Great Holiday Gifts Part 1: 529 Educational Savings Plans
Back by popular demand, the next two Bernie’s BLOG posts will provide info on some great financial holiday gifts for you, your children, or grandchildren. This blog will cover 529 educational plans and the next one will re-introduce many of you to Roth IRA’s. By the way, we are not suggesting that you forego fun gifts for your offspring, but we really like the idea of longer term not nearly as “fun” gifts to help secure the financial futures of your lucky family members.
As many of you know, there are very few investments which grow tax-free, but 529 plans and Roth IRA’s do just that, at least for now.
529 plans are state run educational savings plans which can be used for very broadly defined educational expenses for adults or children. These funds can be used for pre-college, trade school or college tuition/fees. The investments in a 529 plan can be made by anyone, subject to gift tax requirements, and are made with after-tax dollars although some states offer a state tax credit to parents who contribute in their state of residence (North Carolina does not offer this credit at this time). The funds in a 529 plan can be moved to another child and the funds do not have to be used in the state in which the plan was funded. Unlike other investments, 529 plans are controlled by the account “owner”, not by the child. Taxes and penalties are due if money is not used for educational expenses, but again, the definition of educational expenses is quite broad and usually includes computers, books, and room and board. There has also been an important recent change to 529 plans – up to $35,000 of unused funds can now be rolled over to a Roth IRA for the child, subject to lots of rules of course.
These plans carry low management fees because they tend to be “target date” funds where the investment mix is automatically rebalanced as the child gets closer to college age.
Although 529 plans are not LFS managed assets, we would be happy to assist you in starting one for your children or grandchildren, or even yourself! There is no minimum dollar requirement to open an account and dollars can be added throughout the year.
If you want to read up, see link below, or feel free to call us to talk more.