529 Plans ? A Tax Advantaged College Savings Program

529 Plans ? A Tax Advantaged College Savings Program Is it possible to secure a tax-advantaged college savings plan that has no age restrictions? How about no income phase out limits if I make a good living? Do we have to be penalized with those pesky residency requirements? One more thing, can I use the plan to pay for more than just tuition?

An increasingly popular way to save for higher-education expenses and the answer to the above wish list could very well be a 529 plan.

In case you don't know, 529 plans are also referred to as qualified state tuition programs. They are available in almost every state.

In the original 529 plans, known as the state-operated prepaid tuition plan, allowed you to purchase units of future tuition at today's rates. The plan takes on the burden of investing the funds to keep pace with inflation. For those who want something close to a guarantee, the structure practically assures that the cost of an equal number of units of education in the sponsoring state will be covered at some future date when needed.

A word of caution, prepaid tuition programs typically will pay future college tuition only at any of the sponsoring state's eligible colleges and universities. Some will pay an equal amount to private and out-of-state institutions, but be sure to check the fine print because every state is slightly different.

The savings plan is the newer version. It's similar to an investment account often utilizing mutual funds. These funds accumulate tax deferred. This means the withdrawals from state-sponsored 529 plans are free of federal income tax as long as they are used for qualified college expenses.

With prepaid tuition plans, contributions can be used for all qualified higher-education expenses such as tuition, fees, books, equipment and supplies, room and board fees, etc., and the funds usually can be used at all accredited post-secondary schools in the United States. A key difference is the investment performance risk with these plans is in the hands of the investor. Depending on the investment chosen, and your management, or lack thereof, you could do better or worse than the pre-paid tuition plan.

529 savings plans place investment dollars in a mix of funds based on the age of the beneficiary, with account allocations becoming more conservative as the time for college draws closer and the focus changes from growth to protection of principal..

Some state residents qualify for a deduction on their state tax returns or receive a small match on the money invested. In 48 states, the majority, earnings are exempt from taxes.

Award programs are popping up that allow consumers who purchase certain products and or specific services to receive rebate or deposit dollars that go into state-sponsored college savings accounts.

One attractive feature to take into consideration is that funds contributed to a 529 plan are considered to be gifts to the beneficiary. So anyone, grandparents, Aunts, Uncles, even non-relatives, can contribute up to $12,000 per year (in 2006) per beneficiary without incurring gift tax consequences. For families with large amounts of assets available to gift, and the desire to do so, this could be a good estate planning tool.

Contributions can be made conveniently in one lump sum or you could start modestly using monthly installments from bank drafts directly from checking.

One other facet of the estate planning power of this savings tool would be the fact that assets contributed to a 529 plan are not considered part of the account owner's estate, therefore avoiding estate taxes upon the owner's death that could be incurred if the same monies were held in other investments.

Savings Benefits
529 plans allow people of any income level to contribute. There are no age limits for the student. The account owner maintains control of the account assets until funds are withdrawn. If desired, account owners can even change the beneficiary as long as he or she is within the immediate family of the original beneficiary.

Tax Reporting
When it comes to tax reporting, a 529 plan is also easy on your record keeping. The sponsoring state, not the account holder, is responsible for all income tax record keeping. You will receive Form 1099 from the state at the end of the year when the withdrawals are made for college expenses. You need only one figure to worry about, the amount of income to report on the student's tax return.

Ideas for Aunts, Uncles & Grandparents
The 529 plan is a great way for grandparents to shelter inheritance money from estate taxes and contribute substantial amounts to a student's college fund. At the same time, they also control the assets and can retain the power to control withdrawals from the account. By accelerating use of the annual gift tax exclusion, a relative, or family supporter could elect to use five years' worth of annual exclusions by making a single contribution of as much as $60,000 per beneficiary in 2006 (or a couple could contribute $120,000 in 2006), as long as no other contributions are made for that beneficiary for five years.

If the account owner dies, the 529 plan balance is not considered part of his or her estate for tax purposes.

Compare different plans to determine which might plan available is best for your situation.

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