Whether you have a mom, moms, or hodge-podge of mother-like figures in your life, it's a good time to acknowledge that you're in debt to some highly influential women.
As we approach Mother's Day, we'd like to help you remember to do two important things:
1) Call your mother.
2) Consider paying it foward by investing in future generations.
Very few investments can yield the returns that can come from investing in the education of our youth. Mom or not, if you come to the conclusion you want to help anyone in your family get a college education, please consider seriously the following six benefits of Section 529 plans:
1. They hold the potential for tax-free, equity rates of return. A very wide range of low-cost investment vehicles is available to many 529 plans, and income from 529 plans will not be taxed when spent on qualified college education expenses.
2. The donor retains full control of the plan assets. Unlike outright gifts, the donor retains full control of the use and investments of the assets until dispersed.
3. 529 plans have flexible transferability. While not unlimited, they offer substantial flexibility to shift benefits to other family members in the future and even to designate a successor owner of the plan. There is no time requirement for using the plan assets. They may, for example, be held for the life of the donor or beneficiary and beyond.
4. Substantial amounts may be put to work. There is an exception to the gift tax rules for 529s allowing donors to give five years of the annual $14,000 exemptions at one time ($70,000). For example, a grandmother and grandfather with three grandchildren could put as much as $520,000 into 529 plans in one year without incurring any gift taxes. In contrast, Roth plans are typically limited to a maximum of $18,000 per person, per year. However, be aware that the 529 plan sponsor often has an aggregate cap; Vanguard has an aggregate cap of $370,000 of contributions for each plan, for example.
5. Time is your friend. Opening a 529 plan at birth is not too early, and it is seldom too late to start. Starting early gives one the best chance of substantial tax-free returns.
6. Downside risks are small. If the donor simply changes their mind and takes back the future proceeds for their own personal purposes, the impact may be substantial but typically not devastating. A typical worst result would be to pay tax on the full earnings of the plan at ordinary rates, plus a 10% penalty for nonqualified use. Outright losses would not be deductible.
While the case for 529 plans is compelling, they are not for everyone. Additionally, Roth plans, tax free bonds and Coverdell accounts, among others, are education investment strategies that can be used for tax advantage, and it may be helpful to use combinations of these. The professionals at Revolution Partners can help you evaluate your unique family and financial situation in order to select an appropriate college savings plan for your greatest assets. We would be glad to help you start with financial planning today!