College Funding – Opening a 529 Savings Plan

Although several savings vehicles exist to fund a college education, 529 plans may be one of the best. 529 plans combine the advantages of other college savings vehicles but avoid some of the common drawbacks. The primary advantage is that earnings within the account are tax-exempt when used for qualified higher education expenses. This may be even more beneficial than a traditional IRA or 401k where the money is tax-deferred, but is still taxed as income when distributions are taken. The essence is- if you are going to pay for higher education expenses at some point, you might want to consider a 529 plan as a funding option.


Coverdell Education Savings Accounts actually offer the same tax exemption, but the annual contribution limits are lower ($2,000 for 2006 & 2007) and high-earners will probably get phased out (joint phaseout $190-220,000 for 2006 & 2007, $95-110,000 if single). The other important difference which is often overlooked is that a well funded 529 plan may be less restrictive for a child’s ability to get financial aid including scholarships, grants, and student loans. This is because the account must be registered to the person funding the account rather than to the beneficiary–the person receiving the education. This is a crucial difference from UGMA/UTMA accounts and trusts in which the account is registered to the child and often may adversely affect financial aid packages. Note that the account is still an asset of the “account owner” which could theoretically have an affect on financial aid as well, but not to the extent of assets held in the name of the child.
Many states also allow for a state income tax deduction based on the size of your contribution. New York, for example, allows a married couple to contribute up to 10,000 tax-deductible dollars to a 529 plan each year ($5,000 if single). You’ll want to check your individual state’s rules regarding 529 plan contributions. In New York, all contributions to a 529 plan must be made by the account owner. In some states, there isn’t any state income tax, so the deduction becomes irrelevant. These are some of the things to consider when selecting a plan.
529 plans are convenient in that there are no income limits which restrict who can contribute to the plan. The limits are on the amounts which can be contributed, and vary depending on which state you are talking about. A grandparent who earns $500,000/year, if they are the account owner, may still be able to contribute regularly to the plan. The account owner retains control over the investments and, if necessary, can change the beneficiary to somebody else within their family. While I tend to refer to the beneficiary as the “child” it could be somebody much older who is pursuing higher education. Again, many rules governing 529 plans are specific to the state which you are dealing in. You’ll want to research your own state’s plan and then consider what the benefits and/or drawbacks may be to using another states plan.
If you want to determine whether or not a 529 plan is the best funding option for your children or grandchildren, please feel free to contact me.
Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net
*As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

2 thoughts on “College Funding – Opening a 529 Savings Plan”

  1. What if my kid ends up not going to college since that is unpredictable at this point in my life to judge? Or gets a full ride and doesn’t need the fund? Whatever the situation might be. Is it passed in the family until it is used?
    Any chance I could use if for high school tuition too?

  2. Hi Dustin,
    Great questions.
    If your kids don’t end up going to college, you’ve sort of defeated the purpose of the 529 vehicle. You’d have the option of either moving it to somebody else in the family (going out as far as a first cousin) or you could take a non-qualified withdrawal (subject to 10% penalty + income taxes).
    In the event of a scholarship, you might be OK. The beneficiary can take out an amount from the plan up to but not exceeding the amount of the scholarship. You still get taxed on earnings in the case of the scholarship but no penalty would apply.
    Russell

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