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529 Plans: College Savings with Flexibility & Tax Protection

Some of our clients and friends weren’t able to attend our dinner meeting on June 17, when BlackRock VP Vivian Tsai gave an illuminating presentation about 529 plans. In this week’s blog post, we’d like to share some of the information she provided.

Let’s start by taking a look at college costs, which are high now and expected to continue rising. According to Sallie Mae’s How America Saves for College 2013, the cost of attending a four-year college in 10 years is estimated to be $139,028 at a public institution, or $248,878 at a private institution. Clearly, you need to begin saving for your children’s education as early as possible. If you started putting just $200 a month into a tax-free investment vehicle when your baby was born, by the time the child turned 21 you’d have about $120,000 (assuming a 7% annual return, gross of fees).

Changes in tax laws have made 529 plans a very popular way to save for future education expenses. You open an account for a beneficiary, and all of the money you put in grows without being taxed. And your beneficiary isn’t taxed on the withdrawals as long as they’re spent on qualified higher education expenses (tuition, room and board, mandatory fees, and books and supplies).

Every state offers a 529 plan, and many of them don’t levy state income tax on the amount of earnings you contribute (unfortunately, California does). Especially when you don’t receive a tax advantage by investing in your own state’s 529 plan, it’s worth looking into plans offered by other states, which may offer more attractive terms or investment options.

You may be surprised by how flexible 529 plans can be:

  • The beneficiary can attend any educational institution that’s eligible for federal student aid. As well as four-year colleges, this includes many two-year community colleges and technical/vocational schools, graduate schools, and schools abroad.*
  • You can contribute no matter how high your income is (unlike, e.g., Coverdell accounts).
  • There is no limit on the number of accounts a beneficiary can have.
  • Other people can contribute to the account, not just the account owner—Grandma and Grandpa could chip in, or friends could contribute instead of giving birthday presents.
  • You can change the beneficiary to someone else in the same family with no tax consequences. If your beneficiary receives a scholarship, plan assets can be returned with some tax consequences but no 10% penalty.
  • There’s no age limit for beneficiaries, so you can have an account for an adult’s continuing education or graduate program.
  • Almost all states allow the accounts to grow in perpetuity (except Virginia).
  • Anyone who is a US citizen or permanent resident can open an account or be a beneficiary, and a trust can be an account owner.

In 2013, you can give $14,000 to one person per year without any estate tax implications or filing requirements. This means that each parent can contribute that amount to a child’s 529 plan; a couple can therefore contribute $28,000 per year. Parents could contribute an equal amount to 529 plans for other children. There’s even a way to make accelerated contributions that are pro-rated over a five-year period ($140,000 per couple per beneficiary).

Compared to asset transfers made through the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), 529 plans have some distinct advantages:

  • The assets in a 529 plan remain the property of the account owner rather than becoming the minor’s property. UGMAs and UTMAs are irrevocable.
  • Assets in a 529 plan are factored into the Expected Family Contribution (EFC) calculations at a rate of 5.6%, like other parental assets. Assets in an UGMA or UTMA are the student’s property and calculated at a 20% rate.

The more that parents can help their children with college expenses, the fewer loans the students will have to take out. Saving for your children’s education is important but it can seem complicated and difficult to understand. While we are not attorneys or tax accountants, we can help you navigate the decisions you need to make, and we can connect you with people in our network of trusted professionals who can provide legal or tax advice.

Please feel free to contact us with any questions: call (925) 365-1533 or send an e-mail to

*To find out which schools qualify for federal aid or to look into federal student aid programs, check the Federal Student Aid website. You may also want to look at the information on the College Savings Plan Network and Saving for College websites.

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