Consider state-funded section 529 plans for your college funding program

A college education is one of the best investments you can make for your child's future. But the high cost of college may alarm you – especially if you've waited too long to begin saving. For example, a Coverdell Education Saving Account (formerly called the Education IRA), with its annual contribution limit of $2,000, won't offer much help if your child is already in high school.

Fortunately, there's another option for your college savings plan. State-sponsored college savings plans (or Section 529 plans, after the section of the Internal Revenue Code addressing them) allow some flexibility in choosing a school and the opportunity for late starters to make sizable investments while reaping tax breaks.

How the plans work

While there are two types of Section 529 plans, we only discuss one type here – that is, Section 529 plans that allow you to set up educational savings accounts.

Section 529 plans allow individuals to invest in a predetermined pool of stock and bond investments. Most plans will require you to divide your investment according to a given asset allocation determined by your child's age. In general, the asset allocation will be more aggressive for younger children and less aggressive for children nearing college age.

Lifetime contribution limits to Section 529 plans vary from state to state, and you may have some flexibility on when you can contribute. In addition, there are no income thresholds and typically no annual contribution limits, although annual contributions of more than $14,000 may require filing a federal gift tax form and are subject to federal gift taxes. Contributions up to $14,000 annually ($28,000 when made jointly with a spouse) or a lump-sum contribution of $70,000 every five years will not incur gift taxes, up to the plan's respective lifetime contribution limit. Any earnings in the account potentially grow tax deferred. If you live in the state where the plan is administered, you may also be eligible for state tax deductions.

Once your child reaches college age, he or she may withdraw money from the account to pay for qualified higher education expenses. Assuming that you have followed the plan's rules, there will be no penalties, and withdrawals used for qualified education expenses are tax free. Any money left over in the account can be transferred to a sibling, first cousin or other family member (as defined by the Internal Revenue Code) of the original beneficiary without triggering gift taxes, as long as the new beneficiary is the same generational level as the original beneficiary.

Balance "pros" against investment risks

Flexibility in contributions and college choice are the biggest advantages of Section 529 plans over other tax-deferred college savings vehicles. Even though these plans are state-sponsored, you do not need to be a resident of the state to participate, although you may lose out on state tax benefits by participating in an out-of-state plan.

Apart from tax savings, these plans offer the advantage of professional asset management. Each state contracts with a single asset management firm to oversee the plan, so by comparing various state plans, you'll be able to choose from several professional management companies.

The primary drawback to Section 529 plans is investment risk. Returns from Section 529 plans are not guaranteed. This means that your investment could lose value, perhaps just as your child is beginning college. Although the firms that manage Section 529 plans may use less-risky asset allocations to reduce risk as your child nears the first day of college, risk cannot be eliminated altogether.

You'll also want to have a thorough understanding of contribution and withdrawal rules before investing in a plan, since rules vary depending on the state. Pay particular attention to rules regarding transfers, early withdrawals, or withdrawals for things other than college expenses.

Research the numerous funding options thoroughly

Section 529 plans are just one of the options you have for college savings. If you're getting a late start or if your child is unsure of which college he or she wishes to attend, a Section 529 plan may be your best choice.

However, if you've started saving and investing you may want to consider other options, including:

Coverdell education savings accounts (education IRAs)

If you are eligible, these vehicles allow you to set aside $2,000 each year toward a child's education. Withdrawals for qualified higher education expenses are tax free for children under the age of 30, and account balances can be transferred to siblings without any tax consequences so long as it is done prior to the previous beneficiary's 30th birthday and the new beneficiary is under the age of 30. While tax benefits make these accounts attractive, the low contribution limit may not provide enough money to pay for college. Unlike state-sponsored plans, income limits apply for eligibility. Only single filers with incomes of less than $110,000 and joint filers with incomes of less than $220,000 are eligible.

As with any financial planning decision, the choice that's best for you will depend on your unique situation, including your risk tolerance and the number of years until your child begins college.

Another consideration is your child's plans. Does he or she even plan on attending college? If so, has he or she chosen a school? Talk with your child about college, then make an appointment with your financial professional to find the plan that best suits your needs.

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

If you are investing in a 529 plan outside of your state of residence, you may lose available state tax benefits. Make sure you understand your state tax laws to get the most from your plan.

529 plans are subject to enrollment, maintenance, administration/management fees and expenses. 529 plans are subject to fluctuation in value and market rise, including loss of principal.

Investors should consider the investment objectives, risks, charges, and expenses of 529 plans carefully before purchasing. More information about 529 plans can be found in the issuer's official statement. Please read the official statement carefully before investing.

Life insurance and annuities are issued by an affiliate, AXA Equitable Life Insurance Company (NY, NY) and by various unaffiliated carriers. Securities products and services are offered through AXA Advisors (member FINRA / SIPC), 1290 Avenue of the Americas, NY, NY 10104 (212-314-4600). Securities (including mutual funds) are not FDIC insured, not bank guaranteed and subject to investment risk, including possible loss of principal invested. AXA Advisors and AXA Equitable are affiliated and do not provide tax or legal advice.

Information provided has been prepared from S&P Capital IQ Financial Communications sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is provided for informational purposes only, and is not intended for solicitation or trading purposes. S&P Capital IQ Financial Communications is not an affiliate of AXA Equitable. Please consult your tax and legal advisors regarding your individual situation. Neither AXA Equitable nor any of the data provided by AXA Equitable or its content providers, such as S&P Capital IQ Financial Communications, shall be liable for any errors or delays in the content, or for the actions taken in reliance therein. By accessing the AXA Equitable website, a user agrees to abide by the terms and conditions of the site including not redistributing the information found therein.

This content is provided for informational purposes only. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

Please be advised that this document is not intended as legal or tax advice.  Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.  The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.

AXA Equitable Life Insurance Company (New York, NY) issues life insurance and annuity products. Securities offered through AXA Advisors, LLC, member FINRASIPC.  AXA Equitable Life Insurance Company and AXA Advisors are affiliated and do not provide tax or legal advice.

What's the next step for you?

A financial professional can help you decide. Let's talk.

Find a financial professional

GE-91307 (01/2016)