Thursday, April 24, 2014

Common mistakes people make with their 529 college savings plan

529 plans are tax-advantaged investment plans intended for covering future higher education costs for a named beneficiary. These investment vehicles, which may be run by a state, a state agency, or an educational institution, allow account holders to invest in bonds, mutual and index funds, and money market funds to pay for their beneficiary’s eventual college tuition and expenses.

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 A lot of people who invest in a 529 plan often forget to take note of factors such as additional fees and certain conditions. The following are some examples:  

Eschewing gift tax exclusion
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Because contributions to a 529 are considered gifts and are tax-free, grandparents can pitch in as much as $70,000 to initiate their grandchild’s education plan, allowing them to save on their own estate tax. However, ‘front-loading’ a 529 like this prohibits subsequent contributions for the next four years.  

Neglecting adjustments

529 plans usually allow for yearly adjustments. If, for example, the account spans 18 years, this time frame can be maximized to reap the most return on investment. The first few years of a 529 can be managed to emphasize higher yield and higher risk equities. The middle years can add bonds, index, and mutual funds, and the last few years can focus on money market funds.  

Putting things off

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Two or three years won’t garner much when one faces tens of thousands of dollars in academic expenditures. Investing early, even before having children, is best. If the intended beneficiary decides to skip college, the account can be transferred to benefit the sibling or some other aspiring college student. Withdrawing the account and reinvesting is also allowable for 529s.  

Michael Lewis, Haskell Indian Nations University CFO since 2004, has over two decades of experience in the world of cost accounting, budgeting, and finance. More information on his career is available here.

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