In 1996, Congress passed a law that allowed families to set aside substantial assets to pay for college education. Named after a section of the Internal Revenue Code (much like the familiar 401(k) retirement plan), the Section 529 Plan is more flexible than a pre-paid tuition plan, provides for more control than a custodial account, and permits greater contributions than any other college savings device. Now, with the additional tax benefits offered as part of the 2001 tax act, the Section 529 Plan is arguably the single most advantageous tax-deferred savings program available today.
A Section 529 Plan is an investment account established under the auspices of a state for the benefit of a family member (usually a child or grandchild). The Plan allows you to contribute as much as $55,000 per beneficiary (or $110,000 for a married couple filing jointly). Although the contributions are deemed to be gifts to the beneficiary, there are no adverse federal gift tax consequences because the contributions can be treated as five years= worth of annual exclusion gifts. Contributions will be excluded from your taxable estate for federal estate tax purposes. Withdrawals from a Section 529 Plans are now entirely income tax-free, provided they are used for higher education expenses, such as tuition, room and board, and books.
More than 40 states now offer Section 529 Plans, and others will soon be available. One of the most recent plans, the Maryland College Investment Plan, allows a state income tax deduction on contributions made by a Maryland resident (up to a maximum of $2,500 per beneficiary per year, with the unused amount carried over to future years). Under Maryland’s Plan, which is managed by Baltimore-based T. Rowe Price, the maximum amount that can be invested for a beneficiary is $175,000. (The account balance can appreciate in excess of $175,000, but no more contributions will be accepted beyond that point.) In comparison, the Virginia Education Savings Trust provides for a $2,000 state income tax deduction for Virginia residents, but has an account limit of $250,000.
In addition to these tremendous tax advantages, Section 529 Plans also offer significant non-tax benefits. One such advantage is the wide array of investment options that are available. Each state plan permits you to select from numerous mutual funds, which range from conservative to aggressive. Moreover, unlike other savings plans that transfer control of the assets to the beneficiary once he/she reaches a certain age (e.g., Uniform Transfers to Minors Act), Section 529 Plans permit you to maintain control over the assets. Section 529 Plans also provide for an extremely flexible beneficiary designation. Thus, if a child elects to skip college, the account can be rolled over to a more educationally-inclined family member, such as the original beneficiary’s siblings, spouse, children or stepchildren, parents and in-laws.
Please feel free to contact Aresh Homayoun us if you have any questions on Section 529 Plans.
Aresh Homayoun, Esq.
Paley, Rothman, Goldstein, Rosenberg & Cooper, Chartered
4800 Hampden Lane, 7th Floor
Bethesda, Maryland 20814