Situation:
A married couple with twins wants to start saving for their children’s college education. They have heard about Section 529 college savings plans and ask their adviser whether he thinks the plans are a good idea.
Solution:
With the cost of a college education going up each year, the couple should consider setting up a 529 college savings plan to minimize the effect of rising tuition costs once the twins reach college age.
According to the College Board, a New York-based non-profit association of schools, tuitions for public colleges and universities for the 2006-07 academic year rose by 6.3% to $5,836, compared with the previous year, and by 5.9% to $22,218 for private institutions.
A 529 investment plan is operated by a state that helps families save for future college costs. The Internal Revenue Code, under Section 529, provides special tax benefits to plan participants.
For several reasons, the plans are a great way to save for college education costs.
First, the investment grows tax-free for as long as the money stays in the plan.
And when the plan makes a distribution to pay for the beneficiary’s qualified college costs, the distribution is federal-tax-free.
The following college costs are eligible for qualified withdrawals: tuition, fees, books, and required supplies and equipment.
A limited amount of room and board also qualifies if the student is enrolled at least half-time.
Second, the couple, or the donor, stays in control of the account.
With few exceptions, the named beneficiary has no rights to the funds.
Most plans even allow the donor to reclaim the funds for themselves at any time they desire.
However, the earnings portion of the “non-qualified” withdrawal will be subject to income tax and an additional 10% penalty tax.
Third, a 529 plan is an easy way to save for college.
Once the couple decides which 529 plan to use, they complete a simple enrollment form and make their contribution.
Then they can relax and forget about it if they like. The plan, not the couple, handles the investment of their account.
Finally, everyone is eligible to take advantage of a 529 plan. So if the husband or wife is thinking of going back to school for a degree, they can take out a plan for themselves.
More information about 529 plans is available at
collegesavings.com, a website of the College Savings Bank of Princeton, N.J.
There the couple can compare different state plans. They can enroll in a 529 plan in any state regardless of where they live. And when it’s time for their children to go to college, they can withdraw the funds to pay for the schooling regardless of where the college is located.
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Tax INsight is prepared by experts who are active members of the American Institute of Certified Public Accountants. Tax INsight appears on the web and in IN Daily every Tuesday. Comments are welcome at
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