Estate planning applies to everyone—especially people who are starting new families. So much of your estate planning directly pertains to how your children will be taken care of in your absence.
One particular way in which you can provide for your children is by putting aside money to pay for their college education. This is commonly referred to as a 529 plan because it is authorized in Section 529 of the Internal Revenue Code.
The Two Types of 529 Plans
There are two types 529 plans:
- Prepaid Tuition Plan
- College Savings Plan
Not every state has both but luckily in New York, there are two different ways for you to invest in a college savings plan.
With the prepaid tuition plan, you are simply pre-paying for some or all of an in-state public college. But what if your child decides to go to an out-of-state public school or a private college when they are older? Not only can they be converted, but there is also a Private College 529 Plan as well—should you choose to invest in that. You should, however, look and see which private colleges sponsor this plan. If there is a school that your family has a history of attending, you can see if this plan could be used for it.
A College Savings Plan works like a Roth 401(k) retirement plan. You make contributions to a college savings plan after taxes have been deducted from your paycheck. The benefit of this is that the money will not be taxed again when your child goes into college. Because your money is being invested, the value you get out of it will be directly tied to the strength of the investments.
Things to Consider
There are several things to consider when choosing a 529 plan for your child, and all of these questions can be answered for you by an estate attorney. For example, what are the tax benefits involved with a 529 plan?
This will differ by state, and they are always subject to change due to future legislation. When you meet with your attorney, ask him or her about the specifics regarding contributions (for prepaid tuition plan), investments (savings plans), and withdrawals.
In regards to a savings plan, there are likely going to be both taxes and financial penalties if the money is taken out and not used for college or for private elementary and middle schools (savings plans can be used for those as well).
Lastly, a 529 plan will play a role in determining how much financial aid the recipient will receive. When you are going over your estate plan, you can assess the likelihood of the future student receiving need-based financing (not needing to be repaid). But if the loans they take on will require repayment, your 529 plan might limit their overall level of debt.
Law Office of Alexander Sherwood Keenan
If you want more information about how to begin a 529 plan, the Law Offices of Alexander Sherwood Keenan can assist you. In addition, you can strengthen or outright create an estate plan that will safeguard the people who are important to you. Contact us online to schedule a consultation today.