Thursday, June 9, 2016

529 Plans

While contemplating future planning, a major concern for a great number of people is how to pay the enormous cost of their children’s higher education.
One such planning technique is the 529 college savings plan (for purposes of this post, 529 plan refers to an individual investment plan and not a state sponsored plan). The 529 plan is a tax-advantaged qualified tuition plan designed to encourage saving for future college costs. The plan is not complicated and does not require a significant amount of money up front. Rather, it is simply an investment account to which funds can be added at any time and in any amount.
529 plans are tax-advantaged because the earnings growth on the contributions within the account appreciate free of income tax. Additionally, withdrawals taken to pay for qualified higher education expenses are also tax-free, with such expenses being broadly defined to include tuition, room, board, books and computers. 529 plans also offer flexibility as they are not child specific. That is, if one child receives a full scholarship to attend college, the funds set aside in that child’s 529 plan may be used for other children.
Another major advantage of this plan is the asset protection it offers. The Florida Statutes protect 529 plans from the claims of creditors, including creditors of the account owner and creditors of the beneficiary.
While such plans are beneficial, it is important to note that just like any other investment product; performance is subject to market risk. Additionally, a 10% penalty may be imposed if assets are removed from the account for purposes other than a qualified education expenses.
Although the market risk argument can be made, it is undeniable that 529 college savings plans offer an exceptional planning mechanism for college savings, while also keeping a large share of your assets protected from creditors.