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Sept, 2010
The 529 Plan: A College Funding Tool with Estate Planning Potential

Paying for a child's or grandchild's college education is an expensive proposition, even for families that have saved diligently in pursuit of their goal. Enter the 529 plan, a tax-advantaged investment vehicle that offers both college funding and estate planning benefits.

A College Savings Tool

There are two types of 529 plans: prepaid tuition plans that let you lock in tomorrow's tuition at today's prices and college savings plans that let you choose from a menu of investments and offer more return potential as well as risk.

Both types are generally sponsored by a state government and administered by one or more investment companies. Contributions are made on an after-tax basis, but withdrawals used for qualified undergraduate or graduate school expenses are federal income tax free. Withdrawals for other purposes are subject to ordinary income taxes, a 10% federal penalty tax, and possible state taxes. Eligibility to contribute is not limited by age or income, and total contribution limits often exceed $200,000.

Estate Planning Potential

529 plans may support a long-term gifting strategy while providing significant control over assets that have been removed from a taxable estate. Tax rules permit individuals to give $13,000 to as many individuals as you choose each year without triggering the need to file a federal gift tax form. (Married couples can give up to $26,000.)

One strategy for reducing a taxable estate is to contribute $13,000 to each child's or grandchild's 529 account on an annual basis. You can also make a lump-sum contribution of $65,000 ($13,000 times five) during the first year of a five-year period. (Married couples can gift up to $130,000.) During the remainder of the five-year period, you may not be able to make additional gifts to the same beneficiary without incurring the gift tax. If the contributor dies within the five-year period, a prorated portion of contributions may be included in the taxable estate.

Consult your financial advisor or an estate planning specialist to determine how a 529 plan may help you pay for college expenses while also complementing your estate planning strategy.

You should also consult a tax advisor to determine how federal and state tax laws apply to your situation. Investors should carefully consider plan investment goals, risks, charges, and expenses before investing. Be sure to consider whether your or your beneficiary's home state offers benefits that are only available for residents who participate in its qualified tuition program. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan.

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©2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement

Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.