On Tuesday, February 8, 2011, Missouri’s State Treasurer Clint Zweifel announced a drastic 44 percent reduction of expenses for ‘do-it-yourself’ Missouri MO$T 529 plans, making it the fifth “cheapest” plan in the nation. This is great news for investors, because lower costs generally mean higher returns.
It is estimated that this significant reduction in costs will save investors $18.5 million over five years. Beginning in June, expenses for the various investment portfolios through the Missouri MO$T 529 plans will be reduced as follows:
|Investment Strategy||Current Cost||Reduced Cost|
|Age-Based and Index-Based Options||0.55%||0.29 – 0.38%|
|Actively Managed Portfolios||0.87 – 1.58%||0.53 – 0.60%|
Recently, 529 plans have become the preferred method of saving for college for many reasons including flexibility, tax advantages and investment options.
An account owner, usually a parent or grandparent, establishes a 529 plan on behalf of an individual beneficiary. The beneficiary can be a child, grandchild, niece, nephew or even the account owner; the beneficiary need not be related to the account owner. The benefit in this type of account structure is that the owner retains full control of the funds until distribution. At no point is the beneficiary entitled to the account balance as would occur with an UTMA (Uniform Transfers to Minors) custodial account, which stipulates that the funds in the account be distributed to the beneficiary at age 18 or 21 (varies by state).
Funds deposited into the 529 plan grow tax-deferred until they are withdrawn. When used for qualified college-related expenses, the entire distribution is completely tax free at both a Federal and state level. Qualified expenses include tuition, fees, books, supplies, required equipment, and certain room and board costs.
If the full balance of the 529 plan is not used for qualified expenses (due to the receipt of a scholarship or lower than expected tuition, for example), the owner can transfer the remaining balance to a related family member. Another option would be to withdraw the balance of the account. In that scenario, income taxes (Federal and state) would be due on the account growth, and the IRS would assess a 10 percent penalty. The taxes are paid based on the beneficiary’s tax bracket.
Account owners have a myriad of options available for investment of the funds while in the savings stage. Some plans offer ‘age-based’ options, which automatically adjust the asset allocation to a more conservative mix as the beneficiary gets closer to college. Other investment options can include individual portfolios, such as index funds or mutual funds for those account owners who prefer to customize their allocation.
Many states even offer income tax deductions for contributions made to 529 plans. For Missouri residents, taxpayers are allowed an $8,000 state income tax deduction ($16,000 if married, filing jointly) for contributions to 529 plans. Missouri does not even require the use of its own state-sponsored plan in order for tax payers to receive the income tax deduction.
If you are considering a contribution to the education of someone you care about, your Moneta Group Family CFO® can provide further details and help with the selection of the most appropriate 529 plan for your college savings goals.