Save for college with a 529 Plan

Avoid sticker shock later by putting away cash for college now

Author: By Carolyn Quoma
Posted: Thursday, September 18, 2008
The average cost of one year of college, as reported by the College Board, ranges from $6,200 for public schools to $23,000 for private – and rising. That’s a lot for parents and students to raise on their own, so some grandparents are stepping in to help cushion the blow of sticker shock.

As the children get older, many grandparents would rather help pay for higher education than buy more clothes and video games anyway.

 For those who prefer the idea of depositing money directly into a college savings plan, a College 529 may be the simple solution. 

 

“A College 529 plan is probably the easiest way to begin saving for college,” says David Mazzetti, senior financial adviser at Ameriprise Financial Services, Mazzetti and Associates, a financial advisory service based in Poughkeepsie.

 

A College 529 plan is a state tax-deferred account whose proceeds can be used for qualified college expenses (including tuition, room and board, and books). Grandparents can open a new account with their grandchild as the beneficiary. If the child’s parents already have a College 529 plan going, it’s easy for relatives to make contributions.

 

Who can open an account?

“A College 529 plan is for any person who wishes to help a beneficiary with college costs,” says Stephen Augstell, senior financial planning consultant for Key Bank, which has 64 branches in the Hudson Valley area.

 

Parents, grandparents, aunts and uncles – anyone who wants to help a child save for their education – can open an account. The child’s age doesn’t matter, though of course it’s better to begin as early as possible to benefit from compounded interest.

 

What are the tax advantages?

The account is tax-deferred, meaning you’re not required to report the earnings on your state income taxes. The money is not taxed upon withdrawal, either, provided the money is used as intended for qualified college expenses. New York State residents may deduct up to $5,000 worth of contributions annually on their state income taxes.

 

Are there benefits to having a non-parent hold the account?

All aspiring college students are encouraged to fill out the FAFSA (Free Application for Federal Student Aid), the document that helps to determine the amount of financial aid they will receive. The FAFSA requires only the parents’ income levels and assets to be reported, not other relatives, so if a grandparent or anyone else is holding a College 529 account with the student as a beneficiary, those savings aren’t reported, Mazzetti explains. This could translate to more financial aid for the student.

 

These plans also have a “hidden” advantage for those who are concerned about estate taxes. “You can front-load a 529 plan with up to $12,000 per year without incurring a gift tax,” Augstell points out.

 

Some grandparents have used this rule to their advantage to draw down their estate. There are several stipulations – including that the donor must survive for five years after the gift to avoid the gift tax – so it’s best to talk to a financial adviser before going this route.

 

What about the Upromise program?

Upromise is an adjunct feature of College 529 plans by which you can earn savings for your 529 plan by spending money at hundreds of participating restaurants, stores, gas stations, and other businesses.

 

Imagine: Mom opens a 529 plan for son Kevin. His grandparents, aunts and uncles all sign up for Upromise. All of them can earn money for Kevin’s account when they eat out, shop, or fill up the gas tank at participating locations.

 

“You can go to CVS, buy a box of Kleenex and earn money for your 529 plan,” Augstell says.

 

The percentage earned varies from merchant to merchant, but some businesses contribute as much as 10 percent of your purchase. For a complete list, visit www.upromise.com or www.nysaves.org.

 

Are there different types of accounts?

New York State’s college savings options include Vanguard and Columbia plans. Other states offer different plans, and you’re free to shop around, although you may lose out on tax breaks exclusive to state residents.

 

Vanguard is a self-directed account, whereas Columbia requires an investment professional to actively manage the funds. Both are good options, Mazzetti and Augstell agree.

 

“If you choose to use a financial adviser [with a Columbia account], be sure to take advantage of all they have to offer as far as managing investments and re-balancing the account,” Augstell says.

 

A Vanguard account allows parents to select a portfolio based on the child’s age, with more aggressive investing when the child is very young, and then moderate and conservative investments as she nears college age.

 

What if Junior decides not to attend college?

If the child who is named beneficiary chooses not to attend college, the account holder may change the beneficiary to another child within the same generation – for example, a sibling or cousin, Augstell explains.

The only drawback to the 529 plan is that if you decide to withdraw the money and use it for any purpose other than education, you’ll pay a 10 percent penalty on earnings and any remaining earnings will be taxed as ordinary income.

 

What if you’re going back to school?

A college 529 plan can be used to fund adults’ education as well. “Let’s say you know that in six months you’re going to start grad school, and you have some money saved up,” explains David Mazzetti, senior financial adviser at Ameriprise Financial Services, Mazzetti and Associates, a financial advisory service based in Poughkeepsie. “Why not drop it into a 529 plan, let it accrue earnings, and then take it out?”

 

To get started, go to nysaves.com and open an account online. There is a $25 minimum deposit to get started and a $30 minimum for the Upromise program. Of course, it’s always a good idea to visit a financial adviser to discuss all the options before you decide on any plan.

 

Carolyn Quoma is a freelance writer living in Dutchess County. She is a frequent contributor to both Hudson Valley Life and Hudson Valley Parent magazines.

Categories: Feature Stories

Tags: college,college plan,money

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