529 College Saving Plans – Part 2

by Money Reasons

Today, I decided to expand on the discussion about 529 college saving plans which was in an earlier blog post. In my post called “My 529 College Savings Experience“, I covered that basics that the average person would need to know. If the beneficiary decides not to use the money, and wants to cash out the plan instead, they will have to pay tax on the earnings and a 10% penalty

The list below are additional ways to get the money tax and penalty free.

The potential student (beneficiary) dies, and the distribution goes to another beneficiary or the estate of the other beneficiary
The designated beneficiary becomes disabled.
If the beneficiary received any of the following:
- a qualified scholarship excludable from gross income.
- veterans’ educational assistance
- employer-provided educational assistance
- any other nontaxable payments (other than gifrs, bequests or inheritances) received for education expenses.

As you can see many of the ways to avoid the tax are pretty dark reasons, and depressing, so I didn’t include them in the initial post.

TheEliminateTheMuda blogger “Learn Life Coach” has a few kids with 529s. But they are bright, and the Coach explained that he thinks they might get scholarships! The good news is that you can get your money back without paying tax or the penalty, if they get a qualified scholarship! So this is the one positive reason out of the bunch above where you can get your money back if you child/student gets a scholarship.

The Everyday Tips and Thoughts blogger “Kris“, also commented that you can transfer the 529 fund to another beneficiary if the original beneficiary decides not to go to school.

The less than obvious feature of a 529 plan is the level of control that the creator of the 529 has. You control the plan, and have much control over it. You can even take out your contributions tax and penalty free! Of course that would undermind the entire idea of your 529 plan… You can even change the beneficiary to yourself or anybody at any time.

My intent was just to introduce that it’s possible to avoid the taxes and penalty on the earning within the 529 plan by the above various means.

One of the biggest negatives, is that the amount of funds you have in the plan could effect the amount of financial aid available to the beneficiary student, when the apply. But if the parent of the beneficiary owns it, the financial aid office will only take into consideration 5.46% of the value (not too shabby!!!)

What vehicle are you thinking about using for college cost? If you current are the beneficiary of a 529 and using it, please tell your experiences with it!

-MR

My 529 College Savings Experience

by Money Reasons

First, what is a 529 plan and what are it’s benefits!

What is a 529 plan?

These are college saving plans that are operated by state or educational entities. The “529” numeric element refers to the IRS code with created these types of plan in 1996. There are typically 2 types of plans:

Prepaid Tuition – You buy credits at today’s prices for future use! The logic is that it will be cheaper to buy it today at the current prices rather than in the future after cost have skyrocketed (and historically this has typically been the case).

Savings – Typically you put money in investments such as mutual funds, bond funds, fixed income, etc. These vary vastly with respect to what is offered…

What are the Benefits?

Distributions from these plans used for qualified educations expenses are exempt from federal income tax.
Contributions to a 529 grow tax free while in the plan.
With some states (including mine), the contributions to state 529s are deductible from state income taxes. This varies in detail from state to state!
As long as the student is a half-time student, the distributions are tax free when used for room and board.

*For an excellent Wiki at Wikipedia click here!

My Personal Experience:

When I started the 529 for my son, the market was very high because of the tech bubble, so I lost money the first few years. To make matters worse, I went with an Age based mutual funds in my plan. I didn’t lose money but each year they rebalanced the portfolio for me, putting more in bonds and fixed income as my son aged. So it’s been just a fair investment for my son.

My daughter has done considerable better, at least until this last downturn. Her balance (since it’s has a higher proportion in equities) lost more money than my sons, but she’s coming back too.

So, in a nutshell, I’ve done okay with the plans, but not as well as I hoped. Such is life though, I still think it’s worth have them, after all, the important point is to be prepared for the high college cost in the future (which should be substantial, private college may be higher that $200,000)…

If you child decided not to go to college, then the 529 earnings is tax and a 10% penalty will be applied (you might even have to replay the deductions from your state income tax back too)…

So reader, how are you preparing for high future college costs?

-MR

Considering A Coverdell Education Savings Account?

by Money Reasons

This Account use to be called “Education Individual Retirement Account“, which I always thought was a poor naming choice for a college savings account!!! The plan is sometimes called an “Educational Savings Account” or an ESA.

So what are the properties of an ESA?

The money put into an ESA is NOT tax deductible. So you can’t take a deduction from your taxes the year that you make the contribution.
A child can only have a maximum of $2,000 from all sources!!! By this I mean if I had an ESA from my son and put $2,000 into it, that’s all the money for the year that can go into the account. So nobody else can contribute to any ESA for that child once it hit the $2,000 mark!
The account must be started and all the contribution made before the child (beneficiary) is 18 years old.
Earning are not taxed if they are used for qualified educational expenses (elementary school, high school, or College)
Once a single person make over $110,000 or a married person makes over $220,000, they are no long alonger allowed to contribute to an ESA.
You can contribute up to $2,000 for each child.
Distributions from ESA’s earnings that are used for qualified education expenses* are tax and penalty free.
***Distributions of contributions, are always tax and penalty free because no tax deductions are allowed for amounts contributed to an ESA.

*qualified education expenses are expenses such as tuition, fees, books, supplies, equipment, tutoring, uniforms, room & board, transportation, computer equipment, supplemental items and services (including extended day programs).

If you have a balance in the ESA when the beneficiary turns 30 years old, it must be distributed within 30 days. The earnings in the account will be taxable, and a 10% penalty will hit the account too.

While this sounds like a good option, I think there might be some better options out there… Still, it’s not bad if nothing else was out there…

-MR

My Upromise Experience and was It Worth It?

by Money Reasons

I always try to plan for future expenses. That why I opened a Upromise account right before my son was born. Back then I had more expenses and any amount I could save counted!

For that time in my life, Upromise was a perfect vehicle for me to save for my son’s college without it hitting me hard in the wallet. I’m always thinking about money and ways to make the pennies scream… After a while those pennies add up!

a million pennies

I’ve had the Upromise account for the last 9 years, how has it treated me? Overall, I’ve earned $951.48 (not too shabby). If I was more aggressive with it, I could have made much more. I use to buy the McDonald’s gift certificate booklets (with a credit card I had linked in Upromise so I got an extra 1%), then use them for my lunch. Then once a week, I would enter the codes on the back of the booklets into the Upromise site. Perhaps, I’ll buy a $5.00 booklet this Christmas for nostalgic reasons. Note, It’s not worth doing the McDonald’s booklets now because they lowered the benefit they gave back to 1%, when I was doing it, it was 5%.

When my son was three, I had been promoted at work and was receiving more money, so I started putting my own money in a 529 plan. Now, the 529 plan is where the bulk most of his money for college resides.

Back to the Upromise, do I think it was worth it?

Yes, not so much from the incredible amount of money we were able to save (blatant sarcasm). The benefit came from keeping my son’s college education in the forefront of my mind.

If you participant in the Upromise program, you naturally think about saving for college more. The more you think about it, the more clever you become in looking for ways to saving for it. I hate to say it creates a “heightened awareness”, but that’s what it did for me.

With the 529 plan that I’m now in, it automatically take money from my savings account every month and buys the into fund that I signed him (and daughter) up for.

The key is to always think about the big cost in life that will hit farther down the road. If you take actions now, the hit might not be a like a Mike Tyson hit… if you perhaps properly, it’ll be more like a Hannah Montana hit, it will still sting but at least you’ll still be standing up. 😀

If you are thinking of going the Upromise route, please leave comment and I’ll provide additional information about my experience!

Don

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529 College Saving Plans – Part 2

My 529 College Savings Experience

First, what is a 529 plan and what are it’s benefits!

What is a 529 plan?

What are the Benefits?

My Personal Experience:

Considering A Coverdell Education Savings Account?

*qualified education expenses are expenses such as tuition, fees, books, supplies, equipment, tutoring, uniforms, room & board, transportation, computer equipment, supplemental items and services (including extended day programs).

My Upromise Experience and was It Worth It?