Friday, November 28, 2014
As college costs have spiked, anxious families are looking at strategies for helping their future children or grandchildren get an education. One of theses strategies is to open a 529 college-savings plan and have it start growing years before the future student is born.
Anyone can start a 529, which is funded with after-tax income; the fund’s earnings and principal will be untaxed as long as the money goes to expenses that qualify as higher education. It is wise for parents with adult children to open a 529, as it helps jump start savings. Furthermore, if parents subsequently transfer ownership of the account to their grown children, both generations can benefit from some gift-tax exemptions.
In addition to increasing the amount of giving both sets of parents can do without owing gift tax, this can help wealthier grandparents reduce their estate below taxable level, especially in states such as New York and Pennsylvania, where estate-tax exemptions are much lower than the 2014 federal level.
Starting a 529 plan when a child is born can mean years of lost earning potential. A plan started with the maximum $14,000 initial gift, five years before a child is born, funded with $500 every month and earning interest at 3% compounded monthly, would yiled $226,784 by the child’s 18th birthday. The same plan started at birth would yield $167,336. While the future is unpredictable, a will can provide for an executor or trustee to carry out 529 plans using assets in a revocable trust.
See Peter S. Green, The Way-Early ‘529’ Gift, The Wall Street Journal, Nov. 3, 2014.