- The Washington Times - Thursday, March 21, 2002

A change in tax law has spurred a flood of parents to invest in college-savings plans for their children.
The change last year made income earned through "529" college-savings plans tax-free rather than tax-deferred.
As a result, both the number of accounts opened and the amount of contributions have jumped.
"When you look at the options available to investors to save for a child's education, the tax advantages of a 529 plan just allow you to save more," said Brian Lewbart, spokesman for T. Rowe Price, a Baltimore mutual fund company that manages Maryland's and Alaska's 529 savings plans.
The company compared earnings of a 529 plan to those of a regular savings account. It found that a 529 plan can be as much as 34 percent more profitable over 18 years, because its income is not taxable.
"The ability to save more is going to be a key benefit of a 529 plan," Mr. Lewbart said.
Investments in 529 savings plans are expected to grow nearly 50 percent a year, to more than $51 billion by 2006, according to Cerulli Associates, a Boston market research and consulting firm. The plans are named for legislation that created them.
There are two types of 529 plans: prepaid-tuition plans and college-savings plans.
With a prepaid-tuition plan, one can purchase tuition for the future and lock in its cost at current rates without worrying about how expensive education might become in the future.
For example, if a parent purchases tuition at the University of Maryland at College Park for his 3-year-old child this year, at rates of $5,341 for tuition and $3,856 for room and board, when that child reaches college, his tuition and room and board will be prepaid at $5,341 and $3,856 per year, even if tuition has climbed to $10,000 and room and board is $8,000 per year.
College-savings plans work differently. They operate in the manner of mutual fund investments, in which an individual simply makes contributions that are then invested in mutual funds. The account grows based on the performance of the mutual funds.
"It's savings down the road in the fact that interest earned over the life of a plan until it's used is that interest and other forms of investment income are not taxed," said Fred Leverett, an accountant with Tempchin Jordan in Silver Spring. "So the savings is there."
Mr. Leverett, who said he is seeing rising interest in 529 plans among his customers, opened such an account this year for his 14-year-old son. He said it will save him money. Even bigger savings are possible if a parent opens the account for a younger child and the interest can vest over a longer period of time.
There are drawbacks to 529 plans, however. Most of the prepaid-tuition plans are restricted only to the states' residents and to the colleges in their home states. A small number of college-savings plans are also restricted, but most have no residency requirements.
Savings plans have a minimum and maximum contribution level. The low is usually $25, while the high is set at $270,000 by federal law. Once a 529 account reaches its limit, no further contributions can be made.
Plans like the 529 are also confusing because of their various restrictions. There are penalties for using the money for anything other than education expenses, and some plans are limited to savings for four or five years of tuition and room and board.
The rules also vary from state to state and are not written in stone, changing continuously as more people adopt 529 plans.
Whether enrolled in a savings plan or a prepaid-tuition plan, participants in the 529 program also see more immediate benefits.
Depending on the plan and state of residency, participants in 529 plans can claim several-thousand-dollar deductions on their taxes.
So someone who opened three accounts for one child in Maryland, for instance, can lower his taxable income by $7,500, because Maryland allows $2,500 to be deducted for each account.
In Virginia, the deduction is $2,000.
The District has no deduction, said Mark Lobel, a principal at Quinn Lobel & Associates PC in Northwest.



Copyright © 2018 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.

 

Click to Read More and View Comments

Click to Hide