By Keith
Driscoll, Financial Consultant
Salomon Smith Barney
In the last column, we learned why Section 529 College Savings Plans may be an attractive alternative to conventional strategies such as US Savings Bonds, Education IRA and UGMA/UTMA accounts.
Certain features of the College Savings Plans merit a closer look as they tend to be quite detailed and specific with regard to investment strategies and contribution allowances.
The funds in a College Savings Plan are usually invested in a family of pre-selected portfolios according to the age of the student or the number of years until enrollment in college. The contributor has no say in how these funds are invested after initially choosing an aggressive, balanced or conservative savings option. The portfolios typically hold more equities while the beneficiary is young and, as the student ages, funds are automatically moved into portfolios with a larger portion of fixed-income investments. This strategy effectively reduces the risk of stock market volatility on funds needed to pay for college expenses in the near future. The performance of the portfolios depends upon market conditions and there is no guarantee that there will be enough money in the account to cover all education expenses.
The possibility exists that the beneficiary of the account will not go to college, or may receive a scholarship that covers all or part of the college expenses. College Saving Plans offer the flexibility to make a tax-free transfer of the account to a sibling or another family member who can then use the funds for his/her education expenses. In the case of scholarships, taxable, but penalty-free, withdrawals of funds up to the scholarship amount are allowed.
College Savings Plans can be part of an attractive estate planning strategy for parents or grandparents because they allow for the tax-free transfer of wealth while the contributor retains control of the funds. Annual contributions to College Savings Plans of up to $10,000 per beneficiary ($20,000 for married couples) are exempt from federal gift and generation-skipping taxes. There are also special rules that allow for gifts of up to $50,000 per beneficiary ($100,000 for married couples) without incurring federal gift and generation-skipping taxes. Contributors should consult with their tax-advisor for additional information on gifting assets.
Meeting Your Goals
Contact Keith Driscoll, Financial Consultant, at Salomon Smith Barney with any
questions or comments. Please call 800-336-0156, or email keith.p.driscoll@rssmb.com,
for a complimentary consultation on college expense funding.
Salomon
Smith Barney does not provide tax or legal advice. Please contact your tax or
legal advisor for guidance.
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