Saving for College – the 529 College Savings Plan

We all want to see our children succeed, even see them surpass our own successes, in their chosen path. Whether it be a career, a calling, or a passion, we want to give our kids the best possible chance for success.

One of the useful tools for helping that process, and one that gives some benefits to the contributors, is a 529 college savings plan. Created under Title 26 §529 of the United States Code, a 529 college savings plan is a tax exempt/deferred account which allows contributors to gift funds to a beneficiary for use on ‘qualified’ higher education expenses essentially tax-free.

Why are we talking about them now? Because now, for 2013, the amount an individual may give to the plan has risen to $14,000 per year, and $28,000 for a married couple. In addition, an individual may give a lump contribution of up to $70,000 (up to $140,000 for a married couple) to a single beneficiary so long as no contributions are made for the next 5 years.

The best part about 529s is that they grow tax-free, and withdrawals are tax-free so long as they are used for qualified expenses. Also, many plans don’t require withdrawals to go to a specific school or state; many programs are open enrollment, available to anyone in the U.S., and are eligible to be used for any accredited 2- or 4-year school. So, in theory, a California resident could fund a 529 Savings Plan based in Virginia for a student who lives in Michigan to attend a school in Texas. You can even open up a 529 plan for yourself, and legislation is working its way through the U.S. Congress to allow employers to contribute to 529 plans for employees.

Now, each plan is different, and each has its own requirements and limitations. But significant tax savings could theoretically be realized if you live in a state with no tax benefits to take advantage of, such as one with no income tax to offset, by shopping around and establishing a plan with the best benefits regardless of the state where it is based.

Texas has 3 current plans, each  significantly different from the others. One guarantees tuition rates at Texas public schools, one allows for matriculation to any accredited school, and some allow contributions totaling $370,000, not including the accrued earnings. Considering tuition continues to shoot up, essentially doubling inflation each year, your kids will need all the help they can get.

Setting up a 529 College Savings Plan is often a significant addition to a comprehensive estate plan that can pay off big dividends for your children and their future.