A college education is one of the most important investments you can make for a child or grandchild’s future. In fact, studies suggest that higher education may translate into significantly higher earning power over time.  It’s no secret, though, that college is also expensive.

College costs have been increasing faster than the general rate of inflation for years. If tuition and other related education expenses continue to increase at historical rates, the cost of a college degree for today’s newborn could increase to over $400,000 at many private universities and $200,000 at public colleges in 18 years, according to the College Board’s online college cost calculator (www.collegeboard.org). Yet affording college is just one of many financial goals that families face.

How do you balance the high cost of college with other competing demands, such as saving for retirement, buying a home or paying down debt?

A popular and cost effective potential solution is a state-sponsored, and in most instances, tax-advantaged college savings plan. Commonly known as a 529 plan, it’s named after the section of the Internal Revenue Code that made this type of plan possible.

What’s so great about 529 plans?
In two words: tax benefits. One of the most appealing advantages of 529 plans is the fact that the money you contribute grows free from federal income taxes. That means your investment earnings have a chance to compound faster than in a taxable account.

What’s more, as long as you use your 529 savings to pay for qualified education expenses, those withdrawals are also free from federal income tax. Some states even offer residents state income tax benefits on contributions and withdrawals.

When used carefully, a 529 plan can also be a valuable tool for estate planning. For example, grandparents can transfer part of their estates to grandchildren through gifts earmarked for college
expenses. Plus, a special gifting provision of 529 plans allows you to contribute a lump sum equal to five years’ worth of tax-free gifts in a single year and pro-rate the gift over five years for gift-tax purposes. This enables you to move money out of your estate faster than if you made regular annual contributions; it also allows your money to compound tax free that much sooner. Keep in mind that contribution limits for 529 plans vary by state.

Giving You Flexibility
With a 529 plan, you can save for higher education costs for just about anyone in your life — your children, grandchildren, other relatives, or even yourself if you decide to go back to school. There are generally no age limits for the account beneficiary. And unlike other tax-deferred investment programs, your ability to contribute is not phased out at higher income levels.

Most important, the money you save in a 529 plan can be used at any eligible two- or four-year public or private college, university, graduate school, and most vocational and technical schools to pay for a variety of qualified educational expenses. These include tuition, room and board, fees, books computer equipment and other required supplies. If you use 529 savings for non-qualified education expenses or other purposes, the earnings portion of your withdrawal may be subject to ordinary federal income taxes plus an additional 10% federal penalty tax and any applicable state income taxes.

Maintaining Control
As the account owner, the 529 plan is in your name, which means that you retain control over the investment and distribution decisions for the life of the account. This is in sharp contrast to other college savings plans such as Uniform Gift to Minors (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts, where assets are legally transferred to the beneficiary’s control upon reaching the age of majority.

And because the money in a 529 plan remains in your name, your child or beneficiary may be eligible for more financial aid than if they owned the account themselves. (For more specific information, check with the financial aid office for the college or university of your choice.)

What if your child decides to skip college and start her own business instead? No worries. The money you save in a 529 plan can be transferred to another family member, or even yourself, for higher-education costs.

The ability to transfer 529 plan assets also applies for a number of other reasons, such as moving assets from a high cost plan to a lower one, moving to a state plan that offers more generous tax incentives for contributions to a 529 plan, and consolidating your assets if you have more than one plan. Regardless of the reason, keep in mind that taxes and penalties may apply. Please consult the specific state’s plan document for specifics on transferring a 529 plan.

A Winning Combination of Benefits
For most families today, saving for a child’s education is a considerable undertaking that requires careful planning. A 529 plan offers attractive benefits, including tax-advantaged account growth, tax-free withdrawals for qualified expenses, high contribution limits and account flexibility. Contact your financial professional to see if a 529 plan is right for your college savings needs.

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