529
Plans Offer an Attractive Combination
At the
end of 2003, Section 529 plans held an estimated $32 billion in assets. In five
years, if current trends hold, they are expected to increase by more than 400
percent in deposited assets.¹
What's behind
this surge in popularity?
These college
savings plans offer many benefits, including the combination of potential
tax-deferred growth and federal tax-free withdrawals for qualified
higher-education expenses. Also, 529 plans have no income limitations or age
restrictions, and donors can give up to $11,000 per year ($22,000 for couples)
without incurring gift tax penalties.²
Tax-Deferred
Growth
Deferring taxes can make a tremendous difference in the rate at
which college savings can accumulate.
As you can see
from the accompanying chart, a $10,000 lump sum invested in a taxable account
(28 percent) earning a hypothetical 8 percent return would grow to $19,600 in 12
years. In a tax-deferred 529 account earning the same rate of return, it would
grow to $25,200. Withdrawals would be tax-free if they were used for qualified
education expenses.³
The difference is
even more pronounced when you make additional $300 monthly contributions. The
taxable account would grow to $80,600 after 12 years, whereas the tax-free plan
would grow to $96,300 during the same period.
As you consider
college savings programs, keep in mind the powerful combination of tax-deferred
accumulation and tax-free withdrawals offered by 529 plans. Please call if you
would like more information about college funding.
1)
"A Competitive Outlook for 529 Savings Plans," Cerulli Associates,
2003
2) As with other investments, there are generally fees and expenses associated
with participation in a 529 savings plan. There is also the risk that the plan
investments may lose money or not perform well enough to cover college expenses
as anticipated. Qualified withdrawals are tax-free through December 31, 2010,
unless Congress extends the tax-law provision. The tax implications of 529 plans
can vary significantly from state to state. Most states offer their own 529
programs, which may provide advantages and benefits exclusively for their
residents and taxpayers.
3) Because many people start planning for college when a child enters
kindergarten, these examples assume a 12-year period.
