Improved Section 529 Laws Benefit College Savers

Newly signed Federal and State Bills enhance tax benefits.

New state and federal laws have added significant tax benefits for families using Section 529 Plans to save for their children’s college educations. Here’s a summary of three key provisions:

Break #1-Tax-Deductible Contributions: For Pennsylvania residents, retroactive to January 1, 2006, any contribution made to any 529 plan sponsored by any state, is now deductible on your Pennsylvania state income tax return. The upper limit on deductible contributions in 2006 is $12,000 per investor ($24,000 if married) per beneficiary. For example, a $12,000 contribution would result in a tax-break of $386 based on Pennsylvania’s 3.07 percent state income tax rate.

Break #2-Tax-Deferred Growth: This provision remains unchanged in that 529 plan assets grow without federal or state taxation. Investment options vary greatly, including static or set allocations into investments ranging from high-risk stock funds, bonds funds, money market and/or combinations of all. Most 529 plans also offer age-based investments whereby allocations automatically become more conservative as the beneficiary gets closer to college age.

Break #3- Tax-Free Withdrawals: An enhanced new provision for Section 529 plans is the permanent extension of favorable tax treatment on qualified withdrawals. Qualified expenses include payments to accredited post-secondary institutions for tuition, room and board, books, fees, supplies and equipment.

An additional kicker for Pennsylvania residents owning plans from other states is the elimination of Pennsylvania income taxes realized on gains out-of-state plan withdrawals for qualified college expenses.

Participant Control: A key benefit with 529’s is that the investor maintains control over investment and withdrawal decisions. The investor also retains the right to change beneficiaries from one child to another, which could come in handy if the named beneficiary obtains a scholarship (good), if grades do not match expectations (bad), or if the student decides to forgo their sophomore year in order to spend their “college money” on a Harley (sorry Charley!).

Financial Aid: Parents investing in 529 plans also should know that these assets are considered “parental assets.” Predecessors to 529’s, namely UGMA and UTMA accounts, are considered “child-owned.” For the purposes of qualifying for financial aid, parental-owned assets are normally preferable. Moreover, a grandparent controlling an account intended for college is even better from a financial aid perspective, since their accounts are completely off of the financial aid radar screen.

Summary: Based on research from the College Board in 2005, a 4 year college education for a newborn is now expected to exceed $138,000 for a public institution and a whopping $300,000 plus for a private school. Section 529 Plans, especially in light of recent enhancements, now contain even more compelling tax benefits. Certainly there are expense factors to consider, which can vary greatly, even among plans offered within the same state. There is also the risk that plan investments may lose value or not perform well enough to cover college costs as anticipated. Before investing, request disclosure documents containing more complete information regarding underlying investment options and performance, a complete fee description and possible risks. •

Philip C. Henry, CFS is the President of Henry Wealth Management, LLC, an independent financial planning firm located in Bridgeville, PA. He offers securities and investment-advisory services through a non-affiliated firm, NFP Securities, Inc., a Broker/Dealer, Member NASD/SIPC, and Federally Registered Investment Advisor. He may be reached at 412-838-0200 or through email at Phil@HenryWealth.com. His website is www.HenryWealth.com. The opinions expressed in this commentary are those
of the author and may not necessarily reflect those held by NFP Securities, Inc. This is for general information only and is not intended to provide specific investment advice or recommendation. Consult your tax advisor regarding your individual situation.