529 Plans: Tax Free Money to Pay for College and Buy a Computer Too.
$334,000; that is approximately how much it will cost to send your newborn to a 4-year private college starting in the year 2030. If you have two children, that future expense comes close to current home prices in Los Angeles. The cost of higher education is rising faster than inflation (including food and energy). It’s no wonder then that many parents are starting to save early for their children’s college education costs. One of the most efficient investment vehicles to help parents accumulate the necessary funds is the recently introduced 529 plan. Officially known as “Qualified Tuition Programs”, 529 plans are state sponsored tax efficient accounts, created by the IRS, and used to save for college expenses. Unlike most IRS publications/explanations, which leave you scratching your head, the IRS 529 rules are clear and understandable, with significant benefits.
Tax Free, Tax Deductible, & Flexible:
One of the best features of the 529 plan is that earnings are tax free as long as they are used to pay for qualified college expenses. Most custodial accounts become the asset of the child upon the age of majority, are irrevocable, and are subject to the kiddie tax. However, 529 plans are owned and fully controlled by the parent – the child/student is simply the beneficiary. The parent can change the beneficiary to any family member, at any time, without penalty; family members include step parents/siblings, nieces/nephews, and even first cousins. In addition, many states offer tax incentives for their residents who contribute to a 529 plan, thus making this college savings’ investment tool even more appealing.
Not Just Tuition:
Money in a 529 plan can be used for college expenses beyond just tuition. Funds can be used to pay for tuition and fees, room and board, books, supplies, and even computer and technology equipment used for educational purposes (including computer, internet access, printer, and software.) As an added bonus, some foreign study abroad programs are also covered under this plan. Bon voyage!
Even the Obamas Agree:
Congressional leaders are known for taking care of themselves, whether it is their “Cadillac” health plans, their Thrift Savings Plans, or their generous pensions. So it is no wonder that they would also take advantage of 529 plans to save for college. According to the most recent financial disclosure forms, the Obamas have between $100,001 and $250,000 saved in 529 plans for each of their two children. Presidential candidate Rick Santorum has 25 separate investments in 529 plans for four beneficiaries each worth between $1,001 and $15,000. In this case…Do as they do, not as they say.
While 529 plans are state sponsored, it is important to note that funds are not held by the states, nor are they part of a state’s budget. States hire large mutual funds companies to run their 529 plans. This point is relevant because many parents are worried that their child’s college savings will be subject to a state’s budgetary problems and cuts; this is not the case. And lastly, the advice I give all my clients is that while it is nice to help your children with their college education costs, first make sure your own retirement is secure before saving for college. After all, your children can always borrow for college, but you can not borrow for retirement.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Contact Ara at firstname.lastname@example.org or on the web at www.acapam.com for a complimentary consultation.