Saving for college—whether for your children or your grandchildren—has become easier in recent years with the emergence of state-sponsored savings plans. Called a Section 529 Plan, after the section of the Internal Revenue Code that created them, these plans are offered by all 50 states and provide tax benefits to college savers.
While each state plan is different, there are two general types of plans: prepaid tuition plans and college savings plans. With a prepaid tuition plan, the money you put into the plan is earmarked for tuition at your local state university. In most cases, once you make the required payments, you are guaranteed that all tuition will be covered, no matter how much it may rise in the future. What happens to the money if your child decides to go to another college? The value of your plan — although in some states, not the full value — can be transferred to private and out-of-state schools.
College savings plans are more flexible. You can use the value accrued in your plan for any accredited institution of higher learning in the U.S. and in some foreign countries. Another advantage of college savings plans is that it may enable you to qualify for more aid than you would with a pre-paid plan. The risk with these plans is that investments may lose money and may not perform well enough to cover the college costs as anticipated.
Benefits of a Section 529 plan
Any earnings on the money you invest in a Section 529 plan is tax-free for as long it stays in the plan. And withdrawals for qualified educational expenses are free of Federal tax. In addition to the tax benefits, the biggest plus of these plans is that the amounts you can put in are substantial — over $250,000 per beneficiary in some states. Most plans are very easy to set up and are professionally administered and often offer a choice of investment selections. You have full control over the account and can switch investment options within the same plan once a year. You can also withdraw the money if you need to, although there will be taxes and penalties owed if a withdrawal were to be made for reasons other than funding education. And there are no Federal eligibility restrictions—each state has the option to allow non-residents to invest in its plan. In fact, many states allow non-residents to invest in their plans.
While there may be additional taxes or penalties for withdrawal of the funds in the plan for non-educational purposes, that penalty is generally waived if the beneficiary has died, become disabled or if the funds are not needed because the beneficiary has received a scholarship. Also, you can change the beneficiary by rolling the funds over. That way, if your eldest child decides not to go to college, you can put the funds to work for a younger sibling or even a niece or nephew.
For grandparents, Section 529 Plans offer estate tax benefits because contributions are considered completed gifts and are excluded from your estate. Grandparents can also switch beneficiaries to other grandchildren. The rules are complex, however, so consult your financial professional or attorney about gift and estate tax consequences of funding a Section 529 plan.
While a Section 529 plan may not be the total answer to your college funding needs, it is one of the many ways you can make sure that the money to pay for college is there when you need it. To put together a comprehensive college savings plan and to determine whether a Section 529 plan makes sense for you, contact your financial professional.
This article is provided by Anthony Flowers, who offers securities through Advisors, LLC (member FINRA, SIPC) and offers annuity and insurance products through an insurance brokerage affiliate, Network, LLC and its subsidiaries. He can be reached at [email protected]. AXA does not provide legal or tax advice. Please consult your tax or legal advisor regarding your individual situation, carefully read the Plan Program Description, and consider the investment objectives, risks, charges and expenses carefully before investing. GE-94409 (5/14)(Exp 5/16)