Saving For College
- Section 529 Plan Basics
By Bernard T. Garrah, Jr., ChFC, CLU

There are numerous vehicles available to save for college education and choosing one can be very difficult. The best one is a matter of opinion, but one of the most popular is the Section 529 plan.

The Section 529 advantages include tax deferral, high contribution limits, no income restrictions, asset control, potential state income tax deduction (each state determines if this is available), tax free withdrawals when used for higher education expenses, and have special gifting rules (check your specific state tax rules regarding the tax benefits of the 529 Plan).

When 529 plans are used for higher education expenses, those withdrawals are exempt from both federal and state taxes. A qualified expense includes tuition, room and board, books and supplies.

The tax-free nature of the withdrawals is due to the Tax Relief Act of 2001, but be aware that it currently has a sunset provision, which is set to expire December 31, 2010.

Not all types of investments are available for 529 savings plans. One popular design is predetermined investment programs based on the beneficiaries age. These programs change their allocation as the beneficiary becomes older.

For example, a beneficiary born in 1990 could have as much as 90% of their portfolio in bonds or cash, while a beneficiary born in 2004 could have as much as 90% in equities.

If your child does not go to college and you have saved into a 529 plan, don't worry you still have options. Since you have asset control, you can change the beneficiary at any time to a family member of the current beneficiary. A family member includes a parent, grandparent, children, siblings, grandchildren, nieces, nephews, first cousins, steps of any of the above, in-laws of any of the above, and legally adopted.

You can even change the beneficiary to yourself if you so desire. If none of these are an option, you can withdraw the money and the earnings portion of the withdrawal will be taxed as ordinary income, plus a 10% federal penalty and any additional state penalties on those same earnings.

Since the task of determining how much to save, where to save and how to invest can be tricky, I recommend you consult an investment professional. They can help you weed through all your options and help determine if a 529 plan is right for you!

Bernard T. Garrah, Jr., ChFC, CLU, is a Financial Services Professional for Skylight Financial Group in Cleveland. He is a member of the Estate Planning Council and serves on the board of the Cleveland Society of Financial Service Professionals. He is also a member of the Cleveland Association of Insurance and Financial Advisors. Bernie can be reached at 216.592.7360 or bgarrah@finsvcs.com.