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COLLEGE SAVINGS 101

Eight reasons why grandparents love 529 plans
http://www.savingforcollege.com/articles/eight-reasons-why-grandparents-love-529-plans-671

Posted: 2015-07-16

by Kathryn Flynn

In 1970, Marian Lucille Herndon McQuade, a West Virginia housewife and mother of 15 children, thought that a special day should be reserved for families to celebrate and spend time with their elderly relatives. In 1978, President Jimmy Carter declared Grandparents Day a national holiday observed on the Sunday after Labor Day. At Savingforcollege.com, we think that September is the perfect month to celebrate grandparents, since it is also recognized as College Savings Month.

With college costs continuing to rise, more and more grandparents are stepping in to ensure that their grandchildren get a chance at higher education. If you’re a grandparent there are a variety of different ways you can help pay for college, but here are eight reasons why we think saving with a 529 plan could be your best bet:

Start Slideshow

RELATED: 10 easy ways grandparents can help pay for college

1. You Retain Control of the Assets Throughout the Life of the Account

  • The 529 account owner, not the beneficiary, has control of the funds until it’s time for college.
  • For many grandparents, this is an advantage of using a 529 plan versus a UGMA/UTMA custodial account to save for a grandchild’s college education.
  • You can assure the money will be used for its intended purpose. Savings in a 529 account must be spent on qualified education expenses such as tuition, books and some room and board to avoid incurring income taxes and a 10% penalty on the earnings portion of the withdrawal. (Your contributions will never be taxed or penalized).

RELATED: Before you open a grandparent-owed 529 account

2. 529 Plans Are Flexible

  • 529 funds can be withdrawn tax free when used to pay for post-secondary education at any eligible institution. This includes almost any public or private four-year university, and also online programs, foreign schools and trade and vocational programs.
  • Students who are awarded scholarships or decide to attend a U.S. Military Academy will receive an exception to the 10% penalty rule if they need to make non-qualified withdrawals.
  • If your grandchild doesn’t end up using the funds in the 529 account, you can easily change the beneficiary to another grandchild or anyone who is planning to attend college without tax consequences.

RELATED: What if I don't know which college my grandchild will attend?

3. 529 Plans are Easy to Manage

  • Since money in a 529 plan grows tax deferred, your contributions will not have to be reported on your grandchild’s income tax return.
  • Most 529 plans offer automatic investment plans or payroll direct deposits, making regular monthly contributions simple and painless.
  • Many plans also offer age-based investment options, where the plan automatically shifts investments based on the age of the beneficiary so you won’t have to worry about making changes as your grandchild gets closer to college.

RELATED: What investment option should I choose for my grandchild?

4. 529 Plans Offer Greater Growth Potential Than a Taxable Account

  • Investments like mutual funds will lose a large portion of their earnings to annual income taxes, but earnings in a 529 plan grow federal tax-free.
  • For example, if you made an initial investment of $5,000 toward your new grandchild’s college education in a mutual funds and made annual contributions of $1,000 for the next 18 years, you would end up with $36,177 after taxes.
  • With a tax efficient 529 plan, however, you would have $44,177 when it’s time for your grandchild to start college (assuming a 6% annual return for both examples and a 28% federal tax rate for the mutual fund account).

RELATED: Find out how much you should be saving for your grandchild

5. You’ll Likely Avoid Gift Taxes and the Kiddie Tax

  • 529 plan contributions fall under the annual gift tax exclusion, so you can put away up to $14,000 per grandchild in 2015 ($28,000 for married couples filing jointly).
  • In 2015, the "kiddie tax" rule states that if a child has an investment account they do not pay income tax on the first $1,050 earned, and they pay income tax on the next $1,050 at their own (usually low) tax rate. However, any investment income earned over $2,100 will be taxed at their parent’s income tax rate.
  • Earnings in a 529 plan will avoid federal income tax when withdrawals are spent toward qualified education expenses.

RELATED: Do I have to worry about gift taxes?

6. 529 Plans Can Be Used As an Estate Planning Tool

  • Grandparents can reduce their estate tax exposure through making 529 plan contributions, which are considered “gifts” for tax purposes.
  • While annual gift tax exclusions are currently $14,000 per individual, you can actually deposit up to $70,000 if you elect to treat the contribution as made over a five-year period for gift-tax purposes.
  • Although the assets will leave your estate, you retain control. However, if you later decide to revoke the account the value will come back to your estate and will be subject to taxes.

RELATED: Can I use a 529 plan to reduce estate taxes?

7. 529 Accounts Are a Great Place to Put Your RMDs

  • If you’re approaching age 70 ½ (or you’re already there), the IRS requires you to take required minimum distributions, or withdrawals from your IRA, 401(k) or other employer-sponsored retirement plan.
  • There can be severe financial consequences for missing an RMD – you could face an IRS penalty tax of 50% of the amount you were supposed to withdraw.
  • If you have enough saved for retirement, leftover RMD funds can be reinvested into a non-IRA account such as a 529 college savings account.

RELATED: See the top ten performing 529 plans

8. You Could Also Get a State Tax Break

  • In addition to lucrative federal state tax benefits, some states also offer tax breaks for residents who invest in their home state’s plan.
  • Although you are free to invest in almost any 529 plan no matter where you live, your home state may offer state tax deductions or credits for contributions.
  • Many states also offer special promotions for residents who open accounts during events such as “529 Day” (May 29th) and during the month of September, which is nationally recognized as College Savings Month.

RELATED: How much is your state's 529 plan tax benefit really worth?

Originally posted: 2014-09-09

In 1970, Marian Lucille Herndon McQuade, a West Virginia housewife and mother of 15 children, thought that a special day should be reserved for families to celebrate and spend time with their elderly relatives. In 1978, President Jimmy Carter declared Grandparents Day a national holiday observed on the Sunday after Labor Day. At Savingforcollege.com, we think that September is the perfect month to celebrate grandparents, since it is also recognized as College Savings Month.

With college costs continuing to rise, more and more grandparents are stepping in to ensure that their grandchildren get a chance at higher education. If you’re a grandparent there are a variety of different ways you can help pay for college, but here are eight reasons why we think saving with a 529 plan could be your best bet:

Start Slideshow

RELATED: 10 easy ways grandparents can help pay for college

1. You Retain Control of the Assets Throughout the Life of the Account

  • The 529 account owner, not the beneficiary, has control of the funds until it’s time for college.
  • For many grandparents, this is an advantage of using a 529 plan versus a UGMA/UTMA custodial account to save for a grandchild’s college education.
  • You can assure the money will be used for its intended purpose. Savings in a 529 account must be spent on qualified education expenses such as tuition, books and some room and board to avoid incurring income taxes and a 10% penalty on the earnings portion of the withdrawal. (Your contributions will never be taxed or penalized).

RELATED: Before you open a grandparent-owed 529 account

2. 529 Plans Are Flexible

  • 529 funds can be withdrawn tax free when used to pay for post-secondary education at any eligible institution. This includes almost any public or private four-year university, and also online programs, foreign schools and trade and vocational programs.
  • Students who are awarded scholarships or decide to attend a U.S. Military Academy will receive an exception to the 10% penalty rule if they need to make non-qualified withdrawals.
  • If your grandchild doesn’t end up using the funds in the 529 account, you can easily change the beneficiary to another grandchild or anyone who is planning to attend college without tax consequences.

RELATED: What if I don't know which college my grandchild will attend?

3. 529 Plans are Easy to Manage

  • Since money in a 529 plan grows tax deferred, your contributions will not have to be reported on your grandchild’s income tax return.
  • Most 529 plans offer automatic investment plans or payroll direct deposits, making regular monthly contributions simple and painless.
  • Many plans also offer age-based investment options, where the plan automatically shifts investments based on the age of the beneficiary so you won’t have to worry about making changes as your grandchild gets closer to college.

RELATED: What investment option should I choose for my grandchild?

4. 529 Plans Offer Greater Growth Potential Than a Taxable Account

  • Investments like mutual funds will lose a large portion of their earnings to annual income taxes, but earnings in a 529 plan grow federal tax-free.
  • For example, if you made an initial investment of $5,000 toward your new grandchild’s college education in a mutual funds and made annual contributions of $1,000 for the next 18 years, you would end up with $36,177 after taxes.
  • With a tax efficient 529 plan, however, you would have $44,177 when it’s time for your grandchild to start college (assuming a 6% annual return for both examples and a 28% federal tax rate for the mutual fund account).

RELATED: Find out how much you should be saving for your grandchild

5. You’ll Likely Avoid Gift Taxes and the Kiddie Tax

  • 529 plan contributions fall under the annual gift tax exclusion, so you can put away up to $14,000 per grandchild in 2015 ($28,000 for married couples filing jointly).
  • In 2015, the "kiddie tax" rule states that if a child has an investment account they do not pay income tax on the first $1,050 earned, and they pay income tax on the next $1,050 at their own (usually low) tax rate. However, any investment income earned over $2,100 will be taxed at their parent’s income tax rate.
  • Earnings in a 529 plan will avoid federal income tax when withdrawals are spent toward qualified education expenses.

RELATED: Do I have to worry about gift taxes?

6. 529 Plans Can Be Used As an Estate Planning Tool

  • Grandparents can reduce their estate tax exposure through making 529 plan contributions, which are considered “gifts” for tax purposes.
  • While annual gift tax exclusions are currently $14,000 per individual, you can actually deposit up to $70,000 if you elect to treat the contribution as made over a five-year period for gift-tax purposes.
  • Although the assets will leave your estate, you retain control. However, if you later decide to revoke the account the value will come back to your estate and will be subject to taxes.

RELATED: Can I use a 529 plan to reduce estate taxes?

7. 529 Accounts Are a Great Place to Put Your RMDs

  • If you’re approaching age 70 ½ (or you’re already there), the IRS requires you to take required minimum distributions, or withdrawals from your IRA, 401(k) or other employer-sponsored retirement plan.
  • There can be severe financial consequences for missing an RMD – you could face an IRS penalty tax of 50% of the amount you were supposed to withdraw.
  • If you have enough saved for retirement, leftover RMD funds can be reinvested into a non-IRA account such as a 529 college savings account.

RELATED: See the top ten performing 529 plans

8. You Could Also Get a State Tax Break

  • In addition to lucrative federal state tax benefits, some states also offer tax breaks for residents who invest in their home state’s plan.
  • Although you are free to invest in almost any 529 plan no matter where you live, your home state may offer state tax deductions or credits for contributions.
  • Many states also offer special promotions for residents who open accounts during events such as “529 Day” (May 29th) and during the month of September, which is nationally recognized as College Savings Month.

RELATED: How much is your state's 529 plan tax benefit really worth?

Originally posted: 2014-09-09

 

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