A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

Saving for College: As Easy as 529
“529” college savings accounts allow parents and
grandparents to give gifts to children that can later be used for
college education. Named after the provision of the tax code
that sanctioned them, the gifts can be invested in stocks and
bonds, and no federal taxes will be imposed on the investment
earnings as long as the withdrawals are made for qualified
higher education purposes. Moreover, as of 2010, the plans
allow an individual donor to contribute as much as $65,000 to
a 529 plan without gift taxes and without reducing estate tax
credits. For couples, the amount doubles to $130,000. If you
have kids or grandchildren who plan to go to college and you
can afford to contribute to a 529 plan, the decision to
establish such a plan is a no-brainer.
Are there pitfalls to avoid? You bet. Most salespeople
pushing these plans receive hefty commissions that eat into
investment returns. Be an educated consumer and contact a
company such as Vanguard for a no-load low-expense
alternative. While it’s always nice to stiff the tax man, some
high-expense 529 plans could end up shortchanging you. Also

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note that 529 plans are sanctioned by individual states, and
some states allow you to take a tax deduction on your state
income tax return for at least part of your contribution. Thus,
if you live in New York State (which allows a $5,000 per
person deduction), you will want to get a New York plan. If
your state does not allow a tax deduction, choose a plan from
a low-expense state such as Utah. Moreover, if you don’t use
the proceeds of 529 plans for qualified education expenses
(including midcareer retooling or post-retirement education),
withdrawals are not only subject to income tax but also carry
a 10 percent penalty.
Keep in mind that colleges are likely to consider 529 assets
in determining need-based financial aid. Thus, if you believe
you will be eligible for financial aid when your child goes to
college, parents could be better off keeping the assets in their
own names or, better still, in the names of the grandparents.
Of course, if you won’t qualify for need-based aid in any
case, by all means establish a low-expense 529.
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