Section 529 Plans: Introductory Q And A’s, Part 1
Build a better mousetrap, they say, and the world will beat a path to your door. Build a better college-savings plan, we say, and parents will beat down the door. That's certainly the case with state college-savings plans, called 529 plans after the section of the tax law that makes them so special. They were popular enough in the past-and rightly so-because investments grew tax-deferred and earnings, when pulled out to pay tuition, were taxed in the student's lower tax bracket. Starting this year, those earnings are completely tax-free.
Switch custody I have custodial accounts for my kids to help pay for college. I'd like to move the money into 529 accounts to take advantage of the tax benefits. Can I do that? Most 529 plans allow such a transfer, but there are a few special rules. Money you put into the kids' custodial accounts was an irrevocable gift, and moving it to a 529 account doesn't change that fact. The money can never be shifted to another beneficiary, for example, and your children will control it when they reach the age of majority, either 18 or 21, depending on state law. New money put into a separate account in the same 529 plan can still be controlled by the parents and shifted to another beneficiary if the child for whom the account is intended decides not to go to college. The distinction between custodial-- account money shifted to a 529 plan and other contributions is a good reason to separate accounts. Collegesavings plans accept only cash deposits, so you'll have to sell the stock, mutual funds or other investments from the custodial account-and pay capitalgains taxes on any profits-to shift the money. Gain a deduction If I switch from a custodial account, does the amount I put into a 529 plan qualify for a state-tax deduction? That depends on where you live. Only 23 states let residents write off contributions to the state's own plan. In most cases, it's the child who gets the deduction when shifting custodial-account money into a 529. Remember: It's the kid's money. But a few states may allow parents to claim the write-off, according to Joseph Hurley, author of The Best Way to Save for College: A Complete Guide to 529 Plans. For a list of states offering tax deductions for 529 contributions, see the plan profiles in the college section of the Kiplinger.com Web site. For each state's deductibility rules, visit Hurley's Web site, Savingforcollege.com. |