| Finance

Dear Money Mentor:

We are looking at college funding for our growing children.  My father in law suggested we look into the 529 plans.  Save me some time.  Is this a good alternative to giving the kids mutual funds in their own name, or buying an annuity in their name?  We are getting lots of advice.

Thanks for the help.  We want the best for the kids.  We just have to live too!

        Three headed for college.

Dear Three Headed For College:

There are a number of great strategies that may be integrated to fund the future needs of college bound youngsters.  And you are wise to deal with this a soon as possible.  It very well may be the best alternative for your father in law if he is inclined to help with an expense that is likely to exceed $100,000 plus.  In response to your specific question, 529 plans.

529 savings plans are named for the Internal Revenue Code section that defines how these trusts may be set up and how they function.  This is a federally promoted program that is adopted state by state.  Generally, the state sponsors a trust, allows a parent or grandparent to make a contribution (not tax deductible) into the trust, allows the donor to select among a group of investment opportunities, and allows the earnings to compound tax free.

In quick summary the benefits are as follows:  The funds accumulate tax free.  There are no income limits for donors or beneficiaries as there are with other types of plans.  Eligible expenses are broad enough to include living expenses, not just tuition.  Estate planning and Gift tax considerations often guide the wise use of the plans as you may exceed the gifting limits for this purpose.  And, the original donor, say a grandparent, is allowed to actually retain control of the fund, and may, with certain penalties invade for their own use. 

This factor alone makes this option the choice of many who prefer to continue to control the assets in case the child or grandchild should happen to change their minds midstream and desire to take the college funds to Daytona beach for an extended vacation.  Many parents have been surprised to learn that certain completed gifts to youngsters actually become their property and subject to their use when they reach certain ages.  A 529 provides for a type of protection from this possibility.  There is a resource on the web that provides a summary of the plan as adopted by each state.  Not all states offer the same benefits or the same investment options.  You should find something that will make you happy.  www.collegesavings.org is the url.  Keep in mind some states offer the additional benefit of a state income tax preference if the 529 contributions are invested in their state.

Before buying mutual funds in your children’s name, or buying an annuity, check out all of your options, including the possibility of increasing your 401K contributions if your company plan allows borrowing from the plan for educational purposes.  Education for three youngsters is a big investment.  The multiple strategies to make resources available should be very well thought through.  The best option for your contribution may require a different choice than your father in law would make to meet the same goals.

Regards,

DPC, the Money Mentor.