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New Tax Advantaged Assistance for College Savings
Many Employers Offering New Section 529 Savings Plans
Many employers are offering their employees the opportunity to create
a Section 529 plan to save for higher education expenses for
themselves, their children or their grandchildren. The biggest
benefits of this new plan are its tax advantages and flexibility. In
addition, the accounts may be used for any eligible school in the
country, including private and public colleges, universities, graduate
schools, community colleges and vocational schools.
How Does A Section 529 Plan Work?
Any individual, regardless of the amount of taxable income he or she
has, can establish an account for an individual named beneficiary in
any state. The owner of the account makes an investment choice from
those offered by the state plan. The asset allocation mix can be
changed once every 12 months by the owner, however, the account is
managed by a professional money manager throughout the entire
year.
The key to the value of a Section 529 plan is its tax advantages.
Earnings on the invested funds grow tax deferred while in the account
and tax-free if withdrawn to pay qualified education expenses.
Qualified education expenses include tuition, fees, books, supplies,
equipment and room and board, as long as the beneficiary is enrolled
as at least a half-time student.
A Section 529 plan also provides flexibility in addition to tax
savings. If the original beneficiary decides not to use the funds or
doesn't need the entire account balance, the owner may change the
beneficiary to another family member. If the account owner wants to
withdraw funds from the account for reasons other than paying for
qualified education expenses, earnings are subject to income taxes
plus a 10% penalty similar to early withdrawals from an IRA
account.
Estate Planning Benefits
Estate planning needs can also be met while saving for college using
Section 529 plans. Unlike many other estate planning techniques,
significant assets can be moved out of the account owner's estate
while retaining control of the disbursement of the account funds.
Therefore, establishing a Section 529 account can remove assets from
the owner's estate, but allows the owner to retain control. Under a
Section 529 plan, the owner can contribute a maximum of $55,000 in one
year for each beneficiary selected ($110,000 if married) without gift
tax consequences. The $55,000 is prorated over 5 years ($11,000 per
year) and is counted towards the $11,000 annual exclusion for gift tax
purposes for the 5-year period. Therefore, additional gifts to the
beneficiary during the 5-year period would be subject to the gift
tax.
Also note that assets currently invested according to the Uniform Gift
to Minors Act (UGMA) may be rolled into a Section 529 account if the
new account maintains the same beneficiary and the beneficiary uses
the funds for qualified education expenses. However, since Section
529 plans can only receive cash, the UGMA account would have to be
liquidated and the minor would recognize any gain or loss.
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