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How to Pay for Your Kids’ College

College graduationGiven the rising cost of most college tuition, the complexity of college loan agreements and the difficulty for most middle-income families in simply maintaining their budget for ordinary daily household expenses, planning for your children’s college education is an important topic to consider at the earliest possible stages of a child's development. Fortunately, an established method of helping to accomplish this goal is the 529 college savings plan.

The Legal Intelligencers recent article titled “529 College Savings Plans: How They Work explains that the 529 college savings plan is a way to save and set aside money specifically for the purpose of funding higher education. It’s a tax advantaged investment program that’s designed to help you fund future qualified education expenses. The benefits are that it offers flexibility, control, and tax advantages—plus it’s available to anyone who wants to make contributions for qualifying higher-education expenses without income limits (like Grandma or a favorite uncle!).

The 529 owner keeps control of the assets and is allowed to choose how much and when money can be withdrawn. The owner can also change the beneficiary to a different family member related to the original beneficiary (see your estate planning attorney for the rules on this) whenever they like, and the investment allocation can be adjusted once a year.

You can also enjoy some federal income tax savings with a 529 plan because the account can grow tax free. But contributions are not deductible. Any withdrawals from the 529 made expressly for qualified higher-education expenses are also federal income tax free, but non-qualified withdrawals will be hit with regular federal income tax plus a 10% penalty.

One other feature of a 529 plan is that it can also be effective in estate planning. A 529 savings plan can decrease future estate taxes, as up to $14,000 of the annual gift tax exclusion per contributor can be taken when transferring assets to a child or grandchild (or up to $70,000 with a five-year election). When the assets are deposited in the 529 plan, the law says they are viewed as being removed from the account owner's estate, even though that owner still has control over the distribution of the plan itself.

Talk with an experienced estate planning attorney because there are many options available and your participation in a 529 plan doesn’t guarantee that the contributions and investment returns will be enough to cover higher education expenses. Contributors assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals. Your state may offer state tax advantages to residents who participate in the in-state plan.  Again, speak to an experienced estate planning attorney to find out more.

You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.

Reference: The Legal Intelligencer (March 3, 2015) 529 College Savings Plans: How They Work

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