College Savings – Louisiana 529 Plan is a Good START
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Over the past 20 years, saving for a college education has become a more prominent fixture in financial planning. According to SavingforCollege.com, a website dedicated to providing information on college savings, the cost to attend college has increased approximately 6 percent per year during this time span. In order to help families save for the expense of a college education, Congress established Section 529 of the Internal Revenue Code. Named after this section of IRS code, each state is allowed to establish its own plan and to determine what features they will offer. Although each state has its own plan with its own features, residents in other states may utilize the plan of another state. Some plans offer incentives or additional benefits to its residents so it is important to research what plan might be best for your situation.
Types of Plans – There are two basic types of 529 plans: prepaid tuition plans and savings plans. Prepaid plans allow you to pre-pay all or part of the cost to attend an in-state institution. If your child decides not to attend an in-state university, they may be converted to use towards an out-of-state institution or private university. Savings plans are similar to IRA accounts such that the owner will have a choice among different investment options. The value of the account will fluctuate depending on the performance of the investment selection.
The most attractive feature of 529 plans is the tax-benefits associated with the plan. Contributions grow tax-deferred as long as the funds stay within the plan. More importantly, withdrawals are tax-free as long as they are used for qualified college education expenses. Qualified educational expenses include tuition,
books, supplies and equipment required for enrollment in the university. In addition, room and board expenses (on and off campus) are considered “qualified” up to a specified amount according to the university’s cost of attendance.
Contributions to 529 plans are treated as a gift for federal gift tax purposes and are applied to the annual gift-tax exclusion (currently $13,000 per beneficiary). The IRS does allow a donor to make deposits up to $65,000 in one year if the donor elects to have the contribution counted as if it was made over 5 year period. This feature can be used as an estate planning tool to advance funding to a designated beneficiary.
Another important feature of 529 plans is that control of the funds is retained by the account owner, not the beneficiary. Unlike a custodian account, control of the funds does not transfer to the beneficiary at the age of 18. In the event the funds in a beneficiary’s account are not used, the beneficiary can be changed to another qualified beneficiary, usually a family member. If the funds are withdrawn and not used for qualified education expenses, the IRS imposes a 10% penalty on the amount that constitutes earnings. Withdrawal of the principal is not taxed and is determined on a pro rata basis. Furthermore, any earnings will be subject to income tax in addition to the 10% penalty.
To Louisiana’s credit, it has an outstanding 529 plan. The Louisiana START Savings Plan has been recognized as a five star plan by Savingforcollege.com. For Louisiana residents, it is very likely to be the best 529 plan for college savings.
The START savings plan has 3 key features that make it more attractive
than other 529 plans offered. 1) The plan uses low-cost Vanguard stock funds to give investors the opportunity to have exposure to the stock market. The annual management fees of these funds tend to be less than .40%, which is among the cheapest available. 2) The state will provide a match or an “earnings enhancement” of 2 to 14% of yearly deposits depending on the beneficiary’s family adjustable gross income from the previous year. 3) Deposits made to the account may be deducted from the account owners Louisiana income tax return. The maximum deduction is $2400 per beneficiary per year for a single owner and $4800 for account owners filing a joint return.
The Louisiana START savings plan is often overlooked by commissioned sales representatives since the plan is not offered through broker-dealers. Sales representatives are not paid a commission to sell it. They will often utilize other state’s plans that are offered through a broker-dealer in order to receive compensation for their advice.
With the cost of college skyrocketing, savers need every advantage when saving for their child’s college education. The Louisiana START Savings plan offers one of the best alternatives for residents of Louisiana. To participate in the plan an application can be obtained from the Louisiana Office of Student Financial Assistance or an account can be opened online at www.startsaving.la.gov.
For additional information about college savings, please give us a call at 504-835-1135 or e-mail me at mnobile@crescentsterling.com
Disclaimer: Please consult your tax advisor for determining the impact of tax related issues with 529 plan