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Dollars & Sense: The Gift of Education

Dollars & Sense: The Gift of Education

Shopping for the top toys for the 2015 holidays can be time consuming and expensive! Hoverboards and Phantom 3 Drones can be pricier than a tablet, ranging from $500 – $1000. While it may not be flashy, giving the gift of education to your child or grandchild is something that they will have forever, not just one year. The process is painless and more than likely less time consuming than trying to find that hot item. College savings plans, or 529 plans, have been available since 1996. A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It doesn’t matter which state the child attends school in, for example you can purchase a CT 529 plan and the funds can be used at any institution of higher education such as a college, university or vocational school, even on-line programs and international schools.

Anyone can set up a 529 plan – a relative, friend, even yourself. The 529 plan has a few components. There is the owner (or contributor), a successor owner (in case something happens to the primary owner) and the named beneficiary. You can change the beneficiary of a 529 anytime to any other individual without tax consequences. For example, a grandparent can establish the 529 as owner and have one of their grandchildren as the beneficiary. If that grandchild doesn’t attend college, the grandparent can change the beneficiary to another grandchild.

The real attraction is that accumulation in a 529 plan is withdrawn state (CT) and federally tax free when used for qualified educational expenses. Traditional expenses such as tuition, room and board are considered qualified and now the cost to purchase any computer technology or related equipment or services are also considered qualified expenses. What happens if the 529 account is not used for college expenses? The owner will have to pay ordinary income tax on the earnings as well as a 10% penalty on those earnings; however, there is never a penalty or tax for your own contributions. There are exceptions to the 10% penalty such as scholarships or entering the US Military.

We all know how expensive college is, even for a state university. According to the College Board, the average cost of tuition and fees for the 2015 – 2016 school year was $32,405 for a private college, a whopping $129,620 for 4 years. The reality is that most families will never be able to fully save enough for a 4 year education, but every penny counts when it comes to paying for college. And once a 529 plan is established for a child, anyone can contribute to that plan. Think of holidays, birthdays and special occasions for making contributions like recognizing the good grades your child achieves in school.

Most of these plans offer low minimums ($50) and automatic investment plans that make monthly contributions simple and painless. They also offer age-based investment options where the plan automatically shifts investments based on the child’s age, in theory becoming more and more conservative as the child approaches college age. The State of CT features the CHET plan and allows a state income tax deduction for contributions of $10,000 and under. If you are not sure if a 529 plan is the best choice for college savings, talk to your financial advisor about other options. Education is a gift that is forever and our young people will need as much financial assistance as possible in the future.

Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services. She also offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser. Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth. Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Roberta can be reached at Nestor Financial Network, 203-876-8066 or roberta@nestorfinancial.com.

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