529s Give The Most Boom For The College Buck
Parents can contribute to 529 college savings plans without concern that the accumulated savings will reduce their childs financial aid package, notes Bruce Harrington, vice president and director of product development for MFS Investment Management Inc., Boston.
To help boomers get the most of their college savings and financial aid plans, advisors should counsel them to open a 529 plan in a parents own name, with the child listed as beneficiary. Thats because only 5.6% of the parents assets are considered in financial aid formulas, compared to 35% of the childs assets.
If the parent already has set up a Uniform Gifts to Minors Act or Uniform Transfer to Minors Act account in a childs name, have the parent convert it and other assets held by the child to a 529 account held by the parent, Harrington urges.
The reason: assets in UGMAs are taxable, whereas those in 529s arent.
“Also, when a child turns 18 or 21, depending on the state, they can take money out of an UGMA,” explains Harrington, “even if they decide not to go to college. With a 529, parents control the funds as long as the account exists.”
Wealthy boomers who have kids about to enter college have another good reason to consider 529s: You can take a $55,000 gift tax deduction in a single year.
“The normal gift rule says you can give $11,000 per year to anyone tax-free. But with a 529, you can give 5 years all in one year,” Harrington says.
The parent would not be able to give any more to that child for another six years, but the advantage is clear.
“At the time you make the gift, all that money comes out of your taxable estate,” Harrington points out.
Harrington notes that a number of proposed changes to tax rules have been made that could affect 529 plans.
One is the fact that individuals now have 60 days to roll over 529s from one trustee to another. That makes it possible for boomers to liquidate an account and use the assets for up to 60 days before they complete the rollover.
Although proposed rule changes being considered by Congress would eliminate that advantage, parents who already have such accounts are likely to be grandfathered. That means they would continue to be able to use the 60-day turnover rule, as long as they have an account set up at the time the rule is changed. Thats one more reason advisors can offer to push their boomer clients who are parents or grandparents to open a 529.
Another question addressed by Harrington is whether 529s are protected from creditors, in view of new legislation eliminating individuals ability to escape debt by declaring bankruptcy.
Possibly, says Harrington, but that is far from clear.
“In the past there was no bankruptcy protection for IRAs until the U.S. Supreme Court extended that protection recently,” he notes. “For now, we think the bankruptcy rule will be governed by the state. For instance, Oregon protects 529s from creditors, so presumably if your plan is in Oregon, youre protected. But other states, such as Massachusetts, do not protect 529s.”
Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.