What is a 529 Plan and how can it help me save for my Children's college?

By Suzanne M. Rehmani, Esq.

The cost of a college education has risen an average of 7 percent per year, over the past few years.  Amazingly, this is more than the current rate of inflation.  For those of us with small children, the cost of sending our children to even a community college could be prohibitive unless we look into savings plans now.  Thus, 529 Plans have become an important vehicle in allowing parents to save for their children’s education, given the rising costs of a college education. The 529 Plan (named after its section number in the IRS code) is a savings plan for college education and is an investment plan operated by a state that is designed to help families save for college.  You pay no taxes on the account's earnings.  The child doesn't have control of or access to the account -- you do. If the child doesn't want to go to college, you can roll the account over to another family member. Anyone can contribute to the account and most states have no age limit for when the money has to be used.  If the child gets a scholarship, any unused money can be withdrawn without paying any penalty (just the tax).

You have a couple of options when you open an account.  One option lets you prepay tuition at a qualified educational institution at today's tuition rates.  Another option lets you save money in a tax-deferred account (earnings only) to be used to pay for education at future tuition rates. The savings account option is typically considered the more attractive of the two and is generally called a 529 Plan.  

All of the account's earnings are exempt from federal tax when they are withdrawn if they are used for qualified education expenses. Earnings are currently tax-deferred in most states, as well. There are no income eligibility requirements and contributions to 529 Plans also qualify for the $11,000 ($22,000 for married couples in 2006) annual gift tax exclusion. Your account can grow up to $268,000 in some states and you can contribute as little as $25 to $50 per month. However, one possible drawback may be your child’s eligibility for financial aid.  As always, you should consult with an experienced estate planning attorney and financial planner to find out if a 529 Plan is a viable option for your family.

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Suzanne M. Rehmani is an attorney in the Business and Estate Planning/Probate Department of the law firm of Kring & Chung, LLP. For more information or with questions regarding real estate law, please contact Ms. Rehmani at (949) 261-7700 or via email at srehmani@kringandchung.com

** The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change with time. Applicability of these same legal principles may differ substantially in individual situations. Please consult an attorney before making a decision in a particular area using only the information provided in this article.