College Savings ARE Getting Better!
Deborah Laemmerhirt, Broker 203-994-4297
Section 529 plans are one of the most popular ways to save for college. Named for a section of the tax code that authorizes them, these plans allow you to invest in pre-paid tuition programs or contribute to tax-favored college savings accounts.
Currently, Section 529 plans are set up by individual states and often managed by professional investment firms.
You don't get a tax deduction for contributions to these plans but the earnings are allowed to grow tax-free until the funds are withdrawn to pay for qualified education expenses.
Other advantages: You don't have to invest in your own state's program. You can shop around to find a plan to meet your needs. And unlike most education tax breaks, there are no income restrictions.
Section 529 plans were first introduced in 1997. But subsequent tax laws made them more attractive with these new provisions:
Qualified withdrawals from a state-sponsored plan are now free from federal tax. In the past, the student had to pay tax on the money when it was withdrawn.
Family members, such as grandparents, can make contributions on behalf of a child. In addition, they can give up to $65,000 to a plan and have the gift spread out over five years for gift tax purposes. Under this provision, the gifts then qualify for the $13,000 annual gift tax exclusion (unchanged from 2011).
Private colleges and universities can now set up their own qualified tuition plans. Originally distributions from these plans were taxable but are now treated as tax-free.
In addition to these new tax law provisions, the IRS has relaxed some of its rules pertaining to Section 529 plans. In the past, one of the disadvantages to contributing was a restriction on changing investments. Let's say you chose to put your child's college savings in a volatile stock sector a few years ago. Now, you want to switch to a more conservative investment.
Under the old rules: Participants were able to choose from a selection of investments offered by a program when they signed up but they were not allowed to make any subsequent changes. So in the example above, you'd be stuck with the volatile investment.
Under the new rules: Participants can now change from one investment to another once every 12 months or whenever the beneficiary changes (IRS Notice 2001-55).
With all the changes, Section 529 plans are better than ever. To see if they are right for your family, check with your tax or financial adviser.
