Taylor Easley and Dale Suezaki are financial advisers at Morgan Stanley, 329-7979.
According to the College Board (a not-for-profit educational association), for 2004-05 average costs per year totaled $5,132 for state universities and $27,516 for private universities. (Figures include tuition, fees, room, board, books, supplies, transportation and other expenses for residential students.) Adding graduate or professional school on top of college may increase the costs of an education dramatically. If these figures are unsettling, this number might provide some reassurance: 529.
Attractive tax benefits
A 529 College Savings Plan lets you contribute generous amounts to a tax-advantaged account to pay for college costs. Aggregate contribution limits vary by state but are often above $200,000 per beneficiary.
A 529 plan account can grow federal income tax deferred. Withdrawals are also free of federal income taxes when used for qualified educational expenses like tuition, books, fees, room and board. (Unless Congress renews or extends the current tax provision, 529 Plan withdrawals will become federally taxable after 2010, but earnings would still accumulate tax-deferred until withdrawn.) If used for other purposes, the earnings portion of the withdrawal is taxable as ordinary income and subject to a 10 percent federal tax penalty unless the beneficiary dies, becomes disabled or receives a scholarship. State tax penalties may also apply. (Some states will impose a state tax penalty on non-qualified withdrawals and this penalty would vary by state but does not currently exceed 10 percent.) There are also important state income tax advantages in addition to tax-free withdrawals such as deductions for contributions for qualified purposes. Be sure to understand your state tax benefits because many states offer state tax incentives for 529 plan investing only to residents who enroll in their own or the beneficiary’s own home state plan. This means that state tax advantages are generally not available to persons who enroll in the 529 Plan of a state where neither they nor the beneficiary are residents.
Ample flexibility
You may be able to start funding a 529 plan with as little as $25 a month. 529 plan accounts may be opened for the benefit of a relative, a friend, or even yourself if you plan on funding your own post-secondary or graduate education. You may also change beneficiaries anytime, provided the new one is a family member of the previous one, as defined in Internal Revenue Code Section 529.
IRS Circular 230 Notice: This material was written to support the promotion or marketing of the transactions or matters addressed herein. It was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under US federal tax laws. Morgan Stanley does not render advice on tax and tax accounting matters to clients. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Consult a tax or legal adviser before making any tax- or legally related investment decisions. This article is published for general informational purposes only and is not an offer or solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your individual circumstances and objectives.
Taylor Easley and Dale Suezaki are financial advisers at Morgan Stanley, 329-7979.