College Savings Plans

Stephen W. Hewitt, JD, CFP®

College Savings Plans (529 Plans) are becoming very popular, and almost all states now have plans available. These plans can be used for all qualified post-secondary educational expenses, including tuition, books and supplies, and room and board. Oregon's plan went into effect on January 1, 2001. These plans have several advantages:

  1. Your plan contributions grow tax-deferred while in the plan, and when money is withdrawn to pay for the beneficiary's college expenses, the earnings are taxed to the student at the student's presumably lower tax rate.
  2. You, as the account owner, stay in control of the funds (but the plan determines how the money is invested -- you must choose one of the available investment options). You decide when withdrawals are made and for what purpose. However, if you withdraw funds which are not used for the beneficiary's college expenses, there is a 10% penalty on the earnings withdrawn, and the earnings are taxed to you.
  3. Anyone is eligible to set up or contribute to a college savings plan; there are no income limitations. Under Oregon's plan, up to $2,000 in yearly contributions can be deducted from your state income tax, resulting in tax savings of up to $180. Oregon allows you to contribute to your account until the account balance reaches $150,000; other state plans may have different limits. After that, the account can continue to grow, but no more contributions can be made.
  4. You can change the beneficiary to another family member if the original beneficiary doesn't need the funds. The plan specifies who qualifies as family members, and they include children, spouses, step-children, grandchildren, in-laws and nieces/nephews. Most states also allow the account owner to be the beneficiary of the account.
  5. Contributions to the plan are considered gifts and remove the money from your estate. Contributions qualify for the $10,000 annual gift tax exclusion, and contributions between $10,000 and $50,000 can be treated as made over a five-year period. This allows you to contribute as much as $50,000 ($100,000 for a couple) in one year and avoid gift taxes.
  6. For financial aid purposes, college savings plans are considered an asset of the account owner and not the student beneficiary. (Some colleges, however, have indicated that college savings plans would be given consideration in the packaging of a student's financial aid award.) Once withdrawals are made, however, the earnings are taxable income to the student and are included in the student's income for the following year's financial aid calculation.

Under Oregon's plan, either the account owner or the beneficiary must be an Oregon resident. But under many other states' plans, you do not have to be a resident to open an account. So you may want to consider plans in other states if they have features you like. For example, you may prefer the investment choices available in another plan, or another plan's lower expenses. Remember, though, that an Oregon tax deduction is only available under the Oregon plan.

Most plans have available a choice of fixed-allocation options, as well as an aged-based (or years-to-college) option. Oregon has three fixed allocation portfolios: aggressive (with 90% in stocks), moderate (with 60% in stocks), and conservative (with 30% in stocks). Under the aged-based option, the mix of stocks and bonds varies based on the age of the beneficiary, with investments mostly in stocks when the beneficiary is young, changing to more fixed- income investments as college approaches. The chart below compares some basic provisions in the plans of four states, which are representative of what is available. We looked at the age-based option in these plans for a 10-year old beneficiary.

State
Plan Manager
Asset Allocation*
Expenses
Annual Expenses for $50,000 Account
Oregon Strong 60% stocks 40% bonds 1.3%** (0.325% admin., plus 0.98%) $650 ($975 if bought through advisor)
California  TIAA-CREF  60% stocks 40% bonds 0.76% $380
 New Hampshire  Fidelity 67% stocks 33% bonds 1.0% (0.3% admin., plus 0.7%) $500
Utah Utah (Vanguard  index funds) 65% stocks 35% bonds 0.32%, plus $25/year $185

If the account is opened through a financial advisor or third-party distributor, there is an additional yearly fee of 0.65%.

College Savings plans can play an important role in funding college and graduate school. For more information about College Savings Plans and other college funding options, please contact us at Silver Oak Advisory Group.

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