Due to changes in the tax law over the years, more of our clients are hearing about qualified state tuition plans (otherwise known as Section 529 Plans). 

These state-sponsored college savings plans are becoming much more popular and if you have children or grandchildren who may someday need funds for higher education, these plans may help make paying for that education much more affordable.

Pretty much every state has now established a Section 529 Plan and you do not need to be a resident of a particular state's program in order to participate in its plan. 

For all practical purposes, states are actually competing with one another which should mean that the best plans will attract the most participation. 

The student does not necessarily have to attend school in the state where the plan is created. The 529 Plan is merely a state-sponsored savings vehicle. Please note that some states do have different plans for residents and non-residents, and some states do not presently allow participation by non-residents. About 2/3 of the states have non-resident programs.

The donor (contributor) to the account is generally the account owner. The donor names a beneficiary (the future student). In the event the future student decides not to attend college, or for some other reason does not need the support, the donor can change beneficiaries.

The amounts invested in the 529 Plan are not tax-deductible; however, the investments grow tax-free until they are needed. Then, provided the funds are used for the beneficiary's qualified school costs, they are tax-free to the beneficiary. 

No one pays tax on the interest, dividends, gains or other investment return earned by the 529 Plan as long as the distributions are for qualifying costs of education.  This was a major law change that took effect for distributions in 2002.

Even better news is that there is no income limit on who may establish an account. The contribution amounts vary by state but please be aware that if you contribute more than $13,000 in a given year, there may be gift tax consequences. You may be allowed to "frontload" an account and spread the gift over five years. To illustrate frontloading, assume a proud new grandparent wants to pay for the cost of her new grandchild's college. 

Grandmother may be able to establish a 529 plan with a contribution of $50,000. She will then elect to spread the gift over five years and use her annual gift exclusion to avoid any gift tax exposure. For reference, a $50,000 gift will grow to about $200,000 in 18 years at an 8% rate.

Such large contributions are certainly not required. Monthly contributions are probably more practical for most families. The 529 Plan does represent a good way to begin an education savings program.  

If you are interested in establishing a 529 Savings Plan for your child, please contact our office.  We can assist you in examining the options and opportunities that are available to you.