In Partnership With: In Partnership With: HD Vest Financial Services

Tax Alpha: Inside 529 Plans

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One of the hardest parts of financial planning is balancing all of a client's conflicting goals and needs, and this is rarely more evident than when it comes to planning for their children's college expenses.

"A lot of people plan for college before they plan for retirement, which is a huge mistake, because there are scholarships and loans that you can take to go to college, but there are no scholarships or loans for retirement," said Holly Manton, a wealth management consultant at HD Vest Financial Services.

Manton noted that many parents expect to take withdrawals from their retirement accounts to pay college costs, but not only will those withdrawals not be available later for retirement - they'll also be considered income for the following year, which means they'll need to be included in any financial aid calculations and could be penalized depending on the parents' age.

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Other parents gift money to their children in custodial accounts, which is better, but has one major flaw: When the child reaches majority, that money is theirs to spend as they like - and they may not want to spend it on college.

The best bet, Manton explained, is the popular 529 Plan, the state-administered investment plans that offer several tax advantages, including tax-deferred growth of the assets, tax-free withdrawals for qualified education expenses, and, in some states, tax deductions and other benefits for deductions.

Some important things to bear in mind:

  • Pick your state.†"My son and daughter's 529s are in the Alaska plan, and I live in Texas, but in Texas there's no state tax, so there's no state tax deduction," Manton said. Different states also have different contribution limits, and different investment options.
  • Be careful about your qualified expenses.†"You really have to make sure you know what qualified expenses are," Manton warned. One of the more common mistakes she has seen involves off-campus housing: It's only qualified up to the amount that the school includes in its cost of attendance figures for federal financial aid purposes.
  • Scholarships are fine.†"The IRS isn't going to penalize your child for being smart or athletic," Manton explained. "If your child gets a scholarship, you can still take out the same amount of money you would have needed for school that year, and you won't pay any penalty on it. You'll have to pay tax on the earnings, but you won't have to pay that penalty."

You can set up an account in advance. Parents who are expecting, for instance, can establish an account with the mother or father as the beneficiary, and then switch it over to the child after the birth.

For more on using 529 plans as part of a client's estate plan, see our video whiteboard in the Tax Alpha tab on AccountingToday.com.

For more information about HD Vest Financial Services, please visit†hdvest.com/taxalpha2†or contact a Business Development Consultant at (800) 742-7950.

Units of the 529 plan investment options are municipal securities and may be subject to market value fluctuation. Before investing in a state specific 529 plan, you should compare your own state's qualified tuition program and any state tax or other advantages it may provide.

Withdrawals for non-qualified educational expenses are subject to a 10% IRS tax penalty and are taxed as ordinary income

As with any investment, itís important to fully consider the planís objectives, risks, charges and expenses before investing.

HD Vest Financial Services†is the holding company for the group of companies providing financial services under the HD Vest name.†

Securities offered through HD Vest Investment Services, Member SIPC, Advisory services offered through†
HD Vest Advisory Services, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000.

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