529 Plans

Report cards came home yesterday. Some were great, straight A’s and all!  Some not so great..but hey, he had 8 tackles at his game today!

All joking aside, I worry about my kids’ education and I know that others do as well. Paying for college is getting more expensive every year. Even at public universities, which are essentially subsidized by the states, tuition has increased exponentially since I started—and that wasn’t all that long ago!

Worrying about your kids’ tuition can be draining, but there are a number of options out there to help prepare for that day. A great way to help fund your child or grandchild’s education is by setting up a 529 plan for them.  They are also a great tool for a comprehensive estate plan.

What is a 529 Plan?

529 plans, also known as Qualified Tuition Plans, are very simple to set up and very effective. 529 plans are tax-free savings plans to help fund education. 529 plans come in two flavors: college savings plans and prepaid tuition plans. The Texas Prepaid Higher Education Tuition Board is the state agency in charge of 529 plans in Texas. There are currently two 529 plans in Texas, the Texas Tuition Promise Fund and the Texas College Savings Plan.

529 Plans, a Flexible Solution

Unlike IRAs or other tax-advantaged accounts, 529 plans are very flexible. They not only allow the beneficiary to be changed at any time, but also allow roll-overs should the beneficiary not need or qualify for the remainder of the account. For example, if a brother has graduated from college with $7,000 left in his 529 savings plan, he can either roll-over the amount into his sister’s account or simply change the beneficiary of the account into her name.

Tax-Advantages of 529 Plans

Unlike other tax-benefit accounts like IRA’s and Coverdell Savings Accounts, 529 plans have no income ceiling for contributors. Also, 529 plans allow a one-time initial contribution equal to 5 years of the gift-tax exclusion tax-free. This is very helpful for families trying to pay-down their estates to avoid estate tax. For individuals the amount possible to transfer tax-free is $65,000, and for married-couples it is $130,000. These amounts can be used for each different 529 plan. For a couple trying to drastically reduce an estate, this is a wonderful way to do it.

The Texas Tuition Promise Fund, a 529 Prepaid Tuition Plan

Using a 529 Prepaid Tuition Plan in Texas allows you to buy credits today to use towards tuition, room and board at a specified time in the future. By paying for credits at today’s tuition rates, you can beat inflation, tax-free, and pay for your child or grandchild’s education ten or twenty years from now. There are currently three types of credits you can buy in Texas. Type I, or All Texas Colleges, is the most expensive, but also means that 100 credits will pay for 1 full year at any public school in Texas. Type II, or Texas 4 Year Colleges, is a weighted-average of all public 4 year universities in Texas. Because they use a weighted-average it is possible that 100 credits will not cover a full year on this plan. They are still a great deal, just not as good as Type I. The third type is Type III, or the Junior College Credits. This is a weighted average of all public 2 year colleges in Texas. While much cheaper than the other two, they also will only pay the weighted-average at a junior college. You must be careful in selecting which type of credit to buy.

Should the beneficiary decide on a private university or a school outside of Texas, it is possible to transfer the credits purchased through the Texas Tuition Promise Fund. The credits will be equal to the costs that the credits would pay for at a public university in Texas.

Texas College Savings Plan, a 529 Savings Plan

529 Savings Plans offer the advantage of flexibility over prepaid tuition plans. Distributions from a 529 Savings Plan may be used towards any qualified education expense. What are qualified purposes for 529 Plan distributions? Qualified education expenses can include (1) tuition and fees; (2) books, supplies, and equipment; (3) computers, equipment, internet access and related services; (4) room and board; and (5) any expenses for “special needs services.” Many of these expenses must be determined in advance by the institution that the beneficiary will attend. Room and board will only be allowed for students attending at least half-time, which is typically considered 6 semester hours, or two classes at many universities. The school will be able to tell you exactly what amount will qualify.

Overview of 529 Plans

Whether you have to worry about the annual gift-tax exclusion, or haven’t heard of it, 529 plans are a great option for anyone trying to determine how to pay for college. They are easy to set-up, easy to fund, affordable, and can save a lot of money over the life of the plan. With the ability to frontload 5 years worth of contributions they are also a viable option for depleting an estate to help avoid estate taxes without paying Generation Skipping Tax or Gift Tax.

Should you have any questions regarding 529 plans don’t hesitate to call me at (214) 519-8448 to schedule a free 20 minute consultation to discuss your options.