March 22 issue - Are you getting all the tax breaks you deserve from your 529 college-savings plan? Maybe not, if you bought through a stockbroker or commissioned financial planner. As tax shelters, 529s can be a quadruple play (if there were such a thing), but you have to buy them right.
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The double play: Each state but Washington has its own "investment" 529. You can contribute for one child or more, putting the money into mutual funds. The account grows tax-deferred. All gains come federally tax-free when your child uses the money for higher education. That's a double tax play right there. (Note that tax-free withdrawals last only through 2010 unless Congress renews them. If not, withdrawals will be taxed in your child's bracket, not yours, so it's still a win.)
The triple play: Tax break No. 3, for wealthy people, covers gift and estate taxes. You can normally give each child or grandchild up to $11,000 a year ($22,000 for couples), gift-tax-free. With a 529, however, you can give five years' worth of gifts all in one shot (that's $55,000 for singles and $110,000 for couples, in a single year). That gets the money out of your taxable estate. And, if you want, you can take it back.
Fourth and last: Here's the tax break you might miss. Most states let you take your investment gains free of state income taxes, if there are any. You might even be able to deduct part or all of the money you contribute or get matching funds. But to receive these goodies, you have to be a state resident. You'll lose them if you choose the plan of another state.
Salespeople need to get paid, so they steer you to plans with sales commissions. Often, that means selling you a 529 from another state, which may cost you a tax deduction. If your employee-benefit plan offers a 529, it may be from another state, too.
So check your own state's plan before considering anything else. You'll find all the details at savingforcollege.com. If you like what you see, you don't need a salesperson. You can buy a 529 directly from the state yourself.
