Too Much in 529?

One of the best ways to shelter your money from taxes and save for your child’s college education is through a 529 College Savings Plan. This plan allows you to contribute $14,000 ($28,000 per couple) of after tax money into an account that grows tax free if used for qualified education purposes. You could call it the Roth IRA for college. For high income earners, this could be one of the only ways to get tax free growth.

You retain ownership of your account and have the ability to choose between various investment options. You can even have other family members gift money into the account. We recommend consulting with an advisor to determine how to choose your investments based on your various children’s ages.

Now, what happens if you saved more than enough money into your 529? Maybe your kid received a scholarship, attended a lower cost state school or decided on a different career path. Fortunately, there are many options:

1. Say your child is brilliant and receives an academic scholarship. Fortunately, you can take out the amount of the scholarship each year as it occurs without penalty from your 529. You shouldn’t be penalized for raising smart children. Now, you will still pay taxes, but it basically turned a tax-free vehicle into a tax deferred vehicle. It is important you take the money out the year the scholarship occurs.

2. Since you own your 529, you can transfer it to another person of the beneficiary’s family. Maybe your child decided on a different path. You can transfer the beneficiary to nearly anyone else in the family. This includes first cousins, aunts, uncles and their future children. It is not limited to just brothers & sisters.

3. You can go back to school. Now, don’t go join your kid at his college, but you can take college courses and expand your horizon.

4. Some schools are starting to offer programs to parents of students where they can take a cooking course or something related. Look to see more of those in the future. Make sure you don’t move into the dorms with your new son or daughter in college.

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Finally, you can take the money out and not use it for educational purposes. Keep in mind you will pay ordinary income taxes on the gains as well as a 10% penalty. If this is your last resort, spread it out between different years.

With the soaring costs of college education, the 529 is a great opportunity to save for your children’s education. However, it is important you still plan for your own retirement and your own goals so the burden does not eventually lie on them. Building a plan that incorporates the right level of college savings and retirement savings in crucial.

By Ben Dunbar
Investment Advisor Representative

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.

Gerber Kawasaki, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing

This information is not intended to be a substitute for specific individualized tax advice