Six Ways To Improve ‘529’ College Plans

    Between the 7 team members on the Fineman Suarez Team we have 5 kids (plus 1 more on the way!) that will be on their way to college within the next 15-20 years and the thought of college tuition for those 6 kids, at the rate tuition is rising no less, is very scary!  That’s way plans like the ‘529’ college savings plan brings along with it a sigh of relief!  For those of you who have invested in a college savings plan for your kids or are thinking of it, here’s a recent article by the Wall Street Journal on ways that the programs should be improved.  We found it to be interesting to say the least and hope these changes see the light of day!  We would love to hear you thoughts or questions on this, share your thoughts HERE!

    Six Ways to Improve ‘529’ College Plans

    JOURNAL REPORT

    These state-sponsored plans—named for a section of the tax code, and which typically invest in mutual funds—allow college savings to grow tax-free. There is no income limit on who can contribute, and the account can be reassigned to direct relatives of the original beneficiary—a child’s cousins or siblings, for instance—if there is money left over or if the beneficiary doesn’t go to college.

    Parents or other adults set up an account as early as possible after a child is born, and contributions up to $14,000 (or $28,000 a couple) in after-tax money during the year are exempt from gift-taxes reporting.​The money grows within the plan tax-free and, if it’s withdrawn for qualified higher-education expenses like tuition, room and board, or a computer, no tax is due. The plans often also come with state tax benefits for residents of specific states.

    But the plans’ design can be clunky. Here is how financial advisers and college-savings experts say that aspects of the accounts and their use could be improved.
    1. Entice companies to do a ‘match’
    One federal tax-code change that could juice participation rates would be to make it advantageous for employers to offer 529 matching for employees, similar to the way 401(k) plans operate for retirement savings, says Andrea Feirstein, a 529 consultant to states and managing director of AKF Consulting Group in New York City.

    Currently, companies don’t receive any federal tax benefits related to 529s, although some do offer payroll deductions to their employees. If employers match employee contributions to 529s today, that money is considered taxable income to the employee.

    Three states do offer tax inducements for companies that contribute to home-state plans on behalf of their workers. Utah has a $1,900 state tax deduction per beneficiary, and Nevada and Illinois each offer a state tax credit up to $500 on 25% of matched 529 contributions.

    A federal-tax-code change would cost the government in forgone tax revenue, but policy makers might choose to make this switch anyway if it inspired more parents to save for college instead of relying on loans, she says.

    “There’s a point, from a policy standpoint, where you make a judgment, like we did with retirement, that retirement security mattered,” Ms. Feirstein says.

    2. Give poorer families a credit
    Another item on Ms. Feirstein’s wish list is a federal tax credit to encourage low- and moderate-income families to save money in 529s. These are the families that have trouble putting away money in 529s because they are—wisely—saving for their own retirement, which, unlike college, can’t be financed with borrowing.

    “If someone came to me and said, ‘I have X dollars to save, where should I put it?’ I would always tell them to save for retirement first,” she says.

    The deferred tax benefits currently available through 529s are helpful, but a more-immediate federal tax incentive, like a credit or deduction, would help convince parents, says Brian Boswell, vice president of research and development at SavingForCollege.com.

    “When TurboTax pops up and asks you, ‘Have you taken advantage of this tax credit or deduction?’ that’s even better,” he says.

    3. Allow more changes
    Once parents or other adults have set up 529 accounts, they have to work through the plans’ regulatory restrictions, such as biannual trading limits. Investors in the plans are allowed by law to make changes to their investment holdings only twice a year (it used to be only once a year, but in 2015 that Internal Revenue Service restriction was expanded to twice a year—which is still a tough restriction, in some experts’ view).

    “If there are sudden market movements and you’ve already made your twice-per-year exchange, your hands are tied,” Mr. Boswell says.

    Groups providing information to investors—such as the College Savings Plans Network, affiliated with state treasurers—had campaigned for four permissible investment changes a year, though the College Savings Plans Network says it supported the modest expansion that was ultimately awarded last year.

    4. Provide a longer menu
    The plans also don’t offer owners as many investment options as they would have with a brokerage account, which makes some sophisticated investors chafe.

    Each plan has a menu of investment options, often target-date funds that start with a heavy weighting of stocks and move toward bonds as the child’s projected high-school graduation date approaches.

    “Some people feel it just doesn’t give the right investment choices for them,” says Keith Bernhardt, vice president of retirement and college products at fund manager Fidelity Investments.

    5. ​Change financial-aid calculations to exclude 529s
    Exceptions should be created so that college applicants who plan to go on to graduate school can have their 529 accounts excluded from calculations about whether they qualify for undergraduate aid, says Dominick Ferraro, founder and CEO of College Select in Greenville, S.C. Aid isn’t as available for graduate students as it is for undergrads, Mr. Ferraro says. “Fellowships or assistantships available to grad students are extremely limited to the type of degree and to a particular student,” he says. Deferring use of a 529 plan until graduate school thus could be a good option for some.

    6. Get the word out
    For Nancy Farmer, president of Private College 529 Plan, the major challenge facing 529s isn’t regulatory, but rather a lack of public awareness. Three out of four Americans don’t know what a 529 is, an annual survey conducted by brokerage house Edward Jones found in May. And that number has increased over time, starting at 63% in 2012. The result is that a helpful aid for college savings, the 529 plans, might be benefiting only some sophisticated Americans and bypassing many others who could use it.

    This also points out an overarching problem with college savings, Ms. Farmer says: Most families don’t understand what college will cost, and they don’t know how they will save the money. She suggests visiting the nonprofit College Board’s Big Future website to run cost calculators for various types of colleges.

    Despite the growth of 529s, three out of four Americans still don’t know what a 529 is, an Edward Jones survey found in May.
    Despite the growth of 529s, three out of four Americans still don’t know what a 529 is, an Edward Jones survey found in May.

    The low awareness isn’t because plan sponsors and state governments aren’t trying to educate parents, Mr. Boswell says: “A lot of people tune it out because it’s complicated.”

    What are the chances of some of these changes getting through Congress? The momentum is usually for having more, not less, with 529s. Early last year, President Barack Obama proposed, and then quickly dropped, an idea to curtail the tax benefits for 529s. Instead, Congress made the popular plans even more alluring, by allowing computers as a qualified expense.

    Rep. Lynn Jenkins (R., Kan.), a legislator behind the bipartisan computer-expense change, says, “These college-savings plans are already changing, and I believe we will continue to expand and enhance them.”

    Ms. Schoenberger is a writer in New York. She can be reached at reports@wsj.com.

    Original Wall Street Journal can be found here: http://www.wsj.com/articles/six-ways-to-improve-529-college-plans-1465178641

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