Saving Money for College: 529 Plans
529 plans are offered in all 50 states but you don’t need to purchase your own states plan, you can pick from any of the 529 plans offered. The 529 plan is named after section 529 of the Internal Revenue Code which allows monies saved in these plans to grow and be withdrawn for higher education free from federal (and depending on the state, state) taxes. One caveat to the tax free advantages is the fact that the current law expires in 2010. Congress must act to extend the tax break or earnings on qualified distributions made after 2010 will be subject to tax. The good news is, according to the National Association of State Treasurers, most senators support making the 529 tax permanent.
529 plans keep the parents and guardians in control of the college funds regardless of the child’s legal status. If their child chooses not to attend college, a new beneficiary can be named. For example, the college savings could go toward a sibling or cousin’s education instead. The college savings in a 529 plan belong to the owner of the account, usually a parent, grandparent or guardian, and the student is named as the beneficiary. This means that the owner of the account controls the funds. Parents don’t have to worry that the college nest egg they have built will be blown on a fancy car instead of used for a college education once the child reaches legal age.
These plans let you start saving for college with a low minimum purchase and have a high lifetime maximum. For example, you could invest up to $230,000 for each beneficiary in many of the state 529 plans. In addition, there are no income or age limits.
Enrolling in a 529 plan is simple. Many offer age based investments that change the mix of stocks and bonds to appropriate levels as the child nears college age. This ensures that your college savings approach is more aggressive in the early years then tapers off to a more conservative approach when the student is closer to attending college. Automatic contributions can be set up at specified intervals or you can make a lump sum and contribute additional funds to the 529 plan whenever you desire.
As with most government tax savings programs, unqualified withdrawals are subject to penalties. Earnings on funds withdrawn for purposes other than higher education are penalized 10% and will be taxed (the principal is not penalized).
In addition to state sponsored 529 plans, a recent tax law change permits accredited colleges and universities to offer their own version of a 529 prepaid plan. This is similar to prepaid tuition but offers the benefits of a 529 plan.
Whether you have babies or teenagers, a 529 plan is a great vehicle for saving money for college. The earlier you start, the easier it is to save.
