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Never Too Early to Save for College


by Dawn Renner CPA, MBA
Management Accounting Group Ltd.

Congratulations, you're a new parent receiving well wishes from friends and family. It also appears your lil' tike is the beneficiary of cash gifts for his or her future. What should a parent do with these funds?

A smart solution is to open a Section 529 college savings plan for your youngster. The 529 refers to an IRS code section that allows for savings for college. Although the contributions are not deductible, the distributions (including earnings) are not taxable if used for higher education. That means they are non-taxable for both Federal and Minnesota tax. With the new "kiddie tax" rules this becomes even more valuable, since investment income over $1,700 per year is taxed at the parents' rate until the child is 18. Another feature that parents (and especially grandparents) appreciate is that junior cannot access the money at age 18 and buy a motorcycle. You control the distribution of funds.

Withdrawals from the 529 must be used for school expenses in order to be tax-free. This can include tuition, books, fees, room and board. If you invest in Minnesota's plan, that does not mean you can only use the funds for Minnesota schools. The funds can be used for schools in any state. If there is money left-over, it can go towards another family member's education or can be distributed with potential tax liability and penalty.

A $100 gift invested at your child's birth and earning 7% per year would provide $338 towards college expenses. Saving $50 per month from birth to age 18 would provide $21,600 for college. Quite a nice graduation present!

Grandparents especially like contributing to these plans for Birthdays, Christmases, Bar (Bat) Mitzvahs, and as an estate planning tool.

The 529 plan contribution provisions were scheduled to expire December 31, 2010, but the Pension Protection Act bill the presidents signed into law August 17, 2006 makes the 529 plans permanent.

Every state has its own plan with varying investment vehicles and rules giving you flexibility in funding choices if you have very specific needs. You are allowed to invest in any state's plan. However, for most people the plan for the state they live in is sufficient. If you are a Minnesota resident, there may even be a matching grant of up to $300 per year available depending on family income.

Once you decide the 529 is right for you, an account can be easily set up online. For more information or to see how the 529 fits your situation, call your accountant or financial advisor, or review the information on Minnesota's 529 website, www.mnsaves.org. You can set up an account directly at this website without going through a broker or bank.

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