529 Savings Plans Resource List

Listed below are helpful sources of information on 529 Savings Plans. Some provide general information on how the plans work and how they compare to one another. Some, like the IRS link provide nuts-and-bolts (rules and regs) for setting up and benefitting from a 529 plan.


Resource 1:
Excerpt from:
Get Your Kids to College: 529 Plans

By Dan Caplinger
July 18, 2006

529 plans, also known as qualified state tuition programs, combine the positive elements of many of these alternatives into one package, while avoiding many of the negative aspects. Section 529 of the Internal Revenue Code gave states and educational institutions the right to set up such plans to benefit people who wanted to save for college. In response, all 50 states have established these plans.

The fact that there are 50 different plans to look at may sound overwhelming. Indeed, most states do not require that you be a resident of that particular state to participate in the state's 529 plan. On the other hand, some states offer state income tax incentives to residents who participate in their home state's plan.

General benefits of 529 plans

There are several positive elements of all 529 plans. First, the interest, dividends, and capital gains earned within a 529 plan are not subject to income tax each year. Instead, taxes are deferred. More importantly, under current law, as long as the money in the 529 plan is used for educational purposes, the income earned within the plan is entirely tax free. Unfortunately, the provision that makes withdrawals tax free is one of the many provisions that is set to expire at the end of 2010, so it is unclear whether this benefit will be available after that.

Second, you retain almost complete control of funds within the 529 plan. Although you designate a beneficiary to receive the funds, many 529 plans allow you to name yourself as the beneficiary; in any event, the beneficiary does not have any power to interfere with the plan while you own it. For financial aid purposes, the student is not considered the owner of 529 plan assets under current rules.

Third, there are no restrictions on who can participate in a 529 plan, and the contribution limits are much higher. No matter how much income you make, you can still open a 529 plan account. The maximum contributions allowed vary by state but for the most part range from $200,000 to $300,000 per child. Compared with the $2,000 limits on a Coverdell ESA, this is extremely attractive.

Last, while plans vary from state to state, a wide variety of different types of investments are available within 529 plans. You may not be able to invest in every individual stock you want, but mutual funds spanning all asset classes are available in some 529 plans.

Types of 529 plans
529 plans divide into two categories. Prepaid tuition plans give you the opportunity to pay now for future tuition. The amount you pay is based on current tuition costs. The idea is that no matter how much tuition costs rise between now and the time your child is ready to go to college, you have locked in the current price by depositing money into the plan. Despite the fact that many of these plans are state-specific and are based on costs of particular institutions, most plans allow you to use plan investments for out-of-state schools or schools not covered by the plan.

The second category is known as a savings plan. In these plans, you simply make a contribution and invest in one of a number of different investment choices. Like a 401(k) plan, the value of the 529 savings plan assets fluctuates over time, and when your child reaches college age, you are eligible to start taking withdrawals from the plan. There is no guarantee that your 529 plan investments will grow as quickly as tuition costs rise, but they may also grow faster than tuition costs, depending on the investments you choose.

Which 529 plan should you pick?
Unfortunately, both plans and state laws related to them vary so much that it's impossible to generalize about which plan is best. In general, however, a good 529 plan has a wide range of investment choices, low expenses, no sales commissions or other unnecessary fees, easy access to account information, strong customer service, and valuable state income tax incentives to residents.

Just because the state you live in has a 529 plan doesn't mean you should choose that plan. If your state doesn't offer any income tax benefits for choosing the state's plan, then you should pick whatever state's plan is best for you, regardless of whether you live there. Even if your state's plan does offer an income tax incentive to choose it, you still should weigh the tax advantage against any additional costs of using that plan. In some cases, even a tax incentive may not be enough to justify choosing your state's plan.

Hopefully, this series of articles has given you a good introduction to the world of education savings. If you want more information, consider visiting the Motley Fool's Paying for College discussion board. In addition, fellow Fool Robert Brokamp has some great information at the College Savings Center.

Lastly, remember that no matter how much you save for your child's education, your child will appreciate the help you provide -- perhaps not immediately, or a year from now, but at some point in the future. When put to good use, education is one of the best investments you can make in your child's life.

SOURCE:MOTLEY FOOL


Resource 2:
From THE SOURCE: The IRS' Official Word on 529 Plans


Your College Saving Options
Time Is Money

There are lots of ready-made savings vehicles that make saving for college easy. Here are some of the most popular choices:
State "529" College Savings Programs

These programs allow you to save money for college through state-sponsored investment accounts.

* Earnings and withdrawals are federal tax-free.
* You can use the funds at any college or university, in any state.
* Funds are treated as parental assets -- current financial aid formulas only count five percent of parental assets when calculating a family's need figure.

For more information, read College Savings Plans.
State "529" Prepaid Tuition Programs

These programs allow you to lock into the tuition price being charged at the state's public universities in the year when you're enrolled in the program.

* Earnings are guaranteed by the state to match in-state public tuition inflation.
* Prepaid tuition program distributions are treated like scholarships -- they reduce financial need on a dollar-for-dollar basis.
* Most programs allow accumulated funds to be transferred to private or out-of-state schools, but then require you to pay the difference between the prepaid tuition price and the current price of tuition at the out-of-state school.

For more information, read Prepaid Tuition Plans.
Coverdell Education Savings Accounts (ESAs)

Formerly known as Education IRAs, these accounts let families put away $2,000 per beneficiary, per year and use the money -- tax-free -- to pay for college expenses.

* You can now use Coverdell funds to pay for elementary or secondary education costs.
* ESAs are counted as the student's asset, which can reduce federal financial aid eligibility under current financial aid formulas.
* There are income restrictions to make full contributions to a Coverdell account -- $95,000 for a single filer and $190,000 for married couples filing jointly.

Let's say a family starts saving at the birth of a child, puts in $2,000 per year, and earns five percent interest. They will have earned over $54,000 by the time the child graduates from high school.
Roth IRA

You may withdraw your contributions to a Roth IRA to pay for college expenses without having to pay either income tax or the ten percent early withdrawal penalty.

Any investment earnings in your Roth IRA are also available for withdrawal without the ten percent penalty, but subject to regular income tax. You may withdraw investment earnings tax-free if you're over 59 1/2 and you've had your Roth IRA for at least five years.
Calculate your savings

Use our online College Savings Calculator to see how your savings will grow over time.

SOURCE: THE COLLEGE BOARD


Resource 3:



USA Today Analysis of 529 Plans