The Smart Way to Save for College

Add comment February 18th, 2008

 Jessica L. Knudsen, CFP®

For many people, the thought of paying rising college education costs for your child seems staggering.  Fortunately, there are many college funding options available to help save for your child’s college education.    One of the more popular options available is the 529 plan.  All fifty states offer their own version of a 529 plan and in most states you do not have to be a resident in order to contribute to their plan (though there may be tax incentives to contribute to your own state’s plan).

 A 529 plan is a state sponsored plan that allows you to save money for college on a tax-deferred basis.  Withdrawals from the plan are federal and state tax free when used to pay for qualified education expenses (including tuition, room and board).  Assets not used for a child’s college education costs can be transferred to another beneficiary.  If it is not used to pay for college, the money can be withdrawn but will incur a 10% penalty and ordinary income taxes on any earnings.Many 529 plans make it easy for you to start investing. 

Many plans offer a low initial contribution and allow you to set up automatic monthly contributions from your bank account.  States typically offer a variety of portfolios: age-based portfolios that adjust the allocation of the investment from aggressive to more conservative as the child nears college age, as well as static investments where the allocation remains constant.

Here are some other important facts about 529 plans:        

• The asset remains in the parents’ name so they will retain control over the account.·        
• High contribution limits (over $300,000 per beneficiary in many states)·        
• The 10% penalty and income taxes due are waived if the beneficiary receives a scholarship or becomes disabled.·        
• The account is treated as an asset of the parent for financial aid purposes (this is lower than if it is considered an asset of the student).        
• In some states contributions can be deducted for state income tax purposes (in Illinois you can deduct $10,000 if filing singly and $20,000 if married filing jointly).·        
• $12,000 per year ($24,000 for married couples) can be contributed without paying gift taxes.·        
•  You are allowed to front-load five years of contributions for a total of $60,000 if single or $120,000 for married couples (good for Grandma and Grandpa). 

Visit www.savingforcollege.com for more information on 529 plans as well as helpful college funding calculators.