Inverness Real Estate Summer-2005 Dollars & Sense: SAVING FOR COLLEGE THE SMART WAY

The average cost of a four-year, public, in-state college went up 10.5% to $5,132 for the 2004-05 school year while the cost for a private school was up 6% to $20,082 per year, according to the College Board. Next to their home, this could be the most significant investment parents and grandparents make. Why not let Uncle Sam help? Start a 529 College Savings Plan.

The greatest benefit to 529 plans is the exceptional income-tax benefits. Money that is invested within the plan accumulates tax-free and when the funds come out to pay for college, there is no tax on the gains. That is a tax-free investment. Uncle Sam is helping you pay for college. If you invest $10,000 for a child at birth and that money grows 8% per year, in 18 years, $40,00 will be ready for college costs. Outside of a 529 plan, the 15% capital gains tax cost would be $4,500. In a 529 plan, however, there are usually no taxes under current law. A $4,500 savings potential.

The second best thing about the plan is that the person who puts the money into the account, controls the account. If the $10,000 is invested in an UTMA/UGMA account, the child has full access—without restriction—to the money at age 21. Hard-earned college savings in the hands of a 21-year-old student? Not always a wise choice! The 529 plan eliminates this concern.

Next, there are also no income limits. Anyone is allowed to establish a 529 plan. Contributions can even be made as an estate-planning tool. Under current gift tax law, one individual can gift $55,000 to a 529 plan and the money is no longer in their estate. This means grandparents can fund the education of grandkids up to $110,000 while taking the money out of their estate and allowing the assets to accumulate tax free.

If money is set aside and the child does not attend college, there is a 10% penalty on the earnings portion of the account. The earnings are then included in taxable income. This is a small price to pay for tax-free accumulation and control. The money can be taken out tax-free if the child receives a scholarship or becomes disabled. It can also be reassigned to a relative of the child.

529 College Savings Plans are education savings plans designed and operated by states to help families set-aside money for college. Every state has a 529 plan and each state can decide how to structure its specific plan.

Due to the large number of options in the education planning areas, it is wise to perform significant personal research and/or seek the assistance of a financial planning professional. Each state has different tax consequences and plan options. Savingforcollege.com is a great resource to get additional information.

Eric Freckman, CFP®, of Guillaume & Freckman Inc.*, is listed on Savingforcollege.com as a 529 consultant in the Chicagoland area.

*Securities offered through Linsco/Private Ledger Member NASD/SIPC

529 Plans involve market risk and are not guaranteed by states against loss of principal or returns. Tax benefits are subject to certain limitations and non-qualified withdrawals may be subject to federal, state and local taxes as well as a 10% penalty. By investing in a plan outside your state of residence, you may lose any tax benefits. 529 plans are subject to enrollment; maintenance and other fess and expenses. The federal tax treatment of 529 Plan will expire after December 21, 2010 unless congress extends the law.

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