GOLDEN VALLEY, Minn. - As a consumer, you are probably aware the cost of living is steadily increasing, and college costs are no different.
College tuition and fees have increased at two-and-a-half times the inflation rate, and economists predict that the costs of attending a state college will soar to $120,000 in 2015.
Dan Ament, Financial Advisory with Morgan Stanley Smith Barney joined KARE 11 Sunrise to discuss how 529 college savings plans may help you meet your education objectives in the most tax efficient manner possible.
What You Should Know About 529s
They're not just for kids. Although most 529 savings plans are used to fund higher education for children, they are ideal for anyone with college funding needs. Whether you're a retiree who wants to pursue lifelong learning or a professional who is returning to school to advance your career, 529 savings plans may have a place in your investment portfolio.
There are no income or age limitations. Some education funding vehicles have age and income restrictions, which limit the amount you can save. Generally, anyone can fund or use a 529 savings plan for education purposes.
They allow tax-free accumulation of savings and tax-free withdrawals. Money in a 529 savings plan accumulates free of federal taxes, and as long as funds are used for qualified college expenses, the withdrawals from your account are also tax-free.2
If you're the account owner, you have complete control over how 529 assets are used. Some vehicles traditionally used for education funding, such as uniform gift to minors accounts, require the assets be turned over to the beneficiary at a certain age. With a 529 plan, you maintain control. This means, if the beneficiary decides not to go to college, you can choose another beneficiary or use the plan for your own educational funding needs.
529 plans typically have high maximum contribution limits, which allow you to save more for higher-education expenses. Most 529 plans have contribution limits in excess of $200,000 per beneficiary.
Contributing to a 529 plan can remove taxable assets from your estate, which may reduce your tax liability. Your contribution is treated as a gift to the named beneficiary (for gift-tax and generation skipping transfer-tax purposes) and qualifies for the $13,000 annual gift-tax exclusion, allowing you to make fairly large contributions without incurring the gift tax. What's more, if you make a contribution between $13,000 and $65,000 for a beneficiary, you can elect to treat the contribution as if it were made over a five-calendar-year period for gift-tax purposes. This means the money gets out of your estate faster than if you made contributions each year. The best part? Even though the asset leaves your estate, it doesn't leave your control if you are the owner of the 529 plan.
They're not just for in-state colleges and universities. Whether the goal is to spend a semester abroad or pursue a degree stateside, you can use a 529 savings plan at any in-state, out-of-state or international institution, as long as it's used with an accredited program.
Plans are professionally managed and offer a range of investment options. With 529 savings plans, you have access to professional money managers with years of experience managing assets. Most plans also offer several investment options, such as age-based portfolios that become more conservative as the beneficiary nears their college attendance date.
Only a small percentage of 529 assets are included in financial-aid calculations. Although the rules may vary slightly by state, generally a 529 account owned by a parent for a dependent student is reported on the federal financial-aid application (FAFSA) as a parental asset and is assessed at a (maximum) 5.6% rate in determining the student's expected family contribution (EFC).6