Student loan lessons
Degrees in hand, grads must deal with debt
By Michelle Singletary
July 26, 2007

Karen Wons of Maryland finds herself in a quandary that is confronting many parents right now.

She is struggling with how best to advise her daughter — a recent college graduate — on paying down her $25,000 in student loans.

Wons did what any wise parent would do. She asked for help.

Here’s the back story. Wons’ daughter works as a project manager at a medical software company. She has an annual salary of more than $50,000. Her employer provides a 401(k). She has about $13,000 in cash from recently redeemed Series EE savings bonds. She has no credit card debt. She has no payments on a reliable car with low mileage. She’s sharing an apartment and other living expenses with an older sister in Madison, Wis. Her portion of the rent is just over $500 a month. (more…)

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Intro to 529s
I thought there were some gift and estate tax advantages with 529 plans, but you didn’t mention that as a benefit. Am I wrong?

The gift and estate tax treatment of an investment in a 529 plan is a good news, bad news situation.

The bad news is that your contribution is treated as a gift to the named beneficiary for gift tax and generation-skipping transfer tax purposes and so you need to be aware of this exposure particularly if you are making other gifts to the beneficiary during the same year.

The good news is that your contribution qualifies for the $12,000 annual gift tax exclusion and so most people can make fairly large contributions without incurring the gift tax.

Even better news is that if you make a contribution of between $12,000 and $60,000 for a beneficiary, you can elect to treat the contribution as made over a five calendar-year period for gift tax purposes. This allows you to utilize as much as $60,000 in annual exclusions to shelter a larger contribution. The money (and the growth of your account) gets out of your estate faster than if you made contributions each year.

And the best news is that the asset leaves your estate but doesn’t leave your control. This is a truly remarkable benefit when you compare it to the “normal” gift and estate tax laws. Anyone who is being advised to reduce their estate tax exposure through gifting, but cannot stand the thought of irrevocably giving away their assets, can now have their cake and eat it too. Of course, if you later revoke the account its value comes back into your estate. Your estate will also have to include a portion of any contribution made with the five-year averaging election if you don’t live past the fourth year.

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Intro to 529s
That penalty doesn’t sound so bad. Am I missing something?

What could be worse than the penalty is the fact that the earnings portion of a non-qualified distribution that comes back to you, the account owner, will be subject to tax as ordinary income at your tax rate. (Some 529 plans allow you to direct the withdrawal to the beneficiary, which would presumably keep it in a low tax bracket.) In addition, if you were able to deduct your original contributions on your state income tax return, you will generally have to report additional state “recapture” income.

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Intro to 529s
Can I transfer my existing Coverdell education savings accounts and U.S. savings bonds into a 529 plan?

Yes, you can accomplish these transfers without triggering tax, but you should be careful about ownership issues. For instance, the Coverdell ESA (formerly the Education IRA) is effectively owned by your child and so it may not be proper to transfer the funds into a 529 account that is owned by you. Also note that the tax-free transfer of U.S. savings bond redemption proceeds into a 529 plan requires that you meet all the qualification requirements for the education exclusion, including the income limits in the year of the redemption.
(savingforcollege.com)

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