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I've read over the info from Colorado's 529 plan and now have some questions...what benefit would the 529 offer me ?


I will attempt to offer some reasons for using a 529 plan, realizing that in many ways you may not be the best candidate because you are much more experienced in investing and tax matters than most people.

I have no problem with using UGMA account.

A lot of people can't get comfortable with UGMA because of the risk that the kid will get the money at the ripe age of 18 or 21 and do something unappealing with it. This is why some of these people go to great expense to set up irrevocable education trusts and spend money each year on "Crummey" notices, tax returns and the high tax rates for trusts. The 529 plan provides the control that parents/grandparents want without all the attorneys and accountants. With the cost of college so high, a lot of assets would need to be put into your UGMA to cover the full potential cost. I have seen comments from experienced attorneys that it is not good policy to put large amounts into UGMA/UTMA (small amounts are ok). The usual reason for UTMA in the first place is to get the income into the child's tax bracket, and there is some risk the IRS could tax the custodian if funds are used for support obligations (does your state define education as a support obligation?). The 529 plan gets the income into the child's tax bracket at the time its withdrawn, and so you don't have to deal with Form 1099-B every year. It can cost a lot these days to have a child's tax return professionally prepared and it is a wonderful perk if the use of 529 plans means no tax return each year.

My 2 non-college children are in 10th and 7th grade.

If UGMA assets are substantial, then the dreaded kiddie tax may become an issue with taxable investments (at least for your younger one). Again, 529 plans can mean no kiddie tax.

I am happier paying capital gains taxes than income taxes.

Capital gains tax at 10%/20% (or even lower with the new super long term capital gains) sure beats the 15%/28% ordinary income rates on 529 plan income. The question is when is it taxed? Tax deferral is a very valuable attribute of 529 plans. A tax "efficient" strategy with a taxable stock portfolio or mutual funds can work well too, but then you (or your fund manager)can't move things around without triggering gains. 529 plans allow tax-free rollovers so you can move things around in most cases. Another question is whether Congress will gets its wish granted for tax exemption of earnings in a 529 plan. This is better than the capital gains break of course. I think it will happen eventually and it will apply retroactively to prior built up earnings in the 529 plan. And finally, Colorado will now give you tax exemption of 529 earnings which could be worth 4.75% to you I believe. This almost makes up for the federal capital gains differential.

I consider myself an experienced investor.

Experienced and active investors may not be satisfied with the hands-off approach of a 529 plan. But a lot of parents are not experienced investors. I read a survey that said that most families with college savings have it in checking and savings accounts. For these people a 529 plan can be a real blessing -- better returns and much better income tax treatment. The automatically adjusting age-based approach that Colorado adopts is something that many people pay a lot of money to financial planners to design. Personally I'm not sure if its the best investment approach but there is some comfort in knowing that these huge investment firms think it is. For some people a good asset allocation strategy is to have some investments on the outside in riskier growth stocks balanced with a more conservative tax-sheltered account through a 529 plan.

Sorry this is so longwinded but as you know I am a fan of 529 plans and I haven't even talked about their most appealing feature for many well-off grandparents and that is the gift and estate tax benefits. I hope I have provided some food for thought anyway.

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