Saving for college usually involves putting money aside and a popular vehicle for this is the so-called “529” plan. Here are five things to consider when deciding on this kind of plan.
- Don’t overlook prepaid tuition plans. If you are fairly certain that you know where the student will be attending college, these may reduce the uncertainty of the amount that will be available for college. The down side is if the student elects to attend a college that does not participate in the plan, then the credits may only cover a very small portion of the tuition cost — or participants just get their money back.
- Beware of the strict rules for changing beneficiaries, which could cause a client to incur taxes or penalties. The new beneficiary must be a member of the family as defined by the IRS, within the same generation (or an earlier one) as the original plan beneficiary, in accordance with gift tax laws.
- Even if the student does receive a scholarship for any reason, the dollars in a 529 plan are not wasted. Clients have the option to withdraw from the plan the dollar amount of the scholarship. Taxes will have to be paid on the earnings, but the 10% penalty on non-qualified distributions is waived.
- The IRS allows 529 plans to be rebalanced only once per year, turning any further trades into taxable events that may incur penalties too.
- Consider target date funds as an alternative to choosing your own asset allocation program.