Pennsylvania Investment Forum

Saving for College

by Judy Loy

Parents wish to give their children the best, but many parents struggle with the cost of higher education. In fact, studies show that employees with bachelors degrees earn on average 85 percent more than those with just a high school diploma. Thus saving for higher education is an important way to pave the way for a child's future, but what is the best way to save for a child's education and give them the opportunity? The new way to save for education expenses is the 529 Plan. It offers tax advantages and a systematic way to invest for educational expenses.

A 529 plan is set up with an owner and a beneficiary. The owner maintains control over withdrawals, the investments inside of the plan (investments usually can only be changed once a year), and can alter the beneficiary. However, to maintain the tax-advantage of the plan, a new beneficiary must be a family member (sibling, parents, etc.) of the previous beneficiary. The beneficiary is the person for whom the education savings will benefit. There are no age restrictions on the beneficiary so one can be set up for any higher education purpose. (For example, an adult professional could save inside of a 529 to earn an MBA.)

A major advantage to the 529 Plan is that earnings grow tax-deferred inside the Plan and withdrawals for qualified college expenses at an eligible educational institution are tax free. If you contribute to your state plan, usually qualified distributions and growth are also state tax-free. A word of warning: This tax exemption for qualified distributions is set to expire on 12/31/2010, unless extended. If the extension is not given by Congress, the investment gain would be taxed at the student's (beneficiary's) rate.

Anyone can contribute to the 529 account, but the owner still maintains control. Contributions to a 529 account are considered gifts and are subject to the federal tax law on gifting. Currently, the gift limit is set at $11,000 per year. This means a father and mother could gift a total of $22,000 in one year into a 529 plan for one child. The maximum that can be invested into a 529 is $290,000 (including contributions and earnings). This amount is planned to increase as college expenses increase.

Delaware Investments out of Philadelphia runs the Pennsylvania 529 Plan. The website for the Pennsylvania Tuition Account Plan is www.TAP529.com. The minimums to invest are $50, thus making saving for college affordable. An easy way to set up a child's Tap 529 is through monthly automatic investments directly from a checking account. Let family know that an account is set up. That way, when Junior's birthday comes around, aunts, uncles, grandmothers and grandfathers can all help save for college.

Now you wonder, what happens if Junior (the designated beneficiary of a 529 Plan) decides not to go to college? As discussed, the beneficiary can be changed to another of Junior's family members. Money withdrawn from a 529, but not used for qualified education expenses, is subject to regular income tax plus a 10% penalty.

To find out more about setting up a 529 Plan, consult a financial advisor or check out the 529 website above. The earlier you start, the more time you have to save for a child's future.

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