529 Qualified Tuition Savings Plans
The College Board reports that the 2015 average college cost for a 4-year public schools is $59,000 and $121,000 for private. A child born in the 2004 will pay more than $152,000 at public universities and $314,000 at private schools by 2022. These numbers alone should have parents thinking early on about how to set some of this money aside. 529 plans may be a good option to look at.
There are numerous advantages to the 529 Qualified Tuition Savings Plan, including the fact that the federal tax advantages can save you thousands! They are currently offered by various states, through the help of a professional money manager or a State Treasurer’s Office. The plans can be extremely different, and so it pays to ask questions.
One key way that the 529 Qualified Tuition Savings Plan differs from 529 prepaid tuition is that you can contribute a lot more money (in 2005 – up to $294,000 regardless of your income) for your child’s future educational needs. These funds can be used for graduate as well as undergraduate schools, and can be used for many non-tuition/ non-mandatory expense needs.
Advantages:
- Plans can be set up for anyone of any age.
- Beneficial gift tax treatment. Unlike the restrictions of gift taxes, which only allow you to gift $11,000 per year, you may contribute up to 5 times this amount in one year per beneficiary without federal gift tax consequences
- No age restrictions.
- Easy to change beneficiaries
- You keep control of the money until you direct it to the student.
- No residency requirements–you can purchase a plan from any state.
- Possible State tax advantages if you live within a state that has a plan with in-state advantages.
- As of 2005, full exemption is provided for funds contributed to 529 plans and ESAs more than two years prior to bankruptcy filing. Check with your plan provider for more details.
Disadvantages:
- As with all investments, plan proceeds are not guaranteed, and you can lose principal.
- You may not lock in current tuition rates.
- Opening an account in no way guarantees admission college.
- Account owner will be subject to a 10% tax penalty for withdrawals made for any reason other than college expenses, with the exception of death or disability of the beneficiary.
- Should your child be offered a full scholarship, congratulations! Some scholarships allow you to name a new beneficiary or withdraw the money penalty-free (though it will be taxed at your normal income rate).
- Coverdell ESA
- State Prepaid Tuition Plan
- State College Savings Plan