529 College Savings Accounts: Preferred Way to Save and Could Provide Child's Nest Egg

Here's an article from Kiplinger's that answers several questions about 529 college savings plans. I thought there were a couple pieces of information worth sharing with all of you. Here's the first:

When it comes to calculating college financial aid, it's much better to have assets in the parent's name. Parental assets are taxed at a lower rate (5.6%) than assets owned by a child (20%). By law, 529 accounts are considered parental assets, so they automatically qualify for favorable financial-aid treatment.

I'm not sure "taxed" is the right term, but you get what they mean -- 529s offer an advantage in that they count as parental assets.

Furthermore, 529s can be used as a nest egg if a child decides not to go to college:

Because you're primarily interested in a college fund, a 529 would let you take advantage of a slew of tax breaks: Your contributions may be eligible for a state tax deduction, your savings would grow tax-deferred, and the earnings would escape tax altogether if the money is used for qualified educational expenses, such as tuition, fees, and room and board.

But if your daughter doesn't go to college, you still have some control over the money. You could transfer the funds to another family member and preserve the tax benefits, or withdraw the money and pay income tax plus a 10% penalty on the earnings.

I guess it's the latter suggestion that qualifies as "using it as a nest egg" in Kiplinger's mind.

In the end, 529s are a GREAT way to save for college expenses. For some reasons why (and tips on how to make the most of them), see these links:

• What to Do with 529 Money If Your Child Gets a Scholarship

• 529s Are the Undisputed Kings of College Savings

• Avoid Costs When Investing in 529 Plans Too

• Why 529s Make Sense

• FAQs on 529 College Savings Plans and Why 529s are a Good Deal

Comments

[Billy]

Great post! Thanks for all of the recent posts on 529's. I'm opening one up as a Christmas present for my niece (actually for her mother and father :-), but I had forgotten the specifics about them being counted as parental assets in determining federal financial aid eligibility.

[Dangger]

10% is alot to lose if you don't use the money for child's school. If you only have one child, and the kids goes to a low cost school, the rest of your investment will suffer the 10% penalty.