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Section 529 College Savings
Plan
What It Is
In 1996, the IRS wrote guidelines for the Qualified State
Tuition Programs, and now 34 states have some version of this
plan (and another 6 are working on it).
Unlike UGMA, the parent maintains full control over the money
in a 529 plan and can even transfer the money for another
child's use if the original beneficiary doesn't go to college.
A recent ruling from the Department of Education also said
that this type of plan would not be considered part of a student's
assets when determining financial aid.
How It Works: The Massachusetts Example
Each state has a slightly different variation, but the plan
offered in Massachusetts is fairly representative. The Massachusetts
U-Fund Program is run by Fidelity Investments and allows you
to invest up to $150,000 per account. There are no income
limitations on who can participate, and your money grows tax-deferred.
During the time your money is held this account, you pay
no state or federal taxes on the earnings until you need to
withdraw them. Furthermore, the money does not have to be
spent at a Massachusetts college or university. Like many
states, you don't even have to live in Massachusetts to use
this program.
Even if your child ends up with a full scholarship and doesn't
need the money you've put into one of these accounts, you
pay no penalty. You simply withdraw the money and pay your
regular tax on it, instead of the less expensive student's
rate.
Types of 529 Plans
Prepaid tuition plans allow you to buy a future tuition
at today's prices, thereby insulating yourself from any steep
price increase in the coming years. In some states, however,
this means that you must send your child to a state college
or university. Others allow you to go to out-of-state schools
and pay a small percentage on your investment. Get information
from your state program to clarify these questions.
Tax-deferred plans, on the other hand, are more like
the Massachusetts plan described above. These are savings
vehicles that are designed not to return huge increases, but
are just enough to stay ahead of college inflation. Your money
is invested based on the beneficiary's age. The younger your
child is when you start the plan the more aggressive the program.
One word of caution: The money you put into these plans is
subject to gift-tax rules. You and your spouse can only contribute
up to $10,000 per child per year gift-tax free. You can, however,
elect to use up, your next 5 years annual gift-tax exclusion
in one year to jump-start a college savings program with $50,000.
If you would like more information, we recommend College Savings
Plans Network. The site offers a wealth of information concerning
plans available throughout the country.
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