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The Basics of 529 College Savings Plans

The Basics of 529 College Savings Plans By Kelly Twedell
Published October 26, 2009
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Families have many options to save for a child’s college education. One popular choice with multiple benefits is a 529 college savings plan. The 529 plan is aptly named after section 529 of the Internal Revenue Code. A 529 plan is an investment vehicle designed to promote saving for future higher education expenses of a designated beneficiary, to include grandchildren. The Obama administration weighed in on encouraging states to make it easier for middle-class households to enroll in 529 savings plans. The White House issued a report stating that only 5 percent currently contribute, compared to 33 percent of high-income households. Funds from a 529 plan can cover a variety of expenses ranging from tuition, fees, books, to supplies required while attending any accredited college, university or vocational school in the United States, and even at a few foreign universities. The money can also be used for room and board, if the student is enrolled with at least a half-time course load. Off-campus housing is included if costs are covered up to the allowance for room and board that the college includes in its cost of attendance for federal financial-aid purposes. Benefits for choosing a 529 plan to save and pay for a college education include:
  • Principal earnings grow tax-deferred and distributions are exempt from tax.
  • State income tax deductions for all or part of the donor contributions for some designated states.
  • Some states offer matching contributions for residents.
  • The student has no rights to the money, whereas the donor controls the account.
  • The assets are not counted as part of the donor’s gross estate for estate tax purposes if reclaimed by the donor - however, they will incur a 10% additional penalty on any gains and are still subject to income tax.
  • Once a 529 plan is selected it practically manages itself through ongoing direct deposits, a failsafe savings plan.
  • There are no age restrictions or income limitations; while the start-up requirements and contributions are low, they vary from sate to state.
One can choose between two types of 529 plans: prepaid and savings. Prepaid plans allow a student to purchase tuition credits, at today's rates, to be used in the future. A smart option considering the consistent inflation rates of a college education. Savings plans are different in that all growth is based upon market performance of the underlying investments, which generally consist of mutual funds. Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the student gets closer to college age. According to The College Board, the average annual tuition and fees is currently $6,585 for a public university education and $25,143 for a private school education. There is no time like the present to start saving for college. To review and compare plans go to Try the College Savings Calculator.

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