NOTE: This article was provided to Grandparents.com by our partners at College Savings Bank. The opinions expressed do not necessarily represent those of Grandparents.com.
The importance of a college education is paramount as more individuals earn advanced degrees and the workforce becomes more competitive. However, as the cost of college also rises each year, the price tag for higher education can be a burdensome expense if families don't plan ahead. State-sponsored 529 plans can provide parents and grandparents a beneficial way to save so that when the time comes for their loved one to go off to college, the funds will be available. Special tax advantages based on 529 contributions make it no surprise that the plans are growing in popularity as a savings tool and a worthwhile investment option.
529 plans allow any U.S. citizen, regardless of income, to establish a tax-favored account for an individual. According to Investment News, 529 plan assets grew 5 percent in 2011, to $134.6 billion –– up from $127.8 billion at the end of the third quarter of 2010, based on quarterly data from Financial Research Corporation. For the fourth quarter of 2011, Financial Research Corporation projects about another $3 billion will be placed in 529 accounts, as account holders boost contributions in order to take advantage of tax savings features before the end of the year.
For many parents and grandparents, investing in 529 college savings plans can offer tax-saving benefits while they save future college education funds. Many state-sponsored 529 plans offer individuals tax deductions or tax credits based on contributions to their respective state's 529 plan –– sometimes amounting to thousands of dollars deducted off a contributor's gross income per year, or tax credits based on how much they've contributed.
In addition to generous tax deductions and credits, when you save for your loved one's college education through a 529 plan, the earnings grow federal and state tax-free, and distributions to pay qualified education expenses are also federal and state tax-free. Eligible qualified expenses include tuition, fees, textbooks, supplies and certain equipment required to attend an eligible institution. If the student's enrollment qualifies as at least half-time, room and board expenses are also eligible, up to a specified level.
Parents and grandparents can also benefit through tax-free gifting when contributing to a 529 plan. Contributions qualify for the federal $13,000 annual gift exclusion –– $26,000 if married, filing jointly. Additionally, there are high maximum contribution limits, up to $340,000 in some state plans.
As the costs of college continue to rise, it's important to prepare and protect your loved one's college savings. With few exceptions, college inflation has steadily risen over the last 10 years. Over the past 50 years, college costs have increased by an average of 6.47 percent annually — nearly double that of general inflation. For the 2011–2012 academic year, the annual college inflation rate was 4.36 percent.
A college education is an investment that will reap rewards for years to come. The Bureau of Labor Statistics reports that in the third quarter of 2011, full-time employees age 25 and over holding at least a bachelor's degree had median weekly earnings of $1,152, compared to $636 for high-school graduates with no college education. And those who complete higher education have more opportunities to enter into occupations yielding higher returns in earnings. According to the U.S. Census Bureau, over a 40–year career the difference in earnings between a high-school graduate and a college graduate can be as much as $1 million.
There is no better time than now to start investing in a 529 plan for your child or grandchild. With the 2011 tax deadline coming up fast, making a contribution today can put more tax dollars in your hand. Give your loved one a solid foundation for a future college education before the December 31, 2011 tax deadline.
Discover more ways to focus on your finances from Grandparents.com:
© 2011 College Savings Bank. All rights reserved. Member FDIC. Article written by Christine Doyle, a financial writer at College Savings Bank. For more information, please visit www.collegesavings.com.
Source: 529 asset growth derived from Investment News: Savers pulled money from 529 plans in 3Q by Liz Skinner. Public college costs and percentage increases are derived from 'Trends in College Pricing' © 2010 The College Board (available at trends.collegeboard.org). Private college costs and percentage increases are based on the Independent College 500 Index © 2010 The College Board (available at professionals.collegeboard.com). General inflation figure based on the Consumer Price Index produced by the Bureau of Labor Statistics, unadjusted 12 months ending June 30, 2001–2010. Median weekly earning derived from the 'USUAL WEEKLY EARNINGS OF WAGE AND SALARY WORKERS THIRD QUARTER 2011' U.S. Department of Labor, Bureau of Labor Statistics. 40-year career earnings derived from "The Big Payoff: Educational Attainment and Synthetic Estimates of Work-Life Earnings" www.census.gov/prod/2002pubs/p23-210.pdf.
Home
