Section 529 plans provide tax breaks on college savings

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Saving for college is a formidable task, especially for families with conflicting financial goals. |ret||ret||tab|

Traditional savings vehicles make saving more difficult by instituting investment restrictions and taxes. The Section 529 plan, however, introduces a new way to save for future college expenses by both parents and grandparents.|ret||ret||tab|

Section 529 plans are state-sponsored investment programs that qualify for special tax treatment under Section 529 of the Internal Revenue Code. Section 529 plans offer families, including grandparents, an easy and effective way to save for future college costs. They also have investment, tax, retirement and estate planning benefits that extend far beyond paying college expenses.|ret||ret||tab|

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Tax benefits|ret||ret||tab|

The 529 plan has an assortment of tax benefits. While there are no federal income tax deductions for contributions to the 529 account, many states, have en-acted legislation that provides income tax advantages on the state level (each state's 529 program is different). |ret||ret||tab|

Regardless of the state of residence, the funds invested in a 529 account do grow tax-deferred until withdrawn. Currently, plan income withdrawn and used to pay qualified college expenses is taxed to the beneficiary and reported as ordinary income. |ret||ret||tab|

Beginning in 2002, plan income withdrawn for qualified education expenses is free from federal income tax. State taxes will vary for each state and may continue to apply.|ret||ret||tab|

Contributions to 529 plans qualify for the annual gift tax exclusion of $10,000 ($20,000 for married couples). |ret||ret||tab|

Furthermore, investors can use five years' worth of annual exclusions to shelter an immediate contribution of up to $50,000 ($100,000 for a married couple) to a 529 plan for each beneficiary, provided that you do not make any additional gifts to that beneficiary over a five-year period.|ret||ret||tab|

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Options|ret||ret||tab|

There are several options available if 529 funds are not needed for education. The account owner can redeem assets as a nonqualified withdrawal and pay ordinary income taxes and a penalty on the plan earnings. |ret||ret||tab|

Currently the penalty rate is 10 percent. The plan owner also can change the beneficiary or roll the account over to someone who also qualifies as a member of the family of the original beneficiary, keeping the 529 account, and the tax deferral, intact.|ret||ret||tab|

Many people, especially grandparents with sizable estates, find the estate tax treatment of 529 plans to be the most outstanding feature. |ret||ret||tab|

Contributions to the plan are removed from the donor's estate, yet the account owner (usually the donor) retains complete control of the distributions from the 529 plan.|ret||ret||tab|

With so many options available, many people are finding the 529 plan to be a gratifying opportunity to invest in their grandchildren's future while effectively continuing their own estate planning. |ret||ret||tab|

Find out more about Section 529 plans by contacting a brokerage representative.|ret||ret||tab|

(Shareen Beal is senior vice president of Commerce Brokerage Services Inc., member NASD & SIPC.)[[In-content Ad]]