By Trusts and Estates Attorney Kerri Castellini
The cost of college tuition for both public and private institutions is on the rise. According to www.savingforcollege.com, the cost of 2033 freshman tuition will likely range from $100,000 to $300,000 depending on the institution. With many parents still paying off their own student loans and saving towards retirement, additional savings for children’s education can be a daunting task.
Luckily, a 529 plan can offer a beneficial and flexible vehicle for saving for tuition. Named for the Internal Revenue Code, 26 U.S. Code § 529, which addresses qualified tuition programs, 529 plans offer a number of benefits beyond off-setting your children’s educational costs.
Most states have their own 529 plans. Although you may not necessarily choose your state of residence’s 529 program, there are a number of factors that you may wish to consider when making your decision. Often, there is a limited number of investment options available for an account holder to use, much like your company’s 401K plan.
For example, D.C. currently has 12 available funds for investment. It may be helpful to review each state’s options and generally how the funds are performing before deciding on which plan to use.
For many 529 plans, there is a maximum contribution amount. The maximum contribution amounts vary greatly from state to state. Currently, D.C.’s maximum contribution amount is $260,000, while Maryland’s is $350,000. Depending on your current assets or personal estate planning, it may be beneficial to seek a 529 plan with a higher maximum contribution cap.
Generally, a District of Columbia 529 plan investments can grow federal and D.C. income tax free for both the account holder and the beneficiary.[i] In addition, withdraws used for qualified higher education expenses (QHEEs) can also be made state and federal income tax free. [ii] Furthermore, contributors residing in D.C. making contributions to a D.C. 529 plan may be able to deduct up to $4,000 from the federal gross income each year on their D.C. income tax return.[iii]
In addition to income tax benefits, a 529 plan may also be an opportunity for a contributor to pass assets on to the next generation and remove the asset from their estate. Contributions to a 529 plan are considered completed gifts[iv]. Gifts under the annual exclusion amount, currently $14,000 per year do not incur any gift tax and are considered out of the contributor’s estate for estate tax purposes regardless of the appreciation of the funds in the plan.
Don’t have children yet? Not a problem, most 529 plans can be established for another beneficiary like a niece or a nephew, or even yourself, and the account owner can change the beneficiary. Although a beneficiary change should be carefully considered to be sure that no income tax, generation-skipping transfer tax, or gift tax issues are triggered, the plan may be a benefit for couples prior to having their first child to provide an income tax benefit and begin to save while they have more disposable income.
Saving for college can be intimidating, but it can be manageable by maximizing your use of available planning opportunities. You may wish to check in with your estate planner or financial advisor to see if there any Section 529 college saving plan opportunities that are a fit for you.
[i] http://www.dccollegesavings.com
[ii] http://www.dccollegesavings.com
[iii] http://www.dccollegesavings.com
[iv] 26 U.S.C. §529(C)(2)