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Financial Planning > Tax Planning

New 529 Plans Could Earn 24% Than Comparable Taxable Accounts

By Staff Writer

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NU Online News Service, June 5, 1:15 p.m. – T. Rowe Price Associates, Baltimore, says a family savings for college with one of the new 529 tax-exempt college savings plans could accumulate 24% more after taxes than it could save by putting the same money in a comparable taxable account, and 11% more than it could save by putting the money in a custodial account.

The new tax bill that Congress just passed will eliminate federal income taxes on earnings distributed from 529 plan accounts starting Jan. 1, 2002.

If parents or other relatives invest $5,000 a year for a child in a 529 plan, and the fund assets earn 10% a year for 18 years, the child would end up with $278,000, compared with $250,000 in a Uniform Gifts to Minors account or $224,500 in an ordinary taxable account, T. Rowe Price says.

These calculations assume that the parents will be in a high income tax bracket, the child will be in a low income tax back, and the state will charge a 5% tax on the 529 plan distributions.

The computations for the Uniform Gift and taxable accounts don?ft yet include the new, lower rates included in the Bush tax bill, but the lower rates probably won?ft do much to improve the returns on the Uniform Gift and taxable accounts, T. Rowe Price says.

If a state has no income tax or exempts 529 earnings from state taxation, the savings in the 529 plan under the revised law would be $287,700, T. Rowe Price says.

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