529 Plan great education savings tool

PHOTO/Rob Stapleton/AJOC
sackerson.jpg Alaskans have a new and extremely flexible estate-planning tool available. The 529 Plan allows parents, grandparents or any other interested custodian the ability to set up an account for education with the advantage of tax-deferred growth.

wealthbuilders.jpg If the beneficiary’s needs or desires change, the gift can be revoked or the beneficiary can be changed. Few understand the full potential of this powerful investment tool that actually gives investors more control over their estate.

College benefits

The 529 Plan is a method of saving for college, tax-deferred. There are no income limits, and investors may choose options that best suit them. If the money is to be used for higher education, the beneficiary is taxed at the beneficiary’s rate and then only on the investment growth. Couples can open an account with as much as $100,000 or as little as $250.

Estate planning

For estate planning purposes a five-year lump sum of $50,000 per child or grandchild ($100,000 for couples) is allowed. These contributions are separate from the investor’s estate, and the investor maintains control of investment decisions and distributions.

Those concerned about losing control when gifting need not be afraid; if money is needed at a later date for an emergency, it is still available. Should this occur, a 10 percent penalty is assessed on the distributed gains. This provides a great investment vehicle for investors wanting to gift money from their estate, but who are concerned it may be needed for an emergency or health care later.

Custodial accounts

There are some problems with custodial accounts that are not found in the 529 Plan. The tax-sheltered 529 Plan is not subject to the annual income and capital gain tax that a custodial account is. Also, custodial accounts have a greater impairment on students receiving scholarships and loans.

If a student is the beneficiary of a custodial account he is penalized by 35 percent of the value of his account in determining eligibility for financial need, but if the investor has used a 529 Plan the student only has a 6 percent offset.

Investors are not permitted to change the beneficiary of a custodial account once the account is set up, and the most alarming factor is the minor receives total control of the money when he or she comes of age regardless of intention to obtain higher education. Custodial accounts can be transferred to 529 Plans as well, but the rules differ, and you should talk to your financial adviser on this.

There are different 529 Plans available, some of which are more limited than others. Please do your research before investing.

Robert Sackerson is an investment executive for Wedbush Morgan Securities. He can be reached at 907-273-2312.

02/17/2001 - 8:00pm