Sending Kids to School with Section 529

Many Americans graduate from college and start their first jobs inundated with paperwork about their company’s retirement plans. These plans provide great tax benefits and are a great way to save for the future. If they don’t sign up for the company retirement plan, American taxpayers are typically reminded at tax filing time about starting an IRA. But nowhere along the line is there that human resources department, or tax return instruction booklet screaming out to you about saving for college.

Sending children to college is likely the biggest expenditure one has in the raising of children in the U.S. and the Internal Revenue Code has an underutilized provision in it to help families cover the cost. Section 529 of the Internal Revenue Code provides for College Savings Plans, commonly known as 529 plans that yield great tax benefits. Contributions to the plan grow annually without being taxed. When funds are withdrawn, if the funds from the account are used for qualified secondary education costs (including college and university tuition, housing, meal plans, and text books), then none of the income from the account is taxed. While there is no federal deduction upon funding the plan (some states such as NY allow for a small deduction), the fact that the income can be used tax-free is a substantial benefit.

I personally ended up saving for three years of my children’s college tuition, and the fourth year tuition was covered by the income and tax savings of the plan. This is even after the horrendous losses sustained from last year’s economic meltdown. (Prior to the meltdown, a good part of their graduate school had been covered as well.) In New York (minimums can vary state to state) you can deposit as little as $25 or as much as $13,000 per donor per child. I use the term “donor” because not only parents can give to these plans, but grandparents, friends, and others. While more than $13,000 per year per child is possible, I don’t recommend you consider this option without consulting your accountant as there may be gift tax ramifications in exceeding that amount. A married couple depositing the maximum annually for their child can have that child’s education at our most expensive private universities fully funded before that child is seven years old. Even depositing far less than the allowed amounts can fully fund a child’s education well before age 18. You can check out how to open a plan with your local investment advisor or go online.

Stuart Gelwarg is a CPA and a partner in the firm of Altman, Greenfield & Selvaggi, LLP.