Attention, Parents and Grandparents!
I know from your letters that many of you are concerned about the rising cost of college. You’re also confused about the different college savings accounts available — 529 plans, Coverdell Education Savings Accounts, UGMAs/UTMAs, trusts, and so forth. Read on about how to receive a free copy of the “Family Guide to College Savings” by CPA Joe Hurley.

Dear Friends,

If there’s a child in your life, consider taking some simple steps before this year ends (where did it go?!) to ensure that he/she will have the money needed to attend college.

First and foremost, if you intend to contribute to a child’s college “kitty,” be sure you do so by December 31. By law, you can give up to $11,000 per calendar year to as many individuals as you wish without owing tax on your gift. A couple can combine their annual amounts and give as much as $22,000 to each individual. (These amounts increase to $12,000 and $24,000 next year.)

If you want to ensure the money is used for educational expenses, you can direct your gift to a trust or one of the accounts Congress established specifically for this purpose: a 529 plan or a Coverdell Education Savings Account (ESA). Just keep in mind that the maximum amount you can put into a Coverdell ESA is $2,000 per year per child. So if Grandma Barbara puts $2,000 into an ESA for Johnny $2,000, Grandma Sarah has to use another type of account.

In contrast, 529 college savings plans are eligible to receive the full $11,000/year contribution from as many people as wish to make one. If both sets of grandparents, mom and dad, and Uncle George all wanted to max out their annual gifts to Jennifer, they could contribute a total of $77,000 to her 529 account.

CPA Joe Hurley, who has literally, “written the book” on the various ways to save for college, points out that you also have the option of making an even larger contribution.

But in this case you must use a 529 plan.

Under a special provision in the tax code, only 529 plans allow a donor to give 5 years’ worth of gifts in a single year — a total of $55,000 — and not owe gift tax. Keep in mind that if you take this approach, you cannot make any additional gifts to the beneficiary of the 529 plan this year or the next four.

Gifts made to a 529 plan are removed from your taxable estate, thus reducing your estate tax bill. However, unlike money contributed to a Uniform Gift/Transfer to Minor account, the “owner” of a 529 account retains control over how the money is spent even after the child reaches the “age of majority.”

Some states sweeten the deal by giving you a state tax deduction if your 529 contribution goes into your in-state plan. New York and Michigan, for instance, allow residents to deduct as much as $5,000 ($10,000 for a couple) from their taxable income for amounts contributed to the New York or Michigan 529 plan. That can save you hundreds of dollars in state income tax. But if you want the tax deduction for 2005, you’ve got to make your contribution in 2005.

Note: this tax break isn’t available with a Coverdell ESA or UGMA/UTMA.

If your child already has a 529 plan, this is a good time to take a look at how the investments in it have been doing. By law you can change the investments in a 529 once a calendar year. If you haven’t switched any of the options in the plan so far this year, you’ve got until December 31 to do so.

According to Hurley, “If you’re invested in a 529 plan you’ll get performance data either on the plan’s website or in a mailing.” But before you jettison a particular mutual fund, be sure you’re comparing its return with similar investments. This isn’t easy. In some cases, the state sponsoring the plan will provide examples of how similar investments have performed. If you are investing with the help of a financial advisor ask him/her for these comparisons.

Another reason to adjust the investments in a 529 plan is because the beneficiary is getting older and you want to reduce the amount of stocks in the portfolio. Although equities have historically provided a better return than bonds, they are also prone to more frequent and larger price fluctuations (a.k.a. volatility). The closer your child gets to attending college and needing the money, the more important stability becomes; you don’t want the account to lose value just before you have to take a withdrawal.

But the average person has no idea what percentage of a 529 account a 10-year old should have, versus a 14-year old. Frankly, even experts disagree on this. “Which is why many people use age-based funds and let the plan make the appropriate changes,” according to Hurley. This approach saves you the trouble of rebalancing the portfolio each year because it automatically reduces the amount of stocks as the child gets older.

While you’re at it, consider your 529 provider. Do you know what you’re really paying for the plan? If you want to check out other 529s, go to Hurley’s website, http://www.savingforcollege.com. You’ll find links to every other state plan so you can compare the fees, expenses, tax breaks, as so forth. You’ll also find answers to common questions about all of types of college saving accounts and a message board where you can post your own questions.

You can “rollover” 529 assets from one plan to another once every 12 months. But before doing so, I strongly recommend you thoroughly do your homework or seek the help of an advisor in order to avoid problems down the road. For instance, some states will “re-capture” the tax deduction you got when you invested in the state plan. You’ll also want to check whether your state hits you with income tax on 529 withdrawals unless they comes out of your in-state plan.

Last but not least, if your child is already attending college, remember that “you need to match up the year you’re paying the expense with the year you’re taking money out of the 529 plan or Coverdell Education Savings Account,” according to Hurley.

Say you pay the tuition bill for Spring semester 2006 before the end of this year (2005) and intend to use a withdrawal from a 529 or ESA to reimburse yourself. “Make sure you get those funds out this year,” advises Hurley. If you wait until next year to reimburse yourself, the 1099 showing you took money out of a 529 or ESA will be dated 2006 instead of 2005 and “you may end up with a tax problem.”

Thirty lucky readers will receive a copy of Joe Hurley’s “Family Guide to College Savings.” Just send me an email telling me why you need this information and how you’ll use it. Please keep this short and sweet. And remember to include your mailing address. Emails that omit the sender’s U.S. Post Office address will automatically be deleted!

Hope this helps,


If you have a question for Gail Buckner and the Your $ Matters column, send them to yourmoneymatters@gmail.com, along with your name and phone number.