| What they're
saying about TaxMama: |
Thanks for your site on how to properly
dertemine how many exemptions to claim on your W-4 without getting a headache.
These should be the directions on
the actual form as opposed to what the IRS has on them. |
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Doug
Davis |
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2/15/01 |
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College Savings Plan? Or is it for Retirement?
Recently, I went to a meeting discussing those Code Section 529 Education Savings
Plans you've been hearing so much about. You haven't heard about them?
What planet are you on?
I have had every broker and financial planner with access to a postage
stamp, flyer or e-mail, solicit my business for 529 plans. I have been
bored out of my mind with their presentations. But, I felt it was time
to learn the facts.
First, you need to know what they are, so visit Joe Hurley's SavingForCollege.com
site for details. He plans and shows the returns to expect on your investments.
Basically, the 529 plans are designed to be a tool to let you, your parents,
and grandparents stash away as much as $225,000 (depending on the state
where the plan originates, Mississippi only allows $100,000. Source: College
Savings Plan Network). The money is designed to be put away towards
college tuition. Yes, it does look like it's designed for rich folks.
But, not necessarily.
Let me tell you why people are so excited about these plans.
- Each person who contributes can put up to $50,000 the first year. (They can't add anything for the next five years.) So that money will grow tax-free for as many
as 18 years, if you do it when your child is born.
- YOU, the person who funds it, control the money in the plan. When your
child turns 18, s/he can't just tap into and spend it on a fling, a car,
or waste it on drugs.
- You can change the recipient. So, if one child doesn't use the money for
education, or doesn't use all of it, you can move the money to your next
child, or various other family members, including grandchildren. The list
is quite broad and quite generous. (See Saving For College.Com).
- In fact, you can use it for your own education. Once the kids are out of
the house, you may want to go back to school.
- When you take the money out, several years later, ALL of it comes to you
tax-free, as long as you use the funds for acceptable educational expenses.
- Acceptable educational expenses have been expanded to include, not just
books and tuition, but computers, modems, Internet connection costs, room
and board while at school, all supplies needed for the classes. (You only
have to be enrolled 'half-time.')
- The money is removed from your estate, so if you die, it's not listed as
an asset on your estate tax return. Yet YOU still retain full control over
the money and can get it back anytime you really want it.
- 8) If you are facing financial problems, creditors are chasing you, whom
you don't want to pay, even IRS - since this money is not yours, it is
protected from all creditors. This is a great place to stash a couple of
hundred thousand dollars that you can retrieve when your problems are over.
(Shades of O.J.)
- Let's say that you can fund $200,000 in the first year, with the help of
family and friends. And you don't have to pay tax on the earnings each
year. Earning 10% each year, you could have about $500,000 saved up over
10 years.
- Some states offer certain tax credits and incentives if you open the account
there and your child attends a school in that state.
- Unlike IRAs and ROTH IRAs, you can put money into these plans no matter
how high your income is. And, you can put a lot more away than into any
IRA.
- When the unused money is taken out, it will be taxed to the recipient.
So, if there is money left over, even after penalties, your child can use
that money to help get started in life. Taken a little at a time, you can
keep the taxes in the lower brackets.
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This is a gift, under the gift tax rules. So, if $50,000 was gifted to the 529
account, it is considered 5 years worth of the $10,000 per year limit on
gifts. If you die before the 5 years end, part of your gift will be added
back to your estate.
- If you don't use all the money for your child, or an alternate child or
family member's education, there will be penalties when you withdraw the
rest of the funds. All the earnings on the funds are subject to a 10% penalty
as well as taxes.
- Although you can use this as a wealth building tool and pass the money
on to other generations, it can't go past your grandchildren. Anything
beyond their generation will open up generation-skipping estate tax issues
- and the related costs.
- The Medicaid folks consider this YOUR asset. So if you control an account,
it will be tapped before you can collect Medicaid. In fact, if any withdrawals
were made 36 months before you plan to collect, Medicaid can use those
amounts to reduce, delay or deny your benefits.
- You don't really get to manage the investment. Once you designate the kind
of fund it will go into, that's pretty much how it will stay invested.
Note, many of those funds adapt themselves as the designated child gets
closer to college age.
- Having these 529 accounts may cause your child to be ineligible for financial
aid. Some states' prepaid plans are counted as part of your child's financial
resources. Other states' savings plans are not. (See Saving
For College)
- Some of the age limits on who you can make the contributions for are unclear.
It seems that you may be able to put the money away for your own education.
- Once you have funded these plans, the money must start being drawn by the
time the designated 'student' reaches age 36. (I can't find the specifics
on this anywhere, but an expert mentioned this as the age. Still looking
for the details.)
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OK, so you can
get all of your financial planners to tell you how to save money for your
children's college education. But what about you?
What they don't tell you ... think about this.
Let's say you stash away a bunch of money that you know your kids will
never use (or you don't have kids, but are putting the money away for yourself
on purpose).
Now, they're gone, and you're on your own. There's money left over.
The money can be used to pay for any accredited education institution.
It's not just for universities. You can use them for technical colleges
and trade schools. You simply have to be enrolled as a regular student,
at least 'half-time.'
Suppose you wanted to travel, learn scuba, become a master chef, a race
car driver, travel agent, dancer, carpenter, general contractor. I'll bet
you that there are accredited schools for all those disciplines - and more.
Think about this - you can indulge your favorite hobbies, get all your
supplies and lodging paid, visit interesting and exotic places as a part
of your course work....all on the tax-free savings you've built up.
Perhaps this is really far-fetched, but think about this - when my brother
studied architecture, one of their course requirements was to build a house.
He and two classmates built one in the Hollywood Hills - for a 'client.'
Now, suppose you could use the money in this 529 plan to pay for the 'supplies'
for that class!
What about that really sharp, hot sports car you want, but can't really
afford? What's if you could find an accredited school to teach you to be
a race-car driver. Wouldn't you need a car?
Or you always wanted to play golf. So you find a school to teach you to
become a golf pro. And your term paper is about comparing the courses around
the country - or the world?
Use your imagination. Get silly. Talk to a good Tax Pro to see if some
of these ideas might just work for you.
This could be a really interesting retirement planning tool, aside from
an education savings account.
[Note:
You DO
realize that those suggestions about the sports car and house are tongue-in-cheek,
yes? I'm kidding! ]
___________________
Eva Rosenberg, MBA, (aka “TaxMama”) is an Enrolled Agent in Encino, California.
She is a sought-after speaker on tax and small business issues. Her practice
focuses on small business, non-filers, and problem tax audits.
Rosenberg is also the creator of The
Internet's HelpDesk & WebReview and the publisher of a free e-zine,
I-Laugh
about using humor in the workplace.
©
Copyright Eva Rosenberg, August 2001. All Rights Reserved. |
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