Wednesday, May 20, 2009

Utah Educational Savings Plan Day

As May 29th has officially been dubbed "Utah Educational Savings Plan Day," I wanted to quickly review the benefits of utilizing a 529 plan to pay for a college education.

529 plans are a great savings tool because, although contributions are not deductible on a federal tax return, earnings withdrawn from the plan to pay for qualified higher education expenses such as tuition, books, and room and board are tax-free. The definition of "qualified higher education expenses" was expanded to include computers for 2009 and 2010. The tax-free advantage of these accounts can lead to incredible savings. For instance, if a father contributed $13,000 to his daughters 529 plan the day she was born, assuming a 10 percent interest rate, the account will be valued at $72,279 the day the daughter turns 18. That is $59,279 of tax free growth!

Although contributions to a Utah 529 plan are not deductible on a federal income tax return, the State of Utah will allow the contributor to claim a 5 percent tax credit on up to $1,740 per beneficiary if the contributor is single, or $3,480 if the contributor is married filling jointly. A tax credit is a dollar-per-dollar reduction of a tax liability, and is thus more valuable than a tax deduction. Consequently, the state will pay as much as $87 of a single contributor's State tax liability, and as much as $174 of State tax liability for a contributor who is married filling jointly.

529 plans can be setup for any beneficiary, including your child, grandchild, spouse, neighbor, friend, or yourself. Additionally, the person who contributed the funds can change the beneficiary of the account at any time. Thus, if your beneficiary decides not to attend college, another beneficiary can be named so the tax-free benefit of the account is maintained. Further, the funds can be used at almost every school across the country.

The last advantage of 529 plans are derived from the plan's contribution limits. In 2008, an individual can contribute up to $13,000 per beneficiary. An individual can make a contribution to an unlimited number of beneficiaries, and an unlimited number of individuals can contribute to the same beneficiary. Even more advantageous, an individual can contribute five years-worth of funds in any given year, as long as the combined five year contribution limit is not breached. For instance, an individual could contribute $65,000 to a plan in year one, but would then be prevented from contributing to the plan during years two through five.

A drawback of the 529 savings plan is that if the funds are withdrawn for a purpose other than higher education, all growth will be taxable as ordinary income AND will be hit with an additional 10% penalty. However, if the beneficiary is awarded a scholarship, an amount equal to the tuition covered can be withdrawn from the 529 plan free of the 10% penalty, although taxes would apply.

Utah's Educational Savings Plan (UESP) is one of the best in the country. The plan's use of low-cost, flexible Vanguard index funds make it a Morningstar favorite. Fees are a rock-bottom .22% - .35%.

Lastly, the State has declared May 29th (5/29) to be Utah Educational Savings Plan Day. Contributions made to a new 529 plan that day will be matched up to $20. If you've been looking for a way to invest in your child's future, why not take advantage of the great tools the State has made available to us. Schedule an appointment with me today to learn more about funding an account.

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