College planning has always been a daunting task most people would rather put off until a later time. With the creation of 529 College Savings Plans, now investors can save college funds on a tax-free basis when used for qualifying school-related expenses rather than on a tax-deferred basis. In the past, parents would set up Uniform Gifts/Transfer to Minors (UGMA/UTMA) Accounts or Coverdell Savings Accounts to fund for their children’s college tuition. The major disadvantages to the UGMA/UTMAs are the taxation and account ownership. These accounts were for the benefit of the child and could be used for anything, including activities unassociated with school. With 529 Plans, the account ownership remains with the individual contributing to the account not the beneficiary.
Unlike 529 Plans, UGMA/UTMA’s earnings and growth are taxed regardless of whether the funds are used for school expenses or not. The tax-free growth of 529 Plans has made them a very attractive alternative for those who wish to help provide some assistance to college-bound students. Investments in 529 Plans involve risks to principal, and offer no guarantees. Depending on your state of residence and the state of residence of the beneficiary, the plan may or may not be eligible for state tax benefits. Additionally, there are exceptions to the gift tax and estate tax exemptions.