The ABCs of 529s

Last month I spent a week with my family in wonderful Walt Disney World. If Disney is any indication on the status of our economy, I would have to say that things are going pretty well. The parks were jam-packed full of families making wonderful memories.
Then it suddenly struck me…the future of our country…the kids… all here with big dreams. Some want to be doctors, some astronauts—others want to be teachers. At Epcot, the “Honey I Shrunk the Audience” attraction, sponsored by Kodak, is based upon the desire to dream and use your imagination, and anything is possible.

What about college for these kids. Is it a dream? Or a possibility? As parents have we begun to prepare to help our children be competitive and lead our country into the future?

One of the most useful and widely recognized college savings vehicles today is the 529 College Savings Plan. The 529 plan is a tax-advantaged savings plan designed to help accumulate funds for future college costs. There are two types of 529 plans: prepaid tuition plans and college savings plans.

Prepaid Plans allow you to purchase units or credits for future tuition at today’s prices. Most of these plans are sponsored by state governments and have residency requirements, so be sure to check with your state and the school your child is considering attending.

The other 529 plan is the College Savings Plan. These plans are becoming very popular and provide an excellent way to save money for college expenses. The parents or college saver in this case is called the ‘account holder,’ who establishes an account for the student, or ‘beneficiary,’ to help pay for eligible college expenses. The funds are usually invested into a portfolio of mutual funds similar to a 401K. This allows investors to be more aggressive when their children are young and become more conservative as the children approach college age.

The main advantage of the 529 college savings plan is that its earnings are not subject to federal tax, and in most cases, state taxes, as long as you use withdrawals for eligible college expenses, such as tuition and room and board. If you withdraw money from a 529 plan and do not use it for eligible college expenses, you generally will be subject to income tax and an additional 10 percent federal tax penalty on the earnings.

Here are some other distinct advantages:

• Some states allow a tax deduction for all or part of your contribution

• No income limits—you can contribute no matter how much you earn

• You can contribute up to $12,000 ($24,000 for married couples) under current gifting rules

• The owner of the account maintains control

• You can change the beneficiary of the assets

• You can open a 529 for anyone—children, grandchildren, spouses or even yourself

• You can use the 529 plan funds at any eligible educational institution (not just in your state)

Some key questions to ask before choosing a 529:

• What fees are charged by the plan?

• Does the plan offer incentives for state residents?

• What are the withdrawal restrictions?

• What expenses are covered?

• When can you change investment options?

• What are my tax consequences?

And finally,

• Who is managing the money?

Let’s face it—the number one goal in investing is growing your money. The manager is the most important thing!

Each college savings option has advantages and disadvantages, and may have a different impact on your eligibility for financial aid, taxes and your personal situation, so please evaluate every option carefully and check with your financial advisor before investing. There is no written rule that says you have to pay for your children’s college, but if you’re contemplating helping them, the sooner you start, the easier it may be down the road.

The future of our country is right around the corner and every advantage our children have in this world will keep America strong and the best place to live. For those of you who frequent Disney, remember—when it comes to college, there are no fast passes.

If you would like to receive further information on establishing a 529 College Savings Plan or if you would like a copy of my college comparison chart, please contact my office.

Kevin C. Krul is First Vice-President and Financial Advisor with Hefren-Tillotson. He may be reached at 412-258-1101 or kkrul@hefren.com. The Wexford office of Hefren-Tillotson is located at 4001 Stonewood Drive.