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529 College Savings Plans: A Great Way to Give

Leading global asset management firm Legg Mason answers your questions about 529 College Savings Plans | 

As the cost of college continues to climb, more families are finding it impossible to save the entire amount. Fortunately, an increasing number of grandparents are eager to help. Yet, some may not be aware of the preferred choice for college savings — 529 plans.

What is a 529 plan?

To help families save for college, section 529 of the Internal Revenue Code lets states operate tax-favored college savings plans. Contributions to the plan grow federal tax-deferred, and withdrawals are federal tax-free if used for qualified education expenses. States also offer tax benefits, which vary.

What makes 529 plans the preferred choice for saving for college?

Tax benefits, professional money management and control by the account owner are three of the primary benefits of a 529 plan. The first one, in particular, represents a powerful advantage over traditional savings vehicles. Investments will grow tax-deferred as long as the money remains in your account, which can really add up. Over 18 years, a hypothetical $100,000 investment could grow to $285,000 compared to $214,000 in a taxable account.*

How can 529 contributions reduce my taxable estate while leaving an important legacy for my grandchildren?

Contributions made to a 529 plan benefit from a special gift tax provision. You may contribute up to $70,000 ($140,000 per couple) per beneficiary in a single year. However, you must treat the contribution as a gift spread over five years in order to avoid incurring federal gift tax or reducing your unified estate and gift tax credit.

What happens if my grandchild doesn’t go to college?

Because 529 plans are transferrable, you can name other grandchildren and family members as the beneficiary. Or, you can put the funds towards your own lifelong learning. Have you ever wanted to take culinary classes or Spanish lessons, learn a new skill or start a new career? Just keep in mind that not all courses are qualified expenses; the college or vocational school must be on the FAFSA list of approved institutions in the US and overseas.

Doesn’t a 529 plan impact my grandchild’s financial aid eligibility?

The value of assets owned by a grandparent, including 529 Plans is not reportable on the Free Application for Federal Student Aid (FAFSA) form. But once funds are distributed from a 529 plan to a grandchild, they may reduce eligibility. However, if a grandparent were to put the 529 funds towards the final one or two years of college, they could have little or no impact on financial aid eligibility.

All investments involve risk, including loss of principal.

*Assumes 6% compound annual growth rate.


Scholars_Choice_logo_rgbTo learn more about how 529s can play a role in estate planning, please visit www.scholars-choice.com.

This is a special advertising section by Legg Mason Global Asset Management.





Christine Crosby

About the author

Christine is the co-founder and editorial director for GRAND Magazine. She is the grandmother of five and great-grandmom (aka Grandmere) to one. She makes her home in St. Petersburg, Florida.

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