Saving For College With Section 529s
Saving for College with Section 529 Plans
by Shelly R. Plumb, Educational Consultant
Section 529 Plans, otherwise known as Qualified State Tuition Programs, are all the rage for parents to save for college. These plans are state-sponsored investment programs. They get their name because these plans fall under the special tax treatment offered under Section 529 of the Internal Revenue Code.
There are forty-six (46) states in the U.S. that have passed legislation authorizing a 529 plan. Out of those 46 states, 38 states have their plan up and running. Also, 23 states are running plans without any residency requirements. This allows investors to pick the program most suitable to their needs.
529 Plans come in two forms. There are savings plans and pre-paid tuition plans. States usually offer one or the other, however, some states are choosing to run both types of programs.
SAVINGS PLANS
Section 529 Savings Plans are state-sponsored investment plans with tax incentives when the money is used to pay for college expenses. Starting in 2002, all money withdrawn for college expenses will be federally tax exempt.
The rates of return vary among plans. Most states do not manage their own plans. Companies like TIAA-CREF and Fidelity Investments manage several states' accounts. Each state plan has different requirements for contributions, rolling the funds to other family members and investment fees.
There is another benefit to opening a 529 savings plan for young couples or soon-to-be parents. These accounts can be opened prior to naming a child, or beneficiary. This gives future parents an option to start saving before their child is born.
For parents who start saving 18 or more years before their child will enter college, or, for parents with children who decide not to attend college, a 529 savings plan may not be wasted. While the primary purpose of these accounts is to help parents save for college, withdrawals may be made for other purposes. When a withdrawal is made for non-college related expenses, the earnings are taxed at the owner's tax rate and sometimes a penalty of about 10% is incurred.
Also, the balance in a 529 savings plan can in most cases be transferred to another
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family member. Parents can transfer balances to siblings in the same family. So, if your son decides to not go to college, the money will not be lost because you may withdraw the money for your daughter.
PRE-PAID TUITION PLANS
Section 529 Pre-paid Tuition Plans are state-operated trusts that offer residents a way to "lock-in" on lower tuition rates. Contributions are made now on college tuition expected to be paid in the future.
The tuition rates that are contracted with the state are at prices tagged to current tuition costs. When calculating the contracted price, some states adjust the price to reflect things like the projected investment gains of the program trust as a whole.
Most state pre-paid tuition plans limit the schools that investors can choose from in the plan. In-state public colleges and universities are usually the majority of schools named as acceptable. Out-of-state private colleges and universities are not usually included in the pre-paid tuition plans.
Before opening an account, parents should make sure they want to limit where their child will attend college. Or, understand the penalties and withdrawal procedures, if the child does not attend one of the colleges under the plan.
Pre-paid tuition plans can be useful savings vehicles for college. However, they are more limiting than their counterparts, 529 savings plans. Either way, saving for your child's college education is a great move and 529 plans are a great way to go for most families.
Shelly R. Plumb is an educational consultant and owner of A+ College Financial Planning -- an organization dedicated to providing financial aid and scholarship assistance to college bound students and their parents. (http://www.college-financial-aid.com). She may be contacted by email: shelly@college-financial-aid.com; by phone: 215-513-1881; or visit the A+ College Financial Planning website: http://www.college-financial-aid.com. For a FREE subscription to The Grade Report Ezine, send an email to newsletter@college-financial-aid.com with subscribe in the subject.
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