Financial Question!

Parents Forum
1

<p>Hi parents. My dad says he is in a bit of a financial mess and the time for fafsa is coming up and he needs some advice.</p>

<p>He said to me:</p>

<p>"can you ask on the college posting site, I saw that a 529
college savings plan would be very helpful to save money and taxes. For
example, if we took $11,000 in savings and put in 529 plan, I would save avout $5000 in state taxes and it would reduce our income category. Is that something people suggest? If yes; we would have to open
account this week by Friday - Latest or we lose 2005 savings"</p>

2

<p>Mellody Hobson just talked 529 plans on GMA this morning. She said..</p>

<p>
[quote]
Education: There are two tax-advantaged ways to save for education — a 529 plan (contribution deadline: Dec. 30, 2005) and an Education Savings Account (contribution deadline: April 17, 2005). </p>

<p>The 529 plans are designed to help families save for future college costs — earnings and withdrawals are tax-free so long as you use them for qualified education expenses. Although 529 plans do not have specific contribution limits, you can contribute up to $11,000 in 2005 free of gift tax. If you invest in your home state's 529 plan, you may be eligible for tax breaks. However, although you may receive tax benefits by investing in your own state's plan, you can invest in any state's 529 plan, so be sure to evaluate your options carefully. Depending on your income, you may also be able to invest in a Coverdell Education Savings Account, which allows you to invest up to $2,000 per year in a savings account, mutual fund or brokerage account (through which you can invest in individual stocks and bonds). Although your contributions are not tax deductible, the money you invest grows tax-free, and all withdrawals from the account are tax-free as well, provided you use them for qualified education expenses. </p>

<p>Retirement: When saving for retirement, there are different deadlines for 2005 contributions. Regarding your 401(k) plan, you need to make all your contributions by Dec. 31. If possible, you should consider maxing out your 401(k) before year-end to reduce your taxable income. You can defer up to $14,000 this year (up from $13,000 in 2004), and if you are age 50 or older, you can defer an additional $4,000 for a total deferral of $18,000. You have more time for IRA contributions — specifically, you have until Monday, April 17, to make your 2005 contribution and you can contribute up to $4,000. If you are age 50 or older, you can contribute an additional $500 for a total of $4,500. </p>

<p>

[/quote]
</p>

<p><a href="http://abcnews.go.com/GMA/MellodyHobson/story?id=145163%5B/url%5D"&gt;http://abcnews.go.com/GMA/MellodyHobson/story?id=145163&lt;/a&gt;&lt;/p>

3

<p>So would this be a benefitial move?</p>

4

<p>I believe that itstoomuch has some info/knowledge about transferring money to 529's -- there have been some posts on this in the past, and you might try a PM or else try searching past discussion on this. </p>

<p>I know that the tax treatment for 529's varies in different states; for example, I know for a fact that itstoomuch's advice about 529s would not apply to California, where I live. Since your father has raised a concern about state taxes, it is very important that you and he make very sure that anything you read is applicable to the state where you live.</p>

5

<p>since you have "fafsa" coming up, I'm assuming you are a senior. If your state provides a tax deduction for a 529 contribution, then by all means consider it. BUT, you should know that those assets are considered parental assets for FinAid purposes under the Institutional Methodology used by many private colleges -- it's no difference then putting them into a savings account. Thus, the school will expect it to be spent down to pay for college, and reduce grant aid accordingly.
Also, the tax savings is also a % negative since Fafsa counts AFTER-TAX dollars for need purposes. The less you pay in federal and state taxes, the more you have to pay for college since your NET parental income will increase.</p>

<p>a great source of info is savingforcollege.com. Good luck</p>

6

<p>Well turns out its too late anyway. Maybe next year.</p>

7

<p>I really don't see how it would give you any benefit at this late date. 529's are designed for long-term savings and rarely provide any noticeable benefit for the short term.</p>

8

<p>In some states, there is a tax savings that can accrue if a parent pays funds into the 529 in the short term and then pays the tuition out from the 529, rather than from personal assets. This probably really is only an advantage to full-pay families who have significant assets - its a tax-saving approach rather than a financial-aid qualifying tactic.</p>