Some Interesting Facts About 529 College Plans…

As we prepare to send my first child off to college, I curse myself for not putting more aside in the 529 plan and I’ll admit I’m a little foggy on how it works. So when I saw this great article from our friends at IMN News Inc. about 529 plans I immediately gravitated to it and thought it was worth sharing. As a refresher, a 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996.

All states offer at least one type of 529 plan, and some states offer multiple options. There are two main types of plans; Prepaid plan allows you to pay for all, or just a large chunk, of the in-state tuition ahead of time. This allows you to lock in a lower rate at a specific institution. Savings plans work much in the same way as a retirement fund: You put after-tax dollars into the plan, and as the plan builds the growth is tax deferred. When money is distributed to pay for college, it is exempt from federal taxes.

Some interesting facts about 529 plans (according to IMN News Inc.)

You Can Pull Out of a Prepaid Plan If Your Child Attends an Out-of-State School: Make sure you discuss withdrawal penalties with your financial representative before choosing a plan. Most plans allow you to remove your money if your child decides to attend an out-of-state school but may impose restrictions or penalties that prevent you from recovering your total deposit.

Your State’s Savings Plan May Not Be the Best Bet: Shopping around is an important step when choosing any investment, and 529 plans are no exception. Although prepaid plans are best suited to those attending in-state colleges, a savings plan is different. According to SavingforCollege.com, “You can be a California resident, invest in a Vermont plan and send your student to college in North Carolina.” Check to see if your school is eligible, and then start researching plans. You can use the SavingforCollege.com search engine, found at http://www.savingforcollege.com/529_plan_details , to compare individual plans.

You Should Consider the Age of Your Child: If you want to maximize your plan’s earnings, you can invest aggressively with a wide range of equity-based investments. A strategy like this is recommended if your child is young and you have many years to work with your portfolio. If your child is older, you may want to invest more cautiously with CDs or bonds. Or you can participate in a plan that makes these decisions for you, tailoring your portfolio to include more aggressive investments in the beginning and then becoming more conservative as the years go by.

There Are Few Eligibility Requirements: The general lack of eligibility requirements, such as age or income restrictions, makes 529 plans a great choice for all types of people. Although there may be an investment maximum, it is generally so high that it is not likely to limit any potential investments.

You Can Change Your Mind: As often as every 12 months, you can roll your money into a different plan if you don’t feel that the one you selected is right for you. Furthermore, you can also change your investment options once each year to make more conservative or riskier investments. Most plans also allow you to take the money back for yourself, although you would have to pay income and penalty taxes on nonqualified withdrawal earnings.

You Keep Control of Your Money: The investor retains control of the money in the 529 plan, determining how much and when to give to the beneficiary. You will be able to determine how to use the funds to pay for education-related costs, including books and tuition.

There May Be State Tax Advantages: In addition to the federal tax savings previously discussed, your state may offer tax incentives for your 529 plan. Taking a look into your state’s incentives is a great first step before branching out to review the plans of other states.

I think another great benefit is that the plan is transferrable between children so we can choose to use these funds for any of our kids and perhaps defer using it until we are financially strapped the most (It’s going to get worse??).

Good luck to all who are just starting to think about college savings and those who are knee deep in the trenches of college tuition! And don’t forget to check out our college scholarships; $1,000 for one lucky high school senior who will be attending college and $1,000 for a student already attending college. Information will be available on our website starting February 11th.