529 savings plans http://www.wisebread.com/taxonomy/term/7787/all en-US 529 Plans for College Expenses: What’s Cool and What’s Quirky http://www.wisebread.com/529-plans-for-college-expenses-what-s-cool-and-what-s-quirky <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/529-plans-for-college-expenses-what-s-cool-and-what-s-quirky" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/seasonal_confusion.jpg" alt="seasonal confusion: snow on blooming flowers" title="seasonal confusion: snow on blooming flowers" class="imagecache imagecache-250w" width="250" height="188" /></a> </div> </div> </div> <p>529 plans for college expenses are very cool but extremely quirky. Cool federal-tax benefits, which were temporary and set to expire in just a few years, have been made permanent by The Pension Protection Act of 2006 (USA). The quirkiness and murkiness remains, however, but is made much clearer by the kind folks at <a title="http://www.kiplinger.com" target="_blank" href="http://www.kiplinger.com">Kiplinger.com</a>, who have provided me (and anyone with an Internet connection) with some great resources,&nbsp;discussed here&nbsp;but&nbsp;awaiting your further perusal, beginning with these articles on <a title="http://www.kiplinger.com/magazine/archives/2007/09/529plans.html" target="_blank" href="http://www.kiplinger.com/magazine/archives/2007/09/529plans.html">saving for college</a> and <a title="http://www.kiplinger.com/features/archives/2007/08/best529s.html" target="_blank" href="http://www.kiplinger.com/features/archives/2007/08/best529s.html">529 college-savings plans</a>. &nbsp;</p> <p>What are 529 plans? They are <a href="http://www.wisebread.com/college/saving-for-college" title="How to Save Money for College">college savings programs</a> created by individual states as authorized by Section 529 of the Internal Revenue Code. There are two kinds of 529s: prepaid tuition plans and college savings plans.</p> <p>States sponsor programs and most outsource investment services to third-party firms such as Vanguard or T. Rowe Price. (The outsourcing of investment plans with pre-designed portfolios was a source of confusion and annoyance for me when I first started investigating these programs but the concept is similar to how employers offer 401(k) plans with multiple but finite investment plans that are designed and serviced by outside entities.)</p> <p>The original intent for Section 529 rule, from what I can glean, was to provide a mechanism to prepay tomorrow&rsquo;s tuition at today&rsquo;s rates. Locking in tuition rates at a state-supported college or university (using a prepaid plan), though attractive, is not widely available. According to Kiplinger&rsquo;s <a title="http://www.savingforcollege.com/kiplinger/plan_details.php" target="_blank" href="http://www.savingforcollege.com/kiplinger/plan_details.php">529 plan locator</a>, only 18 states have prepaid plans (prepaid contracts or prepaid units / guaranteed savings) and, of those, only 5 have&nbsp;&quot;program benefits backed by the full faith and credit of the state&rdquo; with an additional 5 having other types of guarantees (according to&nbsp;one of the <a title="http://www.savingforcollege.com/kiplinger/plan_comparison.php?plan_question_ids[]=112&amp;page=compare_plan_questions" target="_blank" href="http://www.savingforcollege.com/kiplinger/plan_comparison.php?plan_question_ids[]=112&amp;page=compare_plan_questions">&quot;compare by questions&quot;</a> sections on Kiplinger's site,&nbsp;September 12, 2007).</p> <p>If you are considering a private college or university, however, there is a prepaid program: <a title="http://www.independent529plan.org/" target="_blank" href="http://www.independent529plan.org/">Independent 529 Plan</a> sponsored by Tuition Plan Consortium LLC and managed by TIAA-CREF Tuition Financing Inc. According to the plan&rsquo;s website, contracts with private colleges and universities specify that units bought at a discount today must be honored tomorrow. You can visit its website to <a title="http://www.independent529plan.org/colleges/index.html" target="_blank" href="http://www.independent529plan.org/colleges/index.html">view participating institutions</a>.</p> <p>Though the prepaid programs may not be available for your state or desired institution of higher learning, there are tax benefits that should place investigating, selecting, and funding a 529 Plan on a <strong>parents&rsquo; to-do list</strong>. Before you decide on which program to select, here&rsquo;s what&rsquo;s cool and what&rsquo;s quirky:</p> <p><strong>Cool</strong></p> <ul> <li>Contributions may be <a title="http://www.kiplinger.com/basics/archives/2003/02/529faqs.html" target="_blank" href="http://www.kiplinger.com/basics/archives/2003/02/529faqs.html">state-tax deductible</a>.</li> </ul> <ul> <li>Earnings (e.g., capital gains, interest, and dividends) grow <a title="http://www.kiplinger.com/magazine/archives/2007/08/1000529.html " target="_blank" href="http://www.kiplinger.com/magazine/archives/2007/08/1000529.html">tax deferred</a>.</li> </ul> <ul> <li><a title="http://www.kiplinger.com/magazine/archives/2007/08/1000529.html " target="_blank" href="http://www.kiplinger.com/magazine/archives/2007/08/1000529.html">Withdrawals for qualifying educational expenses</a> (tuition, fees, and living expenses of students) are not subject to federal income tax.</li> </ul> <ul> <li>529s are treated as parental assets for financial aid purposes.</li> </ul> <ul> <li>Grandparents (and others) can fund 529 plans with no impact on the student&rsquo;s financial aid status.</li> </ul> <ul> <li>If one child doesn&rsquo;t need any or all of the money, funds can be moved to other 529 accounts; Kiplinger has supplied a list of&nbsp;<a title="http://www.kiplinger.com/columns/ask/archive/2003/q0305.htm" target="_blank" href="http://www.kiplinger.com/columns/ask/archive/2003/q0305.htm">approved transfers</a> here.</li> </ul> <ul> <li>Most 529 plans allow you to use&nbsp;funds for expenses at&nbsp;nearly any U.S. college or university.</li> </ul> <p><strong>Quirky</strong></p> <ul> <li>Individual states contract with third parties to manage programs. These&nbsp;firms offer investment options and&nbsp;pre-designed portfolios, some of which are age-based so that the stock/bond ratio converts from heavily weighted with stocks&nbsp;to&nbsp;heavily weighted with bonds as the beneficiary/student gets older and ready to use the money for college.&nbsp;</li> </ul> <ul> <li>Some options are offered only through brokers; others are available for direct purchase. You can find either type using Kiplinger's <a title="http://www.savingforcollege.com/kiplinger/plan_details.php" target="_blank" href="http://www.savingforcollege.com/kiplinger/plan_details.php">plan locator</a>.</li> </ul> <ul> <li>You can choose a plan sponsored by your state or you can invest in a plan sponsored by another state, though you will most likely forgo certain benefits (such as state income tax deductions) if you go with an out-of-state plan.&nbsp;</li> </ul> <ul> <li>Contributions are not <a title="http://www.kiplinger.com/columns/taxexperts/archive/2007/04/0404.html" target="_blank" href="http://www.kiplinger.com/columns/taxexperts/archive/2007/04/0404.html">federal-tax deductible</a>&nbsp;and gifts are subject to federal gift taxes.</li> </ul> <ul> <li>State income tax benefits differ widely and contribution limits vary by state.</li> </ul> <ul> <li>There may be account maintenance fees (flat fees) and service charges (usually % of assets).</li> </ul> <ul> <li>You can change plans but usually just once a year.</li> </ul> <p><strong>The real value of the 529&nbsp;Plan is that withdrawals for qualified educational expenses can be made free of federal income taxes.</strong> Remember to make sure that&nbsp;withdrawals don&rsquo;t exceed qualified expenses as&nbsp;any&nbsp;excess amounts&nbsp;will result in unearned income to the beneficiary (student). And if the money is not used for college, then&nbsp;earnings are taxed at your regular income rate plus 10%, according to <em><a title="http://www.kiplinger.com/magazine/archives/2006/10/college2.html" target="_blank" href="http://www.kiplinger.com/magazine/archives/2006/10/college2.html">The New Math of Paying for College</a></em>.</p> <p>Now, that you've decided (most likely) to open a 529, which one should you choose? Kiplinger has <a title="http://www.kiplinger.com/features/archives/2007/08/best529s.html" target="_blank" href="http://www.kiplinger.com/features/archives/2007/08/best529s.html">state-by-state recommendations</a> with rationale for its recommendations that I found useful.</p> <p>Here are factors to consider in selecting a plan (each will impact your college cash flow in some way):</p> <ul> <li>Availability of&nbsp;pre-paid plans&nbsp;in your home state or for your desired college/university;</li> </ul> <ul> <li>State income tax benefits;</li> </ul> <ul> <li>Account maintenance fees and service charges;</li> </ul> <ul> <li>Potential investment returns.</li> </ul> <p>Though the 529 plans may not offer&nbsp;significant <em>immediate</em> benefits to all U.S. parents, investing now could yield great advantages to your tax bill and cash flow later. As state offerings (investment plans) change, you'll be wise&nbsp;to evaluate plans now and review your choices every year but the time (and money) invested should be worth it.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> of <a href="http://www.wisebread.com/529-plans-for-college-expenses-what-s-cool-and-what-s-quirky">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/are-you-saving-for-your-childs-college-education">Are You Saving For Your Child&#039;s College Education?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-ways-to-get-paid-for-saving-money">6 Ways to Get Paid for Saving Money</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/rethinking-the-529-college-savings-plan-strategy">Rethinking the 529 College Savings Plan Strategy</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-times-its-okay-to-raid-your-529-plan">7 Times It&#039;s Okay to Raid Your 529 Plan</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-times-cash-is-not-king">8 Times Cash Is Not King</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment 529 529 savings plans 529s college savings plans prepaid tuition plans saving for college Thu, 13 Sep 2007 17:59:31 +0000 Julie Rains 1152 at http://www.wisebread.com