OCEAN CITY – Just over a decade after they were introduced, state-sponsored 529 college savings plans have become an increasingly attractive proposition for families wanting to save for tuition costs and other college expenses a decade or two ahead of time.
For the year ending June 30, aspiring students and their families opened a little more than one million new 529 plan accounts — an increase of 12 percent just a few years ago, according to the College Savings Plan Network.
What’s behind the increase? For one thing, investors have new reasons to like 529s — such as the important new provision of the Pension Protection Act of 2006 that made tax-free withdrawals from state-sponsored 529 plans permanent (previously, that provision would have expired in 2010).
While a 529 plan can simplify many aspects of college savings, choosing and implementing one can be a complex undertaking. Investors need to evaluate their options and pick a plan, based on such criteria as the plan’s state tax deduction (if available), investment options and performance over time and cost. Once they make a choice, investors must decide on the appropriate funding strategy that will keep pace with rising college costs over the next 10, 12 or 18 years, until it’s time to make the first tuition payment. For all these reasons, it’s a smart idea to work with a financial advisor to see that you’re getting the most from your contributions.
Fortunately, families can add to their plan’s balance quickly by making front-loaded contributions. For example, the federal tax code permits a married couple to make annual contributions of up to $24,000 ($12,000 for a single tax filer) per beneficiary.
Grandparents can contribute to a grandchild’s existing 529 plan or even start one of their own for the grandchild. It’s an advantageous move for both beneficiary and benefactor. The elders’ dollars won’t diminish their grandchild’s federal financial aid eligibility either, as only the child’s and parents’ assets are considered during the application process. Grandparents also benefit through tax benefits and can roll over any unused funds to another grandchild.
Consult your financial advisor and tax advisor before embarking on any of the many strategies available in today’s marketplace.
(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)