San Francisco Financial Planner, San Francisco Financial Advisor

529 Plan - These investment programs are designed with one basic purpose in mind – providing families with an easy and effective means to save for future college costs.  But they also have tax, retirement and estate planning implications that extend far beyond this basic purpose.  Unlike most other tax-advantaged programs, 529 plans are open to everyone; no matter what their income level or the age of their children or grandchildren.

You won’t get a federal tax deduction for your contribution to a 529 plan, but you will receive the benefit of tax-deferred earnings.  Any growth in your account is not taxed when withdrawals are taken in the future if they are used to pay for the beneficiary’s qualified higher educational expenses.

With a 529 plan, you are the owner and retain all rights to the account, including the right to determine when withdrawals are taken and what they are used for.  You can change the beneficiary to another relative at any time, and you can even decide to revoke the account and obtain a refund!

According to the U.S. Department of Education, if the parent is the account owner, the assets in a 529 savings plan are treated in the federal financial aid formula as assets of the parent.  Since parental assets are assessed at a maximum 5.6% in determining aid eligibility (as compared with 35% for assets owned by the student), a 529 plan helps families qualify for more student aid.  With over 40 plans in the marketplace, we are available to discuss how these plans may be the “best way to save for college” for your family.

Distributions of earnings are tax free, as long they are used for qualified educational expenses.  These include; tuition, fees, books, supplies, room and board, etc.  The special feature of ESAs is that elementary and secondary educational expenses are considered qualified, as are post-secondary education expenses.
 
All distributions must be made by the beneficiary’s 30th birthday, unless a special needs exception exists.  However, any balance may be rolled over to a Coverdell Account of a family member of the original beneficiary.  Distributions of earnings, made for non-qualified expenses, will be subject to ordinary tax rates and may be subject to a 10% penalty.
 
Qualified Plan “Special” Distribution - An exemption to the 10% premature distribution tax, for distributions made before your 59 ½ birthday, is given for distributions made for qualified higher education costs for yourself, your spouse, your children and grandchildren, and your spouse’s children and grandchildren.  For traditional IRAs, ordinary income tax still applies to all distributions, not considered part of your cost basis.  For Roth IRAs, distributions may be completely tax free, if certain conditions are met.
 
If sufficient retirement funds exist in other accounts, or other sources of retirement income are expected to meet your living expenses during retirement, IRA and Roth IRA assets may be part of an overall education savings plan.  The obvious drawback to this strategy is that you will lose continued tax deferred growth on those assets.  Caution must be exercised not to use needed retirement assets for college education costs.  Only those assets that are not needed to cover retirement costs should be considered eligible for use.