Section 529 Plans Even More Attractive After New Legislation
Section 529 plans were created
to assist families in saving for
tuition and other expenses
associated with college.
Growth in 529 accounts is not
taxable and withdrawals are not taxed either
as long as funds are used for education related,
approved expenses.
A recent change in the "kiddie tax" may
make 529s even more attractive. Previously,
a dependent child's income in excess of
$1,700 began being taxed at the child's rate
(rather than at the parents' rate) at age 14.
New legislation has raised the age to 17.
This increase in the number of years the
parents' tax rate applies, may make 529
plans more attractive than custodial types of
accounts allowed under Uniform Gifts to
Minors Act (UGMA) or Uniform Transfers
to Minors (UTMA) since limited contributions* to 529s are not taxed and
withdrawals are not taxed unless used for
unapproved expenses.
Additionally, the Deficit Reduction Act of
2005 (DRA) also affects how 529s are
viewed when determining eligibility for
federal aid. Under the DRA, student-owned
529 accounts won't enter into the equation,
so they will not count against a student
who's trying to qualify for aid. However, if a
529 account is titled in the parents' name on
behalf of the child, usually the assets in the
account will be assessed at the 5.6% rate of
the parent. Other types of student-owned
accounts (such as those allowed by UGMA
or UTMA) are assessed at a 35% rate.
Over half the states offer a tax break for
contributions (in total or in part) to their own
state's 529 plan. However, Kansas and
Maine are taking the deduction to the next
level, allowing a tax break for contributions
to plans of other states. Although the new
laws only affect residents in Kansas and
Maine, Joseph F. Hurley, a 529 plan expert
who administers www.savingforcollege.com,
says the change "could be the beginning of a
trend among states to open up their
deductions."
*A grandparent or parent can contribute a
lump sum of $60,000 or up to $12,000 per
year without incurring gift taxes.
Source: www.MercuryNews.com, 6-29-06
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