Sec. 529 Planning with college savings plans.

• Author: Franklin, Joyce L.
• Position: FinancialPlanning

The 2001 Tax Act has made qualified tuition savings programs more attractive than ever by allowing tax-free withdrawals from the plans to pay for qualified educational expenses. Qualified tuition programs, also known as Sec. 529 plans, are very beneficial for wealthy and middle-income families.

Sec. 529 college savings plans were established several years ago. Beginning this year, money in a Sec. 529 plan account grows tax-free, as long as the money in the plan is used for qualified higher education expenses, including tuition, fees, books, supplies or room and board.

Assets in the Sec. 529 plan not used for college will be subject to income taxes and the earnings will be subject to a 10 percent penalty, so you may not want to put in more than you know your child will use for college.

Relatives or friends can make annual contributions of up to $10,000 with no tax filing requirements. The plans are a great deal for many people, especially affluent clients, as it allows them to give large gifts, move assets out of their estate, and provide tax-free growth for their heirs benefit.

ADVANTAGES

Some of the advantages of Sec. 529 college savings plans include:

* Withdrawal of earnings and principal from the plans is federal tax-free, as long as the money is used for qualified educational expenses. However, under the sunset provisions, distributions after 2010 are taxable.

* Annual earnings in the account are not taxable.

* Contributions of up to $50,000 per beneficiary may be made in a single year ($100,000 for a couple) without any gift tax implications, although a gift tax return must be filed for gifts over $10,000.

* There are no income limitations on contributions to the plan.

* The donor retains control of the assets, even if the assets are not ultimately used for higher educational expenses.

* Assets can be transferred without a penalty to a family member, including siblings and cousins.

DISADVANTAGES

Some of the disadvantages of Sec. 529 college savings plans include:

* The investment options are limited to the choices available in any state-sponsored program you choose. Most states have a program; California's is called ScholarShare.

* Donors cannot move money between the investment options within a plan. For example, if you choose the 100 percent equity option offered by ScholarShare when your child is two years old, and at age 15 decide that you want a more conservative investment, you will be unable to reduce your risk by switching...