Changes in college savings plans, known as 529s, may cost parents a little more money this fall.
Under 529 plans, qualified expenses including tuition and books can be paid without incurring a 10 percent penalty for withdrawing funds. The money put into 529s is paid after taxes, unlike tax deferred 401(k)s or IRAs, but the interest earned is not taxed, explains Eleanor Blayney, CFP, and consumer advocate for the Certified Financial Planner Board of Standards.
In the past, electronics, computers and other similar equipment qualified as a college expense, meaning the money could be withdrawn tax free and without a penalty.
This year, because of changes made in tax legislation for 2011, these items do not qualify unless they are specifically required by the college. Parents need to check exactly what is required by their child's college to know what can qualify as a 529 expense. This rule could be changed and not made to apply to the current tax year, but, as of now, it does, Blayney says.
"I don't think it is a huge sacrifice for parents in comparison to how much more other college expenses are and the many other items that the 529 funds can be spent on," Blayney says, but it is a potential added expense the CFP Board is warning parents about.
But it seems every little bit counts. Although the percentage of people who feel they are saving enough to cover their children's college costs remained stable from last year to this year, it is still the lowest in five years, down from 24 percent in 2007 to 16 percent this year and last, according to Fidelity Investments' Annual College Savings Indicator Study.
On the plus side, a larger percentage of parents have begun saving, 67 percent for 2011 compared to 58 percent five years ago, the study says. Half of the families who work with advisors and are saving for college are using 529 or similar plans, while only 28 percent of those saving but not using an advisor are using such plans.
An increase also was seen in all parents who are saving for college expenses, whether they use a planner or not, with 37 percent using dedicated college savings accounts now compared to 26 percent five years ago.