A Guide to 529 College Savings Plans
Written by James Chan   

This article is ideal for parents who want to save up for their child’s college education.


What is a 529 Savings Plan?

A 529 college savings plan is a type of investment account in the US designed for the funding of a family member’s college education. Although non-deductible on federal tax returns, deposits up to $12,000 per year and interest accumulated with the account is tax-free. However, it may only be used for college undergraduate or graduate education-related expenses: tuition, fees, room, board, supplies, equipment, etc. 
 
 
Types of 529 Savings Plans

There are two types of 529 Plans, each provide you with tax benefits for educational savings: Prepaid Tuition Plans & College Savings Plans.
  1. Prepaid Tuition Plans: Allows users to purchase tuition (or, in some cases, room and board) units or credits for use in participating colleges when their child attends. As you are essentially replacing future tuition costs with present ones, it is most useful if you have a lot of cash on hand and expect significant tuition inflation by the time your child attends college.
     
  2. College Savings Plans: Operating similarly to IRA accounts or 401(k)s, these allow you to invest your contributions in one of several mutual fund-style investment options:
    • Bond markets
    • Stock markets
    • Money markets
    • Age-based investment (most common)

Creating and Managing a 529 plan

To create a 529, you can either directly contact a 529 Plan Manager or have a financial advisor set one up for you. All 50 states and the District of Columbia administer their own 529 plan, and anyone can use any state’s 529 plan to fund a college education in any state. Websites like savingforcollege.com and College Savings Plan Network contain links in which you can compare different 529 plans and decide which one is best for you. 

While the fund manager will choose the specific investments for your fund, you can control the amount you withdraw or deposit from the plan and even the general strategy you want the fund manager to pursue. As stated above, you have several investment options to choose from when you create your 529, and you can switch between them as you please. You can deposit money into the 529 as you please. However, withdrawals from 529 plans can only be used to cover any higher education related expenses, including equipment, supplies, books, tuition and fees needed for attendance or enrollment in a qualified educational institution. You can freely switch beneficiaries of the 529 plan without tax penalties.
 
 
Advantages and Disadvantages

Advantages
  • Deposits into a 529 plan are completely income tax free, and gift tax free up to $12,000.
  • Any amount left over in a 529 plan upon completion of education can be rolled over into another 529 plan.
  • You can deposit up to $300,000 per 529 plan total. However, remember, that donations over $12,000 per year will be gift taxed.
Disadvantages
  • Account contributions must be used for education purposes; if used for other reasons, a 10% penalty and withdrawal taxes will be levied.
  • Account maintenance fees must be paid to program managers for some states.

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Last Updated on Tuesday, 21 December 2010 04:46