urrently, costs associated with paying for college is increasing five to six percent faster than inflation in the United States. In-state tuition at a four-year public university is more than $18,000, and out-of-state tuition is more than $30,000. Private universities are even more expensive than that. Many parents and grandparents want to help their descendants pay for college. But the costs seems insurmountable, and they do not know how they will simultaneously help pay for college and address their estate planning needs.
The 529 Plan is one option that can help you both pay for your descendant’s college and be part of an estate planning strategy. The term “529 Plan” comes from the section in the Internal Revenue Code that created these plans. Generally, your assets that you put into your 529 do not incur gift, estate, or “generation-skipping” taxes. As long as you use the interest earned from these contributions for “qualified higher education expenses,” the interest does not incur income tax. Importantly, college’s financial aid departments do not recognize these 529 assets as being owned by the student, thus making the student eligible for financial aid. These positive attributes of 529 plans make them excellent ways to save for college.
529 Plans also have estate planning benefits. You are allowed to contribute $14,000 per year for the first five years into each 529 Plan free of gift and estate tax. The only catch is that you need to live at least five years. You are able to individually contribute up to $70,000 over those five years, and if you are married, you can gift up to $140,000 as a couple for each child or grandchild that has a 529 Plan.
Of course, nothing is without is disadvantages. If you do not use your student’s 529 Plan’s gained interest for “qualified higher education expenses,” those gains incur income taxes. Often, you have a small number of options of how to invest your contributions. These investment options are similar to mutual funds. 529 plans in Colorado have either lower or higher fees than the national average, so you should look into your options before making a final decision. I would recommend savingforcollege.com as one good place to begin your research.