Part of the American dream is an accessible college education, and Aunties love to enable the dreams of their nieces and nephews. For many, however, paying college bills is a looming nightmare. A niece or nephew attending a four-year public university in 2017 could be looking at tuition, fees, and room and board running as much as $100,000. Send Sally to a private school, and you are looking at more than twice that amount, possibly averaging $200,000!

One way to help your nieces and nephews plan for their futures is to begin investing in a 529 plan on their behalf, or contribute to one set up by their parents.

To help us cope with the spiraling costs of college, in 1996 Congress gave its blessing to state Section 529 plans, named after the section in the internal revenue code. This new generation of savings plan offers a great alternative to the long-standing list of less-appealing options. Since then, millions of 529 accounts have been opened.  

Once money is in a college savings account, it is invested in a mix of fund portfolios based on the age of your niece or nephew. The money grows tax-deferred until withdrawn to pay for the costs of college.  uition, fees, books, supplies and room and board are all valid expenses, and assets can generally be used for any accredited post-secondary school in the country, including public or private, community, vocational schools and even including graduate school. Once withdrawn, the funds are distributed free of tax when used for education.  

Besides taxes, the 529 plans’ big appeal is control: Even after you have contributed to an account, you retain control of the assets. Since there’s no way of knowing whether your niece or nephew will attend college or live up to family expectations, college savings plans allow a wide variety of options:

-If your niece or nephew has not decided about college, you can leave the money in the account to grow tax-deferred. There are limited age restrictions for the beneficiary, and he or she could decide to enroll at a later date.

-You can change the beneficiary to another member of the same family. A wide range of people related to your niece or nephew qualify, including siblings, spouses, parents, son or daughter, in-laws, aunts or uncles.

-You can get a refund from the account at any time and owe regular income taxes and a penalty on the earnings only (usually 10 percent). Penalty-free withdrawals are allowed if your niece or nephew receives a scholarship, or in the event of death or disability.

Details to Consider

This is a significant advantage over UGMA/UTMA custodial accounts since the contributions you make to custodial accounts are irrevocable and the child controls the assets at the age of majority. Also, if the money in these 529 plans is held in the Auntie’s name, it won’t likely impact the financial aid formula, which is a big issue.
    
If higher education may be in the future for your beloved nieces and nephews, talk to your estate planner or financial advisor. A college savings program that offers this level of tax benefits, estate planning opportunities and investment flexibility is well worth studying. I give the section 529 plan an A+!

Darlynn Morgan is an attorney, speaker and auntie (and a mom!) Darlynn makes it easy for your family to talk about and plan for tough subjects like money, death and taxes. Visit www.MorganLawGroup.com for more resources on how to make sure the kids you love are totally protected if the unthinkable happens.