529 Plans are the Gold Standard for Trying to Satisfy High College Costs

May 10, 2014

Nothing seems to be stemming the rise in college costs, which is occurring alongside a growing body of research about the importance of a college education. Studies confirm that a bachelor’s degree helps improve employability, earning power, job satisfaction, and more. Median annual earnings of a millennial with a bachelor's degree working full time was about $45,500 versus $30,000 for those with a two-year degree or only some college.

 

For a child born in 2013, the cost to attend four years of public university—based on extrapolations using recent annualized college-cost inflation—will be around $229,000; four years of private university are expected to cost more than $510,000. (College Board, 2013)

 

Though there are a multitude of strategies to address increasing costs, the benefit profile of 529 plans makes them an attractive option, particularly for tax-sensitive, higher-net-worth investors with ambitious savings goals, estate planning objectives, and a desire to allocate money specifically for higher education.

 

Here are some of the benefits and features of 529 plans that have drawn so many investors remain highly appealing:

 

High contribution limits. Many plans allow contributions until the account value reaches as much as $400,000.

 

Beneficiary flexibility. You can change beneficiaries as often as you wish, and there are no tax consequences when the new beneficiary is a member of the previous beneficiary’s family.

 

Financial aid treatment. Though there is no single answer to the question of how 529 plan assets affect financial aid calculations.  Assets that are considered the property of the account owner (most often the parents) rather than the beneficiary may be treated more favorably than assets in some other savings strategies.

 

Lack of income restrictions. Anyone can open a 529 account regardless of how much money they make.

 

Tax-free growth. Earnings and distributions are tax-free provided they go toward qualified higher-education expenses of the beneficiary.

 

State tax deductions. Many states allow a tax deduction or credit for investments made to a 529 plan. And while often the benefit is available only to investors who use their home state’s plan(s), an increasing number of states allow a benefit for contributions to any state’s 529 plan.

 

The one benefit that sets 529 plans apart

 

In addition to intrinsic benefits such as flexibility, tax-free growth, and high contribution limits, the estate-planning potential of 529 plans is unique. That’s because, for estate planning purposes, 529 plan contributions are considered completed gifts yet they allow the contributor to retain control of how the assets

are invested as well as when, and in what amount, they’re withdrawn.

 

Consider that those looking to transfer sizable sums out of their estates can use an accelerated funding provision to give as much as $70,000 ($140,000 per couple) at one time by combining up to five years of gifts into a single contribution without incurring gift-tax consequences.  And the number of beneficiaries they can contribute to is unlimited.

 

Thus, grandparents seeking to transfer money out of their estate and make a huge contribution to their seven grandchildren’s higher education savings goals could contribute nearly $1 million

 

Furthermore, if the contributor is allocating assets specifically for higher education, 529 plans are the only option that allows one to “take back” the gifted assets if the beneficiary chooses not to attend college. (If 529 assets are taken back, however, earnings become taxable and there is a 10% tax penalty.)

This combination of benefits makes a strong case for using a 529 college savings plan as the centerpiece of a higher-education savings strategy.

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