529 College Savings Plans Get Even Better!

What is now the best way to save for college expenses?

In my professional opinion, for most people, It's the 529 College Savings Plans. They are now worth a very serious look!

Section 529 of the Internal Revenue Code (the actual name) was put into place to encourage families to save and plan ahead for escalating higher educations costs. There are currently nearly 9 million 529 Plan accounts now with roughly $90 Billion dollars invested.

Here are a few reasons that most people don't know that makes 529 Plans more attractive than ever.

The Tax Increase and Protection Act of 2005 (which became law in 2006) extended the "kiddie tax" rules from age 14 to 17, which made traditional savings accounts, also known as custodial accounts, much less appealing. That and other new laws made 529 college savings plans MUCH more appealing.

With these plans, you could open an account and deposit money (NOT deductible on your federal tax return) and the money would grow tax-free. These deposits could be invested in money market, bond and stock mutual funds.

The Pension Protection Act of 2006 guarantees the tax-free withdrawals from the plans for higher education expenses will not fade away as they would prior to the PPA of 2006.

That is a pretty good deal isn't it? But there are also estate planning and gift planning benefits that aren't available on any other college funding plan.

The tax code allows parents or grandparents to deposit up to $60,000 in a 529 plan for each child (married couple can deposit twice that amount), free of gift tax, due to the laws allowing up to 5 years of gifting (up to $12,000 per person per year) to be done in one fell swoop with these college saving plans. It is a great way of getting assets out of the wealthy estate for the benefit of heirs.

And it gets even better! And you know what else is great about 529 Plans today? The Bankruptcy Abuse Prevention Act of 2005 shelters assets from most creditors after they have been deposited in 529 Plans for at least two years!

Now of course, I'm not advocating bankruptcy, but if this might be possible (and who can foretell the future?), where would you rather have your child's education fund - in a protected 529 Plan or a savings account that would likely be completely lost to creditors? Want more reasons? The Deficit Reduction Act of 2005 (enacted in 2006) improved the financial aid treatment of those people who had the foresight to plan ahead with 529 Plans. Essentially, the assets in the plan are now counted for financial aid purposes as those of the parents and NOT of the child which is beneficial to the family.

Why is this important? Because Colleges expect students to contribute (pay) 35% of the assets owned by that child each year while parents are expected to pay just 5% of assets owned by them each year towards higher education costs as the "family" contribution.

Please note that the 35% student contribution referred to above is expected to drop to 20% in the 2007-2008 academic year.

In summary, the 529 College Savings Plans should be central to nearly everyone's plans to pay for escalating higher education costs. The earlier you get started, the less money you'll have to find elsewhere to pay for a great college education for your children or grandchildren.

Since 1997, Mark J. Orr, a Certified Financial Planner, has helped hundreds plan for more financial success through powerful strategies and advice.

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