Published January 2002

Consider setting up
529 College Savings Plan
as an employee benefit

By Jack Goldberg
Columnist

Exploring education-funding possibilities can be frustrating because many traditional savings options have significant downsides.

For example, with a “custodial account,” the contributor makes an irrevocable gift to a child, giving up control of the money in the account. And, although education-specific savings alternatives such as the Coverdell Education Savings Account (formerly known as the Education IRA) provide tax-free distributions for education expenses, parents with higher incomes may not be able to contribute. Even those who can contribute are limited to $2,000 annually.

Fortunately, today there is another alternative when it comes to saving for college.

Section 529 College Savings Plans, which were named after the Internal Revenue Code Section that established them, let individuals contribute substantially more money toward higher-education expenses while enjoying significant tax advantages. Staying competitive with employee benefits to attract and retain the best employees can be difficult. You may want to explore setting up a company-sponsored 529 plan as an inexpensive benefit to add to your employees’ total compensation.

Investment
Contributions to 529 plans often are invested in a group of pre-selected portfolios, determined by the age of the beneficiary or the number of years until enrollment in college. Some plans also provide other investment options such as 100 percent equity portfolios or 100 percent fixed-income portfolios.

Although once an investment option is chosen for a beneficiary the option may only be changed once per calendar year without triggering any tax or penalty, any time you change the beneficiary, you may also change the investment option.

Tax-free growth
Assets in 529 plans grow free from federal income tax while in the account. Assuming there are earnings, this feature allows the account to grow faster than a comparable taxable account where earnings are taxed every year. Better yet, beginning this month, qualified withdrawals will be free from federal income taxes, at least until Dec. 31, 2010, when, providing that it hasn’t been extended, the exemption expires.

Estate-planning benefit
Section 529 plans also can be an attractive estate-planning tool: Account owners can invest up to $50,000 ($100,000 for married couples) per beneficiary in one year without incurring gift taxes in most cases. Therefore, even though the contributor maintains ownership of the account, the investment is excluded from his or her taxable estate.

State tax benefits
Many programs offer additional state tax benefits, so it is important to examine the structure of your state’s plan. You should weigh any state tax benefits against the benefits and terms and conditions of plans offered by other states, because in some cases, you can participate in a state’s plan that is different from the state where you reside. Investment options, performance and other relevant factors should be considered when making a decision. And, you may also want to explore state prepaid tuition plans, which are another type of 529 plan.

Transfers
If you are already saving within a custodial account, a Coverdell Education Savings Account or U.S. Savings Bonds, you may want to explore the tax consequences, if any, of transferring these investments to a 529 plan. Your professional financial adviser can provide more information to help you decide which education-funding strategy may be appropriate for your situation.

If you are interested in one of these plans personally, or if you are considering adding it to your company’s benefits, we suggest you discuss education funding with your tax and financial experts. Saving for your children’s education may now be just a little easier.

Jack Goldberg is President of Personnel Management Systems Inc., with offices in Everett, Kirkland and Tacoma. The PMSI Web site is www.hrpmsi.com.

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