As a bankruptcy attorney in Indiana for more than 20 years, I help folks with their finances. While I'm always up-to-date on Indiana bankruptcy law (in fact I helped write the latest changes to our laws), I also do my best to keep up with the news on savings and investment opportunities.
That can be important when people turn to me for advice on their financial situation. Then again, after I help people work through the bankruptcy process, my knowledge of money matters comes in handy as they emerge from bankruptcy and begin to rebuild their financial lives.
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Since it's back-to-school time again, I want to be sure parents know about the benefits of 529 plans.
In 1998, the Internal Revenue Code created (in section 529 of the Code-hence the name) a new breed of college savings account for children. Now, 10 years later, every state offers at least one of these plans. Any parent is free to choose any one of these, even if it's not in his state of residence; and the money can be used for college in any state.
A 529 is like an IRA in one sense: The money grows tax-free while it's inside the plan. Since the main purpose of a 529 is to fund education, the beneficiary of each account is a child. If you have three children, you'll want to open three separate 529 accounts.
In a number of ways, 529s are light years ahead of the old Uniform Gifts to Minors accounts for children. First of all, they're more flexible. You can start most 529 plans with as little as $10 a month. But, unlike other accounts, if you have larger sums of money to invest, a 529 allows you to "prepay" up to five years' worth of contributions, in some states up to $300,000 in one shot (think inheritance or lottery). There's no tax reporting to do each year. In fact, there are no tax concerns of any kind until and unless a withdrawal is made.
There are two things you should know about withdrawals from 529 plans: You, the parent, decide when and whether to withdraw the money. Your child never has control over the account. If the withdrawal is to pay college-related expenses for that child, there will be no tax on the profits from the accounts.
But that doesn't mean the account can't be tapped for your own needs in case of emergency-it can. You would need to pay income tax on the gains plus 10 percent additional penalty tax on any profits. That means the college savings account for your child can also serve as a financial "last resort" for you. Most parents resist touching college funds, even during a financial squeeze, but it's nice to know you can if you need to.
Everyone is eligible to open a 529. There are no age limits for these accounts, and the college expenses do not need to occur at the traditional age of 17 or 18. And if the child whose name is on the account as beneficiary can't-or won't-attend college, you're allowed to change the beneficiary and name someone who will use the money.
No, you can't open a 529 account at my office. (I'm a bankruptcy attorney, not an investment advisor, remember?) However, while you can invest directly in a 529, you might find it helpful to talk with a financial advisor about making investment choices within the account. But here's where this all fits in with the work I do and why I'm a fan of 529 plans:
In bankruptcy, any money that's been in a 529 account for longer than two years is exempt from creditors. If you ever get into a financial bind, that means your 529 money will be protected. Money that's been in longer than one year but less than two is exempt up to $5,000, and only money contributed within the year leading up to a bankruptcy filing can be taken by the court to satisfy debts.
There's an underlying principle at work here: Congress recognizes the crucial importance of educating our children. Moms and Dads, Congress and I both hope you'll take this as a call to action for your own children.
Mark Zuckerberg is one of only 15 board-certified consumer bankruptcy specialists in the State of Indiana. He has bankruptcy law offices in Indianapolis, Columbus, Bloomington and Anderson.
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