Hosts Pat Welde of Merrill Lynch & Paul Godlewski of Global Enterprise V C interview guest Doug Hepburn, Investment Rep. Cetera Advisors
Doug Hepburn is an Investment Advisor Representative of and offering securities and advisory services through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other entity.

Show Notes*

Related article “Best Plan for College Savings is an Early Start” that Doug authored for the Pennsylvania CPA Journal.

Q 1. What is the average cost of tuition these days?

A. According to The College Board, average annual tuition rates for 2012-2013 ranged from $3,131 for a two-year degree at a public college to $29,056 for a four-year degree at a private institution. These figures don’t include room, board, books and transportation which can drive the annual price over $60,000 at an elite school.

Q 2. With costs that high, what are the keys to being able to send a child to college without going bankrupt?

A. The three keys to planning are always going to be resources, time and risk tolerance, with resources being the biggest factor. If you have adequate resources to devote to college expenses, time and risk tolerance become less important to the overall equation since the chances of failing are significantly reduced.

Q 3. So if we have some resources, what is the best way to save for college?

A. As with most things there aren’t any silver bullets since everything has a trade off, but generally 529 Plans or college savings plans are the vehicle of choice since contributions can grow tax deferred. Once the child or beneficiary is enrolled, distributions can be made tax free provided they are used for qualifying expenses such as tuition, books, room and board.

Q 4. That sounds pretty good to me. So what’s the catch?

A. Any distributions that aren’t used for qualified expenses are subject to income tax on the earnings and a 10% penalty, so you have to be confident that your child will go to college and that you don’t over fund the 529. That being said, if you do overfund the account and have funds left over after the beneficiary graduates, the money can either be used for graduate school or you can change the beneficiary so that another person can use the proceeds for college.

Q 5. Why wouldn’t someone want to use a 529 plan?

A. For people whose resources may be more limited, it may be more important to prepare for retirement first. In other cases, there may not be enough time for the assets to grow before they are needed so it really is a balancing act.

Q 6. Can anyone contribute to a 529 plan or are only the parents allowed to make contributions?

A. You raise a good point. One of the key benefits of 529 plans is that anyone can contribute to them, parents, grandparents, aunts, uncles. In fact, they have become a valuable estate planning tool for people who want to get assets out of their estate to their grandchildren. One of the provisions of Section 529 permits people to contribute up to five years of annual gifts to a 529 plan in one shot without paying Gift Tax or Generation Skipping Tax. For example, in 2014 a single taxpayer can give up to $14,000 to another person without triggering any taxes. Married couples can give $28,000 through a technique known as gift splitting. Using a 529 plan a married couple could give up to $140,000 to each grandchild and not trigger any taxes. With two sets of grandparents that could be $280,000! There are several caveats to this. First, both donors must live five years beyond the date of the gift and second, they can’t make annual gifts to those beneficiaries until the five years has lapsed. It’s also important to note that each plan has a maximum allowable contribution limit which cannot be exceeded.

Q 7. What is the maximum allowable contribution limit?

A. It varies from plan to plan. Section 529 plans are generally sponsored by state governments and come in two forms: prepaid tuition plans and 529 investment plans. A prepaid tuition plan is similar to a defined benefit where the contributor is buying college credits at today’s prices for use at a future date. Whereas 529 Investment plans are similar to a defined contribution or 401(k) plan in that the contributor decides what they want to put in but they are taking on the risk of loss if the investments don’t pan out. Each of these is sold by a disclosure document containing the maximum limit which generally runs between $70,836 for the Texas Tuition Promise Fund to $452,210 for both Pennsylvania plans.

Q 8. Are there other benefits to 529 plans?

A. For years many states have tried to put incentives in their plans to encourage residents to participate in their plan. Pennsylvania used to do that but now does not. As a result, any Pennsylvania resident can make a contribution to any 529 plan and get an income tax deduction for the contribution, subject to certain limitations. When the money is used for qualified higher education expenses there is no Pennsylvania tax due. From my perspective this is a great benefit because it removes one more stumbling block that people encounter when trying to make a decision.

Q 9. What if a person doesn’t have time to make a 529 plan work?

A. One of my favorite strategies is to have grandparents pay tuition directly to the school a grandchild is attending. It gets the money out of their estate, without triggering Gift or Generation Skipping Taxes AND it isn’t subject to the annual gifting limit of $14,000 per person. What’s more, grandparents can pay multiple years of tuition in advance and accomplish the same goal that accelerated gifting to a 529 plan does, without having to outlive the clock. Now they can’t put any conditions on it so if Junior decides he wants to switch schools, or drop out, the money is spent and can’t be refunded.

*Any tax advice included in this written or electronic communication was not intended or written to be used , and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.

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