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Crash Course in College Cash

Local Money guru Stan Molotsky cuts through the college savings confusion with some do's and don'ts of 529 savings plans.

529 Plans Can Help Boost Savings and Reduce Estate Taxes

By 2001, the cost of college tuition and fees outpaced the rate of inflation by three to one. This continued a decade-long trend in which education costs rose faster than family income in all but nine states.

Although the challenges of paying for education may seem overwhelming to some, education remains a critical asset, and one of the most significant financial gifts a parent or grandparent can give to a child. According to the College Board, a bachelor's degree could mean a $1 million difference in lifetime earnings.

Thanks to recent tax-law changes, giving the gift of education may be easier than ever before. The revamped Section 529 savings plan offers both federal-tax-free withdrawals and estate-reduction benefits for loved ones who contribute to a child's education.

(As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the plan investments may lose money or not perform well enough to cover college costs as anticipated. Nonqualified withdrawals may be subject to income taxes and an additional 10 percent federal tax penalty.)

529 Plan Choices

Named for a section in the Internal Revenue Code, 529 plans are state-sponsored programs that may be structured as prepaid tuitions programs or savings plans.

With a prepaid tuition program, participants pay for future units of tuition at today's prices. For example, you could purchase a certain number of quarters or semesters at the current cost, and the state agrees to pay the difference in tuition once your child reaches college age.

With a 529 savings plan, participants typically invest in a variety of age-based portfolios that focus on growth while a child is young, and the investments become increasingly conservative as the time for college approaches.

Because 529 plans are established by individual states, each plan has a unique set of features and restrictions. As the plans have become more popular in recent years, competition among states has also increased. Many states now allow nonresidents to participate in their savings plans, and some allow planning to pay for out-of-state schools. They may offer tax breaks exclusively for their residents and taxpayers.

529 Savings Plan Highlights

With an all-new set of features and incentives, 529 savings plans offer unique benefits to almost every type of investor. Take a look below for a quick savings breakdown:

  • Funds invested in a 529 plan grow tax deferred, and qualified plan withdrawals are free of federal taxes.
  • Funds can be used to pay for graduate and undergraduate expenses, including tuition, fees, books, room and board, and supplies.
  • Increased contribution limits may allow donors to significantly reduce the size of their taxable estate.
  • Donors can contribute up to $13,000 per year ($26,000 for a married couple) without incurring gift tax consequences.
  • There are no restrictions on a contributor's income.
  • The plan's owner retains control over plan assets, and in if the beneficiary decides not to attend college, the owner may name another beneficiary from the student's immediate family.
  • The plan owner may also withdraw plan funds for non-education expenses, but the funds will be taxed at the owner's rate, and an additional 10 percent tax penalty may be assessed for non qualified withdrawals.
  • The plan may be switched from one state to another once every 12 months.


Despite the rising price of a college education, doing without could cost a child far more in the long run. As you evaluate college savings vehicles, you may want to consider the income tax advantages and estate conservation benefits a 529 plan can offer.

For additional information, please feel free to contact us at 1-800-MONEYSHM or visit our website, www.shmfinancial.com. (three locations to serve you - Collingswood, NJ; Voorhees, NJ; Lakehurst/Toms River, NJ)

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice form an independent financial advisor. The content is derived from sources believed to be accurate.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

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