Section 529 Savings Plans

Section 529 savings plans are state-sponsored college savings plans to which anyone can contribute money on behalf of a beneficiary. Contributions are invested according to options directed by the state. Here are some pros and cons to help you prepare for saving for your childs education with these plans.

Pros:

• Money can be used for any college in the U.S.
• Savers may get state tax breaks for contributions.
• The IRS provides for tax-free distributions for qualified expenses (tuition, fees, books, supplies, required equipment, room and board). As of 2014, rules on qualified expenses for special needs students are still pending.
• Savers can still claim HOPE and Lifetime Learning Credits, as long as the payout from the 529 plan isn't used for the same expenses for which credit is taken.
• Savers can roll over to another plan once every 12 months for the same beneficiary.
• Savers can roll over more often than once every 12 months when changing beneficiaries to another family member. Family members include child, grandchild, sibling, stepsibling, parent, grandparent, stepparent, niece, nephew, cousins, aunt, uncle, in-law, and spouse.
• Savers can gift up to $70,000 a year per child, without triggering the gift tax (at 2014 levels of $14,000 in annual gift tax exclusions). Doing this effectively removes this money from your taxable estate (if you die within five years, a portion may be included in your taxable estate). If you gift-split with your spouse, you can get $140,000 out of your estate without triggering the gift tax.
• Savers can contribute to both a Coverdell ESA (formerly called an Education IRA) and a 529 plan, but total funding for both can't exceed the $14,000 annual gift tax exclusion (as of 2014.) The Coverdell ESA is also subject to other limitations, for example, in who the beneficiaries can be, and how it can be used, and has a lower annual cap.
• Savers can contribute more than $70,000 a year and use an increased unified credit ($1,500,000 as of 2014) to offset the gift tax. Check with each state plan to verify the maximum contribution.
• Donor retains control of the account. If the beneficiary doesn't go to college, the donor can get his/her money back, although they would owe tax on the earnings and a 10% penalty.
• No earnings restrictions.
• Since the donor owns these accounts, the beneficiary may be eligible for more financial aid than if the child owned the account.
• No limited enrollment period.
• No date by which the funds must be used.
• Some states will allow you to contribute by using your credit card. You may be eligible for rewards from your credit card company (check to make sure there are no monthly caps on rewards. For instance, on some credit cards there is a $10,000 per month reward cap. So in that case, you might want to contribute $10,000 per month for five months to get the maximum rewards.)

Cons:

• Must use state-chosen investment options.
• You could lose money in more aggressive investment options.
• Expenses of the plan may be higher than what you'd pay if you invested the money yourself.
• A non-qualified withdrawal (used for purposes other than specified education expenses) will be taxed on earnings and will incur a 10% penalty. Exceptions to the penalty include death or disability of the beneficiary, or cases in which the beneficiary receives a scholarship.
• States may limit contribution amounts.
• Since the donor owns the account, it may be tapped by Medicaid if the donor should need nursing home care and not have other funds available. All the more reason to have long-term care insurance.
• Not all states have protections against donor's creditors.

529 Savings Plans are valuable tools to help you save for your child's education but make sure you understand the pros, cons and alternatives of these kinds of investments.