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529 Plans Can Help Pay for Your Child's College Education

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"Almost anybody saving for college would be crazy not to at least consider Section 529 Plans." — Financial Writer Andrew Tobias

For frustrated parents of college-bound children, trying to save money for skyrocketing college expenses probably feels like trying to put out a house fire with a squirt pistol. For instance, total college costs (including tuition, housing, books and miscellaneous expenses) for the 2001-2002 school year are averaging $10,458 a year for public institutions and $22,533 for private institutions.1 And, remember, that's just for one year! These numbers make accumulation vehicles such as Coverdell Education Savings Accounts (formerly Education IRAs) — even with the new $2,000 annual contribution as of 2002 — look almost futile.

Well, finally, here's something fairly new to help you squirrel away money to pay your child's or grandchild's college bills. Maximum contribution limits are high, restrictions are few, and the income-tax consequences are zero in most cases.

They're called Section 529 Plans, and while the name is anything but sexy, the way these college savings vehicles work is downright exciting. Sponsored by individual states with the blessing of the federal government, Section 529 Plans have been around for a few years. However, it took the Economic Growth and Tax Relief Reconciliation Act of 2001 to make these plans well worth looking at to pay for your child's education.

"Section 529 Plans are tax-deferred investment programs run by the states to help families save for college," Joseph F. Hurley, CPA, CEO of Savingforcollege. com, told New York Life in an interview.2 "Though each state's plan is different, they all have several features in common." Here are the basics:

  • Each program is sponsored by a state and managed by a designated financial institution, which may be a bank, mutual fund or investment management company. Each offers investment options specifically designed to help families save for college.
  • You can make contributions to a Coverdell Education Savings Account and a 529 Plan in the same year, for the same beneficiary, without penalty.
  • Depending on the state, maximum contribution amounts range from a low of $100,000 to over $250,000. "Up to $50,000 ($100,000 jointly) may be contributed at once without gift tax (assuming no other gifts to the same beneficiary within 5 years)."
  • There are no federal tax deductions for contributions. However, all earnings are tax-deferred, though non-qualified withdrawals are subject to a penalty.
  • Through 2001, qualified withdrawals are taxable to the beneficiary. However, starting in January 2002, withdrawals for qualified expenses (tuition, room and board, books, supplies and fees) are received income tax-free. This is a major improvement in the value of these plans.
  • The account is owned by the adult who creates it, not the student. The beneficiary can be changed as desired, giving the donor control. At the same time, however, the account is generally not included in the owner's estate for estate tax purposes, another big plus.
  • Unlike with Coverdell Education Savings Accounts, there are no restrictions on the donor's income. You are not penalized if you earn too much money.
  • The money can be used for college or graduate school, public or private, in state or out-of-state.
  • There are no age or time limitations imposed by federal law in terms of when the money must be taken or used.
  • If the money is not used, it can be directed to another beneficiary or reclaimed by the donor. However, if reclaimed, there will be a 10% penalty on top of current income tax.

Please read the offering statement for more information including charges, fees, and tax implications before investing.

1 "Paying for College: What You Need to Know," The College Board, 2001. See collegeboard.com.
2 For more information, visit savingforcollege.com.

To learn more about the specifics of Section 529 Plans in your state, talk to your registered representative.

A New York Life agent — professionally trained and experienced — can help you analyze your needs and recommend appropriate solution through insurance and financial products and concepts — at no charge to you. Click here to request a free, no obligation, consultation with a New York Life agent.

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529 Plans Can Help Pay for Your Child's College Education

CONSULT AN AGENT NEAR YOU

Please complete and send the form below and we'll have a New York Life agent in your area contact you at your convenience.

  • *
  • *
  • *
  • *
  • *
    *
  • Phone*
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  • Home or work?
    Home Work
  • Best time to call
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    - -
    Why?
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