529 Plans -- yes or no?

1. 529 Plans - established by the U.S. Congress; run by states and by colleges.
2. 529 Plan - an IRS designation relating to taxability and penalties.  Those two words should not be ignored.  Click the link to the relevant section (http://www.irs.gov/uac/529-Plans:-Questions-and-Answers). 
3. 529 Plan - a cash asset available for college expenses.  Your Expected Family Contributions (EFC) (http://www.fafsa.ed.gov) may go up and your financial aid offer go down.
4. 529 Plans - unlimited contributions allowed (subject to the parent/child gift exclusion; refer to the IRS Q&A linked above).  Large accounts, however, may leave an undistributed balance, which may be subject to taxes and penalties.
5. 529 Plans may be shared within families; given to friends or anyone else.

1. Conservative investment practices may mitigate market risk for a 529 Plans.  The flip side of that is a history of  modest gains inside of 529 accounts (http://www.forbes.com/sites/learnvest/2013/07/18/529-savings-plans-9-mistakes-people-often-make/). 
2. Families with large EFC-exposed assets (http://www.fafsa.ed.gov) may benefit the most from 529 Plans for the tax savings possibilities.  However, the IRS gift exclusion allowance should also be considered (see Forbes article linked above).
3. Families with high Adjusted Gross Incomes (IRS 1040, line 37) may also derive a benefit from 529 Plans. 
4. If scholarships and college tuition concessions are of little or no importance, the taxes saved in a 529 Plan are worth considering.
5. You have to spend the money on "qualified educational expenses," not necessarily on what you think your student needs for a particular year of college (a car; off-campus housing; airfare home at a holiday).
6. Distributions drain the account.  The magic of compounding is eliminated.  
7. Consider a college savings strategy that has the option of using your asset as collateral, while continuing to enjoy uninterrupted compounding growth.

Posted in College Planning, College Planning Strategies. Tagged as 529 Plan, Cost of College, Financial Aid, Save for college.

 Comments (1) | Leave a Comment