COLLEGE SAVINGS 101

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Ask an Expert: Should I still use a 529 plan to save if I am unsure of my child's higher education plans?
http://www.savingforcollege.com/articles/ask-an-expert-should-i-still-use-a-529-plan-to-save-781

Posted: 2015-05-18

by Marguerita Cheng

CEO of Blue Ocean Global Wealth

Parents often delay opening a 529 account because of uncertainty regarding their child’s plans for higher education. For example, what happens to the funds if their child decides not to attend college, attend a U.S. military academy or earns scholarships and grants? Parents can still benefit from establishing a 529 plan even if they no longer need the funds or find themselves with excess funds. There are viable solutions to this problem.

For example, parents can change the beneficiary of an existing 529 plan without incurring any tax consequences. A practical solution for remaining funds in a 529 plan is to change the beneficiary to a younger sibling or other relative who plans to attend college. Another option is to allow the current beneficiary to access the funds for graduate school. In the event you have no option other than to redeem the remaining balance as a non-qualified withdrawal, you will incur a tax penalty of 10% on the earnings portion, but not on the principal portion. The principal portion refers to the after-tax dollars that you invested in the 529 plan initially or on an ongoing basis. There are exceptions to the 10% penalty tax rule in the event the child were to pass away, become disabled or attend a U.S. Military Academy. If the student earns a scholarship, earnings on withdrawals up to the amount of the award will also avoid penalty.

The earnings portion of a non-qualified distribution that the account owner, usually the parent, will need to report will be subject to tax as ordinary income at the parent’s tax rate. Some 529 plans may allow the account owner to direct the withdrawal to the child, who presumably has a lower tax bracket. Other tax considerations include having to report additional state “recapture” income if you received any state tax deductions or state tax credits for your initial contributions. Despite the restrictions on withdrawals from 529 college savings plans, these state sponsored tax-advantaged programs help families save for costs associated with higher education. Saving for college is just one component of your family’s overall financial plan.


Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth. Prior to co- founding Blue Ocean Global Wealth, she was a Financial Advisor at Ameriprise Financial and an Analyst and Editor at Towa Securities in Tokyo, Japan. Marguerita has been quoted and featured in numerous national publications. Marguerita is a spokesperson for the AARP Financial Freedom Campaign, a columnist for Be Inkandescent Magazine, and a personal finance contributor to Market Intelligence Center and Washington Business Journal. She is a CFP® professional, a Chartered Retirement Planning CounselorSM, and a Certified Divorce Financial Analyst. As a Certified Financial Planner Board of Standards (CFP Board) Ambassador, Marguerita helps educate the public, policy makers, and media about the benefits of competent, ethical financial planning. She serves as a subject matter expert for CFP Board, contributing to the development of examination questions for the CFP® Certification Examination. Marguerita also volunteers for CFP Board Disciplinary and Ethics Commission (DEC) hearings. She proudly serves on the FPA National Board of Directors and is a member of its finance committee. Marguerita is the 2013 Chair of the Financial Planning Association of the National Capital Area (FPA NCA). As a candid and passionate supporter of financial literacy and capability, she collaborates with the Virginia Council on Economic Education (VCEE), and teaches financial planning and investment management at the Personal Finance Institute at George Mason University, where she helps educators enhance their understanding of economics and personal finance. She studied at Keio University in Tokyo, Japan, and earned her B.S. in Finance and her B.A. in East Asian Language and Japanese Literature from the University of Maryland, College Park. Marguerita is a recipient of the Ameriprise Financial Presidential Award for Quality of Advice and the prestigious Japanese Monbukagakusho Scholarship.



CEO of Blue Ocean Global Wealth

Parents often delay opening a 529 account because of uncertainty regarding their child’s plans for higher education. For example, what happens to the funds if their child decides not to attend college, attend a U.S. military academy or earns scholarships and grants? Parents can still benefit from establishing a 529 plan even if they no longer need the funds or find themselves with excess funds. There are viable solutions to this problem.

For example, parents can change the beneficiary of an existing 529 plan without incurring any tax consequences. A practical solution for remaining funds in a 529 plan is to change the beneficiary to a younger sibling or other relative who plans to attend college. Another option is to allow the current beneficiary to access the funds for graduate school. In the event you have no option other than to redeem the remaining balance as a non-qualified withdrawal, you will incur a tax penalty of 10% on the earnings portion, but not on the principal portion. The principal portion refers to the after-tax dollars that you invested in the 529 plan initially or on an ongoing basis. There are exceptions to the 10% penalty tax rule in the event the child were to pass away, become disabled or attend a U.S. Military Academy. If the student earns a scholarship, earnings on withdrawals up to the amount of the award will also avoid penalty.

The earnings portion of a non-qualified distribution that the account owner, usually the parent, will need to report will be subject to tax as ordinary income at the parent’s tax rate. Some 529 plans may allow the account owner to direct the withdrawal to the child, who presumably has a lower tax bracket. Other tax considerations include having to report additional state “recapture” income if you received any state tax deductions or state tax credits for your initial contributions. Despite the restrictions on withdrawals from 529 college savings plans, these state sponsored tax-advantaged programs help families save for costs associated with higher education. Saving for college is just one component of your family’s overall financial plan.


Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth. Prior to co- founding Blue Ocean Global Wealth, she was a Financial Advisor at Ameriprise Financial and an Analyst and Editor at Towa Securities in Tokyo, Japan. Marguerita has been quoted and featured in numerous national publications. Marguerita is a spokesperson for the AARP Financial Freedom Campaign, a columnist for Be Inkandescent Magazine, and a personal finance contributor to Market Intelligence Center and Washington Business Journal. She is a CFP® professional, a Chartered Retirement Planning CounselorSM, and a Certified Divorce Financial Analyst. As a Certified Financial Planner Board of Standards (CFP Board) Ambassador, Marguerita helps educate the public, policy makers, and media about the benefits of competent, ethical financial planning. She serves as a subject matter expert for CFP Board, contributing to the development of examination questions for the CFP® Certification Examination. Marguerita also volunteers for CFP Board Disciplinary and Ethics Commission (DEC) hearings. She proudly serves on the FPA National Board of Directors and is a member of its finance committee. Marguerita is the 2013 Chair of the Financial Planning Association of the National Capital Area (FPA NCA). As a candid and passionate supporter of financial literacy and capability, she collaborates with the Virginia Council on Economic Education (VCEE), and teaches financial planning and investment management at the Personal Finance Institute at George Mason University, where she helps educators enhance their understanding of economics and personal finance. She studied at Keio University in Tokyo, Japan, and earned her B.S. in Finance and her B.A. in East Asian Language and Japanese Literature from the University of Maryland, College Park. Marguerita is a recipient of the Ameriprise Financial Presidential Award for Quality of Advice and the prestigious Japanese Monbukagakusho Scholarship.



 

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