College Funding Choices

Marshall Rathmell |

Many Americans make contributions to Section 529 plans to help their children or grandchildren pay for a college education.  The average balance in these plans today is a record $17,174 according to The College Savings Plans Network, and the total dollars is close to $200 billion. 

Chances are you already know about these "IRAs for college," where earnings can grow tax-free, and money can be withdrawn tax-free so long as it is used for federally-approved college costs. Each person can contribute up to $14,000 a year without triggering gift taxes, and through a special provision, you can make five years' worth of contributions, moving money out of your estate into the hands of children.

We often recommend 529 plans as we feel they fit well within most financial plans.  There are situations where 529s may not be best. For one thing, money in a 529 plan can count up to 5.54% of a child's college savings in the financial aid worksheets used by most colleges and universities, which directly diminishes the potential for financial aid. More importantly, some state 529 plans tend to offer limited and poor investment choices.

The revised Alabama plan however, is a good plan with good investment choices and the flexibility to change asset allocations as the child approaches college age.

For some people there is an alternative  when a 529 plan is not viable. Section 2503(e) of the Internal Revenue Code provides that gifts made to an education provider, on behalf of kids, grandchildren or any beneficiary, don't count as taxable gifts. So instead of putting the money into a 529 plan, you could pay the child or grandchild's tuition directly.  No gift taxes required, no limited investment options, no money counted against the child's need for financial assistance by the university's endowment fund.

Funding education for children and grandchildren is important  for many of us.  Let us help find a way that works well  for you and your family.