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Business // Thinking Smart
David S. Chang

Benefits Of A 529 College Savings Plan

The average cost of a private college is $40,000 per year, and for a public college it is $18,000. The cost of college has increased by 80 percent in the past decade, and it is growing twice as fast as medical care costs!

The costs are expected to continue rising, which is why college savings is a high priority for many people. One of the best ways is to take advantage of a 529 college savings plan, which is a tax-advantaged, state-sponsored investment account that anyone can open.

Here are some other great benefits:

* 529 is very flexible. You can use a 529 to pay for tuition, fees and books for undergraduate, graduate, technical or trade schools. It is not limited to traditional colleges. In addition, any family member can use the money. A parent who opens a 529 is the owner and the future college attendee is the beneficiary. The beneficiary can be changed if the current beneficiary chooses to not go to school, gets a full ride, goes to a service academy (like me, Go Army!) or doesn’t use all of the money. The owner also can use the funds if he or she decides to go back to school. Another big benefit is that if your beneficiary doesn’t need the money because of scholarships, then you can have the money back without any penalty. Normally you’d pay a penalty if you use the money for anything other than education. It applies to all states, since it is a federal law. The 529 also can last for generations and has no expiration date.

* You can open up any 529 account. Even though the 529 plan is state-sponsored, you can choose any one of them, regardless of which state you live in. There are 114 options, with a different investment structure for each one.

You can go to artofthinkingsmart.com for more information on Hawaii’s 529 plan. Generally, you want to use a 529 from your home state. If your state has an income tax, you may get a tax deduction. Hawaii currently doesn’t offer one for its plan. The only reason you may want to use another state’s 529 is if the investments are better and it has significantly lower expenses that offset the tax deduction. Another great benefit is that anyone can open up a 529 – a parent, grandparent or generous friend. The contributor gets the tax deduction.

* You can have multiple 529 accounts. If you open a 529 in your home state and decide to move, you can keep your money in that account and open another one in your new state. You can consolidate, but some states will request the tax deduction back if you withdraw the funds. It is better to have at least one account per child instead of having one collective 529 account that will be divvied up. Each will have their own plan, you can move money from one account to another, and you can get deductions for each child.

* You can contribute more money. You can contribute up to $14,000 per year, per beneficiary and per donor without incurring the gift tax. So, a husband and wife can put in $28,000 a year, per child. You also can front-load the account and give up to five years of contributions at once, which is $70,000 per person or $140,000 per couple. You won’t be able to contribute for five years, but the money is working for you immediately.

david@artofthinkingsmart.com

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