Families get major tax breaks with promising
Qualified Tuition Program
If you are concerned about the rising cost of higher education, you are not alone. While
today’s price tags are not cheap ($110,000 for private colleges and $50,000 for
public colleges), tuition is rising more than twice as fast as the rate of inflation, and
parents of kids born today can face expenses of over $250,000 by the time their newborns
are of age. No wonder parents consider education savings to be the second most important
financial goal, besides retirement savings. Despite the rising cost, the facts still stand
that college graduates earn a lot more money than non-college grads (average $1 million
more over the course of a lifetime).
Thanks to newly enacted tax legislation called Section 529, saving for college has become
a lot more manageable. This IRS tax code, first passed in 1996, states that investments in
Qualified Tuition Programs (otherwise known as 529 plans) grow 100% federally tax-free, as
long as the funds are utilized for Qualified Higher Education Expenses. Federal tax
treatment is just one of the many benefits of 529 plans. “From state tax benefits to
employer matching contributions, there are a whole range of value-added benefits that 529
plans offer. There are implications depending on what state you are from, so before
signing up, individuals should carefully examine the pros and cons of various 529
plans,” states Arman Rousta, President of 401kid
Advisors, a New York investment advisor that assists families in developing Education
Savings Plans.
529 plans represent to higher education what 401(k) is to retirement. Most state 529 plans
are managed by professional investment companies, such as TIAA-CREF, Fidelity, Alliance,
and Prudential, offer minimum investments of as little as $25 to open an account, and have
generous contribution limits, over $250,000 in some plans. Although they have been around
for over five years, only 25% of parents even know about 529 plans, and many state plans
are still under development. That should change with the recent favorable legislation and
the subsequent land grab that is presently taking place amongst major fund managers,
brokers and investment companies. 401kid’s website (www.401kid.com)
has a breakdown of all 529 plans and provides objective ratings based on relevant
criteria, such as contribution ranges, plan expenses, and tax benefits.
Unlike 401(k), 529 plans can be opened directly by parents and families, without the
involvement of their employers, much like IRAs. However, employer-sponsored plans can have
some additional perks, such as payroll deduction, contribution matching, and access
through corporate portals. “If an employer offers 529 plans, employees need to
evaluate whether the plans being offered are in their best interest, from a tax
perspective,” warns Mr. Rousta, “because the plan that your employer offers may
not carry favorable state tax deductions, amongst other benefits, unique to your state of
residence. To date, there has been a lot of confusion amongst 529 account holders, due
mostly to the misinformation that is being provided by banks, fund managers, employers,
and the media. For those who have already opened accounts and subsequently learn about
advantages in their own state’s plan, balances can be transferred to new 529 plans
once per year, but usually with some type of penalty applied from the original fund
manager.
For those of you who need help saving for k-12 expenses before you worry about college,
529s are not appropriate, but there is another solution. Coverdell Education Savings
Accounts, formerly known as Education IRAs, have recently been upgraded and made tax
deductible for K-12 as well as higher education expenses. With private schools now costing
over $10,000 per year, the $2,000 annual Coverdell limit per beneficiary can provide
welcome relief. Unlike 529 plans, Coverdell accounts can be opened through almost all
banks, and the only major restriction is for families that earn more than $220,000, who
cannot contribute to Coverdells.
Between Coverdell accounts and 529 plans, families now have a more robust arsenal when
trying to tackle ever-growing educational expenses. The key is to devise an attainable
strategy and start while kids are still young. Saving through these new vehicles does
impact a family’s Expected Family Contribution when applying for Financial Aid, but
not to a great degree. And you thought retirement planning was confusing? In sum, even
with the promising new tax breaks, college savings and overall education financing is
still a complex maze, which requires significant planning, resources, and attention.
Dali Singh brings over seven years of marketing experience to the 401kid team. She is
responsible for the development and execution of 401kid's marketing initiatives, including
advertising, event networking and exhibition, online marketing and public relations
programs.
Before joining 401kid, Dali was the Marketing Director for Blue Liner Marketing, a
corporate event planning company, where she was responsible for all aspects of sales and
marketing. At Blue Liner, Dali executed networking strategies, customer acquisition
campaigns, and public relations clients. She has additional experience in strategic
product direction, channel marketing, and marketing communications.
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