Maximizing your 529 savings opportunities in 2013

http://www.savingforcollege.com/articles/8-ways-to-start-2013-with-a-college-savings-bang

If you are the parent or grandparent of a child under the age of 18, be sure your list of resolutions for this year includes efforts to increase your college savings fund. Don't wait until the end of the year—now is a great time to take stock of your situation and make the appropriate moves. Here are eight suggestions for you.

1. Lock in a state tax deduction for 529 contributions

Most states have established a December 31 deadline for making contributions and claiming a state income tax deduction or credit. For residents of those states, there is no particular urgency to making contributions now, at least as far as the state tax break is concerned. But if you live in Georgia, Mississippi, Oklahoma, Oregon, or South Carolina, you have until April 15 to make contributions that might still be deducted on your 2012 state income tax return.

Remember, you don't have to stick with your own state's 529 plan. You may decide you are better off with another state's 529 plan even if it means giving up a state income tax deduction. Use our 529 plan comparison tool, our quarterly performance rankings, and our 529 fee study to help you in your research and decision process. And always read the 529 plan's official program disclosure statement before investing.

2. Consider switching investment options in your 529 plan

The start of a new calendar year provides the opportunity for you to make your once-per-year investment change in an existing 529 account, even if you made a switch just a month ago. And here's a clever maneuver to avoid the once-per-year limitation altogether: Change the beneficiary on the account to another child in the family whenever you switch investment options. Then simply change back to your original beneficiary afterwards. Ridiculous, I know, but that's how the rule works.

The most common reason for switching investments is to align your 529 account with your individual financial situation and tolerance for risk. As your child gets closer to college age, you may want to protect your fund from untimely market downturns. The "age-based" option offered by most 529 plans will automatically do this for you. However, you should still review the plan's allocation among stocks, bonds, and principal-protected investments and make sure you are comfortable with that allocation.

3. Consider rolling over to a different 529 plan

We talked about the limitation on investment changes above, but what about changing to a different 529 plan? This can be accomplished via a "rollover" from your current plan to the new plan. A once-per-year limitation applies here as well, but instead of basing it on the calendar year, the IRS requires that for any particular beneficiary you wait a full 12 months between rollovers. (Just like the investment change ploy, you can change beneficiary as part of the rollover to avoid the limitation altogether.)

Be sure to take a look at your state tax rules regarding rollovers. You may be eligible to deduct rollover contributions into your home state plan. You may also be required to pay "recapture" tax on rollovers out of your home state plan.

4. Set up regular contributions to your 529 plan

Establish an automatic contribution plan through electronic funds transfers from your bank account or through payroll deduction. The low contribution minimums in 529 plans make it easy for your family to budget your college savings on an ongoing basis, which over time can build to a substantial balance.

5. Keep track of your 529 contributions

Under the federal gift-tax law, your contributions to a 529 plan must be counted as gifts from you to your beneficiary. You will need to combine these gifts with other types of gifts made during the year when determining if your total gifts for any one beneficiary exceed the $14,000 gift-tax annual exclusion. Large contributions to a 529 plan for your beneficiary (exceeding $14,000 during the year) can be treated as occurring ratably over five years but you must make a "five-year election" on Form 709, the gift-tax return. A married couple can shelter a one-time contribution of as much as $140,000 from gift tax with the five-year election.

6. Track your progress towards your goals

Very few families have the means to save up for the full cost of a four-year college degree, especially when retirement and future health needs must be funded. Establish a modest savings goal with the help of our college savings calculator and then work towards that goal by making regular contributions and checking the growth of your college accounts on a quarterly or annual basis.

Remember, most students receive some type of financial assistance in the form of scholarships from outside sources or tuition waivers from the colleges they attend. Any remaining gap between the college bills and available savings can usually be filled with student earnings, family budget adjustments, federal tax credits, and education loans. Get a quick assessment of your child's future eligibility for federal subsidized loans by using our financial aid calculator.

7. Reach out to friends and family for help

Which would you prefer your child receive as gifts for birthdays or holidays: store-bought items or contributions to his or her college savings fund? Let your friends and family know that you have established a 529 account for your child and invite them to add to the fund. Many 529 plans have developed special procedures for accepting third-party contributions, and independent services like GradSave make it easy for you to spread the word and collect gift contributions.

8. Inform your child about their college savings account.

You may be surprised at how much pride and appreciation they demonstrate, knowing that college is in their future. It will mean even more to them if they participate by contributing part of their own chore money or outside earnings to the account. Check out this video from the College Savings Foundation.