Putting Retirement Assets to Work

Abraham Lincoln once said, “The philosophy of the school room in one generation will be the philosophy of government in the next.” Consequently, many parents and grandparents value higher education and want to help pay for the college costs of their children and grandchildren.

Is funding higher education a top priority in your family?

529 College Savings Plan

What do you know about Qualified Tuition Plans (aka 529 College Savings Plans)? Did you know they are a popular and tax-savvy approach to college savings? Here are the basics: the grantor (you – the parent, grandparent, aunt, uncle or friend) make contributions in the form of gifts that qualify for the annual gift tax exclusion (i.e., $14,000 per beneficiary), but with an interesting wrinkle. You may gift up to five years’ worth of annual gifts (i.e., $70,000) to a 529 plan and “front-load” your contribution in one year. Not only are these gifted funds and the future growth on them outside your estate, but the contributed funds are not subject to federal (and some state) income taxes. In addition, the funds paid out for qualifying educational expenses are not subject to federal (and some state) income taxes when withdrawn.


One of the best things about 529 plans is their flexibility for the account holders (i.e., you). The owner – who need not be a parent – is still in control of the account when the beneficiary (student) becomes an adult. This means you can transfer it to another beneficiary if need be. For example, if a college savings account is not needed by a grandchild who is awarded multiple scholarships or decided not to attend college, then the 529 account can be designated to a younger child, grandchild or even a parent who wants to go back to school.

Types of Plans

There are two basic 529 plan “flavors” – prepaid tuition and college savings plans – and more than 100 options regarding requirements and eligibility.

Pre-paid tuition plans typically allow those saving for college to purchase credits at a participating college or university for future tuition, as well as room and board in some situations. These prepaid tuition plans are sponsored by state governments and also have residency requirements. The state will generally guarantee investments in its sponsored pre-paid tuition plans.

College savings plans generally allow the account holder to establish an account for the beneficiary to pay his or her eligible college expenses. You can select from numerous investment options, which the college savings plan invests on your behalf. The funds from college savings plans are generally used at any college or university, but these plans may invest in mutual funds, which are neither guaranteed by state governments, nor are they federally insured.

Qualified Expenses Only

The funds in any 529 plan may only be used for “qualified” expenses. The IRS says these are things like the “cost of attendance” room and board (not a new house!), tuition, books and other required materials.

As far as a purchasing a laptop, tablet or other computer, make sure that you hang on to your paperwork and print out the rules from the university website that says students are required to own one. And, no, spring break expenses do not count.

Categories: College Savings