By David Grimaldi
It's never been more important for the children in your life to receive a college education. Studies show that over a lifetime, the earnings gap between a person who has a high school education and one who has a college degree may exceed $1 million.*
According to the college board, a not-for-profit, education association, for 2004-2005 average costs for one year at a state university totaled $5,132 +10.5%, and $27,516 +5.6% for a private university.** Should you also be thinking of graduate or professional school, the costs will really skyrocket.
A 529 Plan Can Help
Although funding a childs way through college will never be easy, some help is available through 529 College Savings Plans- also called Qualified Tuition Programs. These plans were created under section 529 of the Internal Revenue code to help U.S citizens and permanent residents meet higher education expenses and offer considerable financial benefits, such as:
Tax Advantages
Your plan can grow federal income tax deferred. Withdrawals are also free from federal income taxes when used for qualified educational expenses. There may also be state income tax advantages such as tax-free withdrawals and deductions for contributions for qualified purposes. Be sure to understand these important state tax benefits, because many states only offer tax incentives for 529 Plans investing to residents who enroll in their own or the beneficiaries own State's plan. This means that state tax advantages are generally not available to the persons who enroll in the 529 Plan of a state where neither they nor the beneficiary are residents. If withdrawals are used for non-qualified purposes, it may be subject to taxes and a 10% federal penalty.***
Gift and Estate Tax Benefits
Your plan allows you certain gift tax exclusions and offers special estate planning advantages, without triggering federal gift taxes, to encourage donors to contribute for higher education expenses for a loved one.
Flexibility
You can use your plans funds at any accredited institution of higher education.
Additional Contributors
Parents are not the only one who can contribute to a 529 Plan. Grandparents, other relatives, or even friends can establish accounts and contribute.
Investment choices
You can choose from a variety of investment strategies best suited to your individual circumstances and risk tolerance. You'll also benefit from the professional investment management skills.
Types of Plans
Prepaid tuition plans allow you to purchase tomorrows college tuition at todays prices. This may be an attractive advantage since you are assured your tuition is prepaid, but this type of plan generally requires your child to attend a school in your state or a particular school. Under a 529 Savings Plan you may create an account in your name and choose a beneficiary - your child, a grandchild, or the child of a friend. Your regular contributions to the plan can grow tax deferred until withdrawn and, if spent on qualified education expenses, will be tax free when withdrawn. **** In most cases, this can result in considerable savings. Best of all, the money can be spent at any college or post secondary educational institution.
Nearly 529 Reasons to Save
But the reasons to consider 529 Plans don't stop there. They also feature generous contribution limits, often above $200,000 per beneficiary-which can be used for another member of the family in case the original beneficiary doesn't attend college. Check the program guidelines for eligible family members.
For More Information
Although section 529 Plans make saving for college considerably easier, they may not be appropriate for everyone. There are other ways for saving for higher education like Coverdell Savings Accounts, Uniform Gift/Transfer to Minors Act Accounts, savings bonds, and regular mutual funds. But whatever route you take, be sure to begin early. To learn more how you can better invest for your childs education, you may call (866) 651-8625 0r (212) 883-8533 or send emails to david.grimaldi@morganstanley.com.
*Source: Trends in College Pricing 2004: Published by the College Board.
**Figures shown include tuition, fees, room, board, books, supplies, transportation and other expenses for residential students.
***Some states will impose a state tax penalty on non qualified and this penalty may vary by state but not exceed 10% under current laws.
****Under current federal tax law, the tax-free nature of section 529 Plans will be automatically appealed by the end of 2010. Thereafter, unless congress renews or extends the law, earnings withdrawn from a 529 Plan will be taxable income of the beneficiary if used for qualified educational expenses and taxable income of the contributor if used for non qualified.
This material was written to support the promotion or marketing of the transactions or matters addressed herein. It was not intended or written to be used, and can not be used by any tax payer for the purpose of avoiding penalties that may be imposed on the tax payer under U.S. Federal Tax Laws. Morgan Stanley does not render advise on tax and law accounting matters to its clients. Each tax payer should seek advise based on the taxpayers particular circumstances from an independent tax advisor. This article does not constitute tax or legal advise. Consult your tax or legal advisor before making any tax or legally related investment decisions. This article is published for general informational purposes only and is not an offer or solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your individual circumstances and objectives. Investments and services are offered through Morgan Stanley DW Inc., member SIPC.
