Maximize 529 plans

The cost of higher education is becoming a growing burden for families whether its college or trade school. Enrolling in a 529 college savings plan is one of the shrewdest financial moves that parents or grandparents can make. These plans offer significant federal income tax breaks, sometimes state tax benefits as well and a low-maintenance, largely self-controlled way to save for college.

When choosing a plan many investors are drawn to the state income tax deductibility, but this may be limited. For example, in Rhode Island’s CollegeBoundfund 529 plan, you can only receive state tax deductions for contributions up to $1,000 for married filing jointly or $500 for individual filers. The CollegeBoundfund also offers every baby born to or adopted by a Rhode Island family the opportunity to receive a $100 contribution to a CollegeBoundfund account set up before the child’s first birthday or adoption.

Choosing the right one for your needs and how you use it, however, requires careful consideration. The universe of plans can be overwhelming, with most states offering one or more. I find that many people choose their home-state 529 plan by default. Don’t automatically assume that your state’s plan is the best choice for your child or grandchild. Most states’ plans are open to residents and nonresidents alike.

There are many misconceptions about the impact of 529 plans on financial aid calculations. Families saving for college should know that the 529 has advantages when it comes to qualifying for financial aid. For financial aid purposes, 529 plans are considered parental assets, if the student is a dependent, no matter who (parent or child) actually owns the account.

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Parental assets are subject to a maximum 5.64 percent valuation assessment in federal needs analysis; student assets are assessed at a flat 20 percent rate. If someone other than the parent opens and funds a 529 account, those assets are not currently included in the calculation to determine a student’s eligibility for federal financial aid. Interestingly, the flexibility of a 529 allows parents who don’t yet have children to open an account with themselves as the beneficiary and transfer the beneficiary designation to their future child at a later time.

The 529 plans confer a potential estate tax benefit to donors. Contributions are removed from the donor’s estate and are transferred to the estate of the beneficiary. All yearly contributions below the $14,000 per-recipient gift tax provision are removed from a donor’s estate, and a special tax provision allows donors to donate up to $70,000 to a 529 plan in a single year without incurring gift tax.

Each state sets its own contribution limit. Most states use a limit that is based on an estimate of the amount of money that will be required to provide seven years of post-secondary education (including both undergraduate and graduate school). Even so, there is considerable variation in state cumulative contribution limits, with the median $235,000. The RI CollegeBoundfund Plan limit is $395,000. The earnings in an account can grow beyond these limits.

Because 529s must be opened for one beneficiary and withdrawals are tax-free only if they are used for qualified higher education expenses, high net-worth clients who may fund close to the account limits have the ability to rename beneficiaries. This can transform a 529 into a legacy tool. That is, if one child fails to use all the 529 assets, the parent or grandparent can reassign the 529 plan to a sibling or another member of the family, tax- and penalty-free.

What happens to my 529 plan if I die or become incapacitated?

Your 529 account will not terminate; it will simply continue under a new account owner. If you do not designate a successor, the new account owner may have to be decided through probate.

Saving for the high cost of secondary education requires a multifaceted strategy and a 529 plan can be a very important tool to help you accomplish your goals. •

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