Best 529 Tax StrategiesMany states have hired a big-name money manager, such as Vanguard, Fidelity or TIAA-CREF, to manage the funds. Account-holders have no say in how the money is invested. Generally the money is invested in a mix of stocks, bonds and money-market funds. Many plans use model portfolios based on the age of the beneficiary or years before entering college.
In the early years, the money is placed mostly in growth-oriented investments, such as stock mutual funds. As the student gets nearer to college age, the mix becomes more heavily weighted toward more stable instruments, such as bond mutual funds and money market funds. A few plans also offer the option of certificates of deposit for very conservative investors. The money can be used at any accredited post-high-school institution in the United States. Qualifying expenses include tuition, books, supplies and equipment. Some room and board expenses are covered, as long as the student is attending college at least half time. If your child receives a scholarship that "covers the cost of qualified expenses, a refund can be made up to the amount of the scholarship without incurring a refund penalty," according to the College Savings Plans Network, an organization of officials from the states that offer 529 plans. You can also change the beneficiary on the account to another family member or keep the money in the account for future use. There is a penalty for withdrawals from a 529 plan if the money is not used for qualifying educational expenses, unless the beneficiary dies or is disabled. In addition to paying the taxes due on the earnings (taxed at the account holder's rate, not the student's), there is a penalty of 10 percent of the earnings. The earlier in a child's life you contribute to a 529, the longer the money has to grow. To encourage families to "front-load" the accounts at an early age, there is a special treatment of the gift tax exclusion. Normally, if a person gives more than $ 10,000 to another in a year, the giver incurs the federal gift tax. But with a 529 plan, you can contribute up to $ 50,000 in one year (assuming you choose a 529 plan that does not limit the annual contribution), but for tax purposes can treat the gift as if it was given over five years. That allows you to avoid the gift tax. That gift tax exclusion makes contributing a large sum attractive to. He estimates 15 percent of the 529 accounts with his company were opened by grandparents. But the accounts also allow small contributions and monthly payment plans for young families of modest means. |