2010), as long as no other contributions are made for that beneficiary for five years.
If the account owner dies, the 529 plan balance is not considered part of his or her estate for tax purposes.
As with other investments, there are generally fees and expenses associated with participation in a Section 529 savings plan, and no guarantees regarding performance. Consult professionals to obtain further information on what option is best for your unique situation.
If the donor makes the five-year election and dies during the five-year calendar period, part of the contribution could revert back to the donor's estate.
Theresa Cavalier is a registered investment advisor with the Maffe Financial Group LLC, 47 High St., Suite 214, Westerly. 401.447.4374.