August 3, 2015
A 529 Plan, should I start one? We (http://www.succeedwhereitcounts.com) hear that question, or some variation of it, often. There is no one-size-fits-all answer. Consider these facts and factors:
- 529 Plans - established by the U.S. Congress; run by states and by colleges.
- 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).
- 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.
- 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.
- 529 Plans may be shared within families; given to friends or anyone else.
- 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/).
- 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).
- Families with high Adjusted Gross Incomes (IRS 1040, line 37) may also derive a benefit from 529 Plans.
- If scholarships and college tuition concessions are of little or no importance, the taxes saved in a 529 Plan are worth considering.
- 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).
- Distributions drain the account. The magic of compounding is eliminated.
- Consider a college savings strategy that has the option of using your asset as collateral, while continuing to enjoy uninterrupted compounding growth.
Is a 529 Plan right for you? The facts and factors discussed above, when carefully considered, will help you arrive at the answer.
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