According to The College Board (a not-for-profit educational association), for 2004-2005 average costs for state universities totaled $5,132 (+10.5%) and $27,516 (+5.6%) for private universities.* For graduate or professional schools, the costs will increase dramatically. If these figures are unsettling, this number might be a remedy: 529.
Attractive Tax Benefits
A 529 College Savings Plan lets you contribute generous amounts to a tax-advantaged account to pay for college costs. The maximum varies by state and may offer limits over $200,000.
Your plan can grow federal income tax deferred. Withdrawals are also free of federal income taxes when used for qualified educational expenses like tuition, books, fees, room and board. If used for other purposes, the earnings portion of the withdrawal is taxable as ordinary income and subject to a 10 percent federal tax penalty unless the beneficiary dies, becomes disabled, or receives a scholarship. State tax penalties may also apply.** There are also important state income tax advantages in addition to tax-free withdrawals such as deductions for contributions for qualified purposes. Be sure to understand your state tax benefits because many states offer state tax incentives for 529 Plan investing only to residents who enroll in their own or the beneficiary’s own home state plan. This means that state tax advantages are generally not available to persons who enroll in the 529 Plan of a state where neither they nor the beneficiary are residents. Unless Congress renews or extends the current tax provision, 529 Plan withdrawals will become federally taxable after 2010, but earnings would still accumulate tax-deferred until withdrawn.
Ample Flexibility
You can usually start funding a 529 Plan with as little as $25 a month. 529 Plan accounts may be opened for the benefit of a relative, a friend, or even yourself if you plan on funding your own post-secondary or graduate education. You may also change beneficiaries anytime, provided the new one is a family member of the previous one, as defined in Internal Revenue Code Section 529.
* Figures include tuition, fees, room, board, books, supplies, transportation and other expenses for residential students.
** Some states will impose a state tax penalty on non-qualified withdrawals and this penalty would vary by state but does not currently exceed 10 percent.
IRS Circular 230 Notice: This material was written to support the promotion or marketing of the transactions or matters addressed herein. It was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under US federal tax laws. Morgan Stanley does not render advice on tax and tax accounting matters to clients. Each taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
