In my professional opinion, for most people, It's the 529
College Savings Plans. They are now worth a very serious
look!
Section 529 of the Internal Revenue Code (the actual name)
was put into place to encourage families to save and plan
ahead for escalating higher educations costs. There are
currently nearly 9 million 529 Plan accounts now with
roughly $90 Billion dollars invested.
Here are a few reasons that most people don't know that
makes 529 Plans more attractive than ever.
The Tax Increase and Protection Act of 2005 (which became
law in 2006) extended the "kiddie tax" rules from age 10
to 17, which made traditional savings accounts, also known
as custodial accounts, much less appealing. That and other
new laws made 529 college savings plans MUCH more appealing.
With these plans, you could open an account and deposit
money (NOT deductible on your federal tax return) and the
money would grow tax-free. These deposits could be invested
in money market, bond and stock mutual funds.
The Pension Protection Act of 2006 guarantees the tax-free
withdrawals from the plans for higher education expenses
will not fade away as they would prior to the PPA of 2006.
That is a pretty good deal isn't it? But there are also
estate planning and gift planning benefits that aren't
available on any other college funding plan.
The tax code allows parents or grandparents to deposit up
to $60,000 in a 529 plan for each child (married couple
can deposit twice that amount), free of gift tax, due to
the laws allowing up to 5 years of gifting (up to $12,000
per person per year) to be done in one fell swoop with
these college saving plans. It is a great way of getting
assets out of the wealthy estate for the benefit of heirs.
And it gets even better! And you know what else is great
about 529 Plans today? The Bankruptcy Abuse Prevention Act
of 2005 shelters assets from most creditors after they have
been deposited in 529 Plans for at least two years!
Now of course, I'm not advocating bankruptcy, but if this
might be possible (and who can foretell the future?),
where would you rather have your child's education fund -
in a protected 529 Plan or a savings account that would
likely be completely lost to creditors?
Want more reasons? The Deficit Reduction Act of 2005
(enacted in 2006) improved the financial aid treatment of
those people who had the foresight to plan ahead with 529
Plans. Essentially, the assets in the plan are now
counted for financial aid purposes as those of the parents
and NOT of the child which is beneficial to the family.
Why is this important? Because Colleges expect students
to contribute (pay) 35% of the assets owned by that child
each year while parents are expected to pay just 5% of
assets owned by them each year towards higher education
costs as the "family" contribution.
Please note that the 35% student contribution referred to
above is expected to drop to 20% in the 2007-2008 academic
year.
In summary, the 529 College Savings Plans should be
central to nearly everyone's plans to pay for escalating
higher education costs. The earlier you get started,
the less money you'll have to find elsewhere to pay for
a great college education for your children or
grandchildren.
Since 1997, Mark J. Orr, a Certified Financial Planner,
has helped hundreds plan for more financial success
through powerful strategies and advice.
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