noreply@blogger.com (Finance) — Wed, 11 Apr 2012 16:36:00 +0000

Why 529 Plans can Benefit You Today

noreply@blogger.com (Finance) — Wed, 11 Apr 2012 05:31:00 +0000

Congress created 529 College Savings Plans in 1996 with the goal of providing tax advantages along with other incentives to make it easier in order to save for college and higher-education expenses. The frequently used name ‘529 College Savings Accounts’ comes from the section inside the tax code outlining the plan, but the legal name for these types of savings vehicles is a Qualified Tuition Program.
The two main basic types of 529 plans: prepaid tuition and savings plans. Each state has its own plan and has the ability to offer one or both options. As we’ll explain in greater detail, each state also has the ability to customize their 529 plan to some degree, which is why it’s so important to look into the best 529 plan for you.

Prepaid Tuition Option
Utilizing this type of option, you can actually lock in today’s tuition prices that can apply towards any of the eligible state colleges or universities your child attends in the future. If your child chooses to attend an out of state school (including private colleges), the plan will also pay out an equal amount of money.

The prepaid option is usually set up directly with a state agency that allows you to buy a tuition unit, which could result in one year of tuition. Your choices for payments are a one-time single payment or month by month installmets.

The state offers this options because they invest the prepaid tuition dollars in order to meet the future increase in tuition.

One aspect to consider that must be made with respect to the prepaid option is that the money paid out of the prepaid 529 plans will offset financial aid eligibility. To illustrate: if your prepaid 529 tuition plan paid $15,000 for tuition one year, your child will be seen as needing $15,000 less in money for college.

529 Savings Option

Save money in a tax deferred account (earning only) that can be used to pay for education at future tuition rates. The goal behind the savings option is to allow for your contribution to grow to meet the rising cost of future education costs. This option does not lock in the costs to attend any state school. The funds within the plan are eligible to be used towards all qualified higher-education expenses including tuition, room and board, school fees, books and computers.

States providing the 529 savings choice generally don't require residency within that state and generally allow investors to start an account at any time all through the year.

529 Plans By State

Each state establishes their own 529 College Savings Plan with an asset management company of their choice. You are able to open a 529 savings account under the state’s plan and you deal directly with the investment company managing the state’s plan. In plain english, if the state uses Vanguard 529 College Savings Plan management team, your statements will say Vanguard and you’ll work together with that company if you have queries about your account.

Many states do not require that you are a resident of that state in order to participate in their 529 plan. This is very important because some states have different features that make their plan a little more attractive. While every state needs to maintain the same overall framework and maintain the basic federal rules for 529 plans, they are able to make some changes to customize their plan.

Tax Advantages of a 529 Savings Plan

Earnings are Tax Exempt

When used for qualified schooling expenses, the earnings within your 529 college savings account will be exempt from taxes. Normally, an investor would be required to pay taxes on earning from stock investments, but with a 529 plan, the investor gets a tax break and doesn't have to pay taxes on the earnings when used for educational expenses. (See below)

Contribution Can be Deductible in Certain States

While your contributions can't be made as pre-tax, you may be able to deduct a percentage of your contribution out of your state taxes dependant upon which state you reside in.

529 College Savings Plan Features

Unlike other college savings vehicles similar to the Education Savings Account or Coverdell IRA, 529 plans remain controlled by the account owner and not the student. Other plans often grant control to the beneficiary at age 18 or 21, but with the 529 plan, the control is maintained by the account owner (parent, grandparent, or guardian). This can be useful for easing the minds of diligent saving account holders who might be afraid that their child would ditch college to backpack through Europe with the money saved.
Also you can open an account for any person, including oneself. The beneficiary you choose does not need to be related to you and contribution can be made by anyone. That means your grandparents, neighbors, teachers, and friends may make contribution to your 529 plan.

Income Eligibility for 529 Plans

Unlike ESAs (Educational Savings Accounts) which set a maximum income limit of $110,000, 529 plans don't have an income limit when it comes to eligibility. Anyone can open and contribution to a 529 college savings plan regardless of income level. Some states set requirements on how large your account can be, so make sure you look at your state’s 529 plan requirements so that you understand the maximum amount allowed.

Using the Money Within the 529 Plan

Most states don't place an age or time limit for when the funds need to be used. The money can grow until the beneficiary is ready to attend school at age 50 if they choose. You can also choose to roll the account over to another child that is in the same family of the first beneficiary.

The definition of family is regarded as “the original beneficiary’s spouse, children, sisters, brothers, nephews, nieces, first cousins, and then any spouses of those persons.”

Qualified Expenses and Education Costs
The funds within your 529 college savings plan can go towards any accredited degree-granting educational institution, including public, private, and both 2-year and 4-year institutions. Most states will allow for the funds to be applied towards: tuition, books, room and board, transportation, and also computers.

Investing Within Your 529 College Savings Account

Most states use familiar investing companies such as TIAA-CREF, Vanguard, or Fidelity. The funds within your 529 account is invested as you choose, within the investment options provided by the financial company handling the plan. Once you’ve selected a good investment option, you must keep that option and cannot change your selection. You do have the capability to roll your money into another state’s plan if you are unhappy with your investment selection, but you can only do this once every 12 months.

Most plans offer a target date strategy that determines the investment percentage based on the beneficiary’s age. For example: if your child is two years old, the account would be more aggressive today and ultimately shift from stocks to bonds as the child nears college age.

Drawbacks to the 529 College Savings Plan

While there are great benefits to using a 529 College Savings Plan, there are numerous drawbacks that need to be taken into consideration.
School funding Eligibility

Distribution from a 529 plan may have an affect on your child or beneficiary with regards to financial aid. The 529 account is considered to be an asset of the parent or account holder, so when assessing the parent’s capability to contribute towards the child’s college cost (calculated through FAFSA), the value of your 529 account will be considered. The expected contribution of an account holder will include up to 5.6% of the value of the 529 plan, which is actually better than the 35% that is assessed on money that is in the child’s name.

Which 529 Plan Should I Choose?

Like any financial vehicle, a smart investor will research the best options available to him or her. Spend some time to look through the plans of different states and follow these general guidelines for selecting the best 529 College Savings Account.

Start With Your Own State

Many states will allow residents to claim a state tax deduction on 529 plan contributions. Additionally, many states will exempt state tax on the earnings when withdrawn from the account.

Research the Account Manager

Most states make use of a respected financial institution like TIAA-CREF, Vanguard or Fidelity, but it’s smart to research which one offers the options that suit you best. You need to look at the investment options and look the past returns of the mutual funds made available within the plan. Give some thought to this as you compare plans to each other.
Be aware of the Fee Structure

Investment firms charge fees to use their mutual funds and investments. Try to get a plan that provides you the most flexibility and tax benefits and also has low fees tied to it. Be searching for these costs:

Enrollment fee to begin with account
Annual maintenance fee
Expense ratio (mutual fund fees)You are likely to pay mutual fund fees in the range of 0.31 percent to two percent or more for a 529 plan.

Assess the Plans Flexibility

Does the state plan have age restrictions or charge penalties for rolling funds to another beneficiary? How does the state view the use of funds towards graduate schools? You want to make certain you select a 529 plan that has flexible options for you and your students.

Also, some states will charge more for unqualified withdrawals made to the account. Along with the federal fee of 10%, your state’s plan may assess a greater penalty or even close out the account entirely if you use fund prematurely or for non-educational purposes.

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Why 529 Plans can Benefit You Today