Recent changes in tax law make saving for college easier than ever. WebsterRogers LLP has fielded many questions about college savings plans, what the benefits are, etc. John J. Leahey, CPA/PFS, CFP, a certified financial planner, provides information.

Section 529 of the Internal Revenue Code paves the way for qualified tuition programs (QTPs) that allow for college savings to grow tax-free, and pay-outs related to college expenses are tax-free as well. Individual states have adopted these tuition programs, also called 529 Plans, and have made them their own.

Basically, a 529 plan is a state-sponsored investment plan specially geared toward saving for college. By meeting certain federal regulations (i.e., Section 529 of the Internal Revenue Code), these plans qualify to pass tax benefits on to their participants. Since the states sponsoring these plans usually add their own tax incentives as well, 529 plans have become an extremely effective way to save for future college costs. Although there are many advantages to saving for college via a Section 529 plan, benefits fall into five main categories.

Versatility – Anyone, regardless of income, can participate. You are not limited to the plan of your “home” state – about half of the state plans have no residency requirement. You can open more than one plan and even switch plan beneficiaries.

Investment Options – Although administration of the plan varies by state, all 529 plans are professionally managed. When signing up for the plan, participants are generally offered several investment options. And once you’ve signed on, you may still have the ability to change investment options (plan permitting). Rollovers to other state plans are permitted as well.

Contribution Flexibility – Plan payment schedules are very flexible. You can even stop funding the plan altogether after your initial contribution. Contribution limits vary by state, but many states, including South Carolina, allow contributions up to $277,000 per beneficiary. (Contributions are, however, subject to gift-tax rules. You may want to consult a tax advisor before making a sizable contribution; i.e., more than $12,000 per-beneficiary per-year for singles, or $24,000 for married couples splitting gifts. Gift splitting over five years is also an option.)

Donor Control – You, the donor, stay in control of the account; you decide on the withdrawal amounts and when they are made. Most plans even allow you to reclaim the funds at any time. (However, there are some tax ramifications to reclaiming the funds.)
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Tax Breaks – Undoubtedly, the most attractive benefits are the plans’ tax breaks. Your investment grows tax-free, and pay-outs for college expenses are also tax-free. An added bonus – each state usually throws in its own tax breaks. Some states, for example, offer an upfront deduction on contributions to the plan. South Carolina, for example, does. Check out various state-sponsored 529 plans at www.savingforcollege.com. (South Carolina residents can preview their state’s plan in detail at www.futurescholar.com.)

To obtain more information about this and many more topics, contact the nearest WebsterRogers LLP office in Florence, Myrtle Beach, Georgetown, Charleston, and Sumter.