529 PLANS
The next best thing since sliced bread
A 529 plan is a tax advantaged savings plan created to encourage people to save for college education. The 529 plans, or ‘qualified tuition plans’, are sponsored by states, state agencies, and educational institutions and are authorized by section 529 of the Internal Revenue Code.
There are two types of 529 plans: prepaid tuition plans and college saving plans. All fifty states sponsor one of the plans, and for the purposes of this article I will stick to the one I opened for my son, the college savings plan. This was ten years ago when they were called 529b college bound savings plans and were only offered in a hand full of states. When I started in the plan the tax status was also up in the air. In Today’s plans the withdrawals are federal tax free, and state tax free in most states, so long as the money is used for higher education.
The college savings plan is great for relatives of your child who would like to help fund his/her education. I gave deposit forms and SASE to various relatives so they can make any deposits they like whenever they like, and to do it anonymously if they choose to. Most states allow in excess of 200,000 dollars to be put in a single child’s 529 plan.
One of the great things about this plan is if your child happens to get a free ride at his college, one can simply transfer the money to another child. Unlike the traditional custodial accounts, where the child gains control of the account when he/she turns 18, the account holder (the parent) retains control. That’s great if junior wants to skip out on college and party across Europe. He will not be able to use the money you set aside for his college.
Here are some basic facts about the 529 college savings plans.
· Covers all higher education expenses; tuition, room and board, mandatory fees, book and computers (if required)
· Most states have contribution is excess of 200,000 dollars
· No state guarantees Plan could gain money, stay the same or decline in value
· No residency requirements-non residents can purchase plan through brokers or financial advisors
Here is an important fact regarding the IRS treatment of withdrawals. As long as your withdrawals are qualified withdrawals (tuition, books, board, etc…) you will not have to pay federal tax on any gains, and in most states you are not required to pay state tax as well.
However, if you take out twenty grand to buy yourself a new car, expect to pay income tax as well as a 10% IRS penalty.
What about the fees associated with the 529 plans?
In addition to ‘loads’ for broker sold plans, there may be enrollment fees, annual maintenance fees, and asset management fees so be sure to read the entire circular before investing. Broker sold plans also charge an annual distribution fee anywhere from a quarter of a percent to a full percent.
529 savings plans offer a wide array of investments; stock mutual funds, bond funds, money markets and equities. They also have age based portfolios that go from aggressive to conservative as the beneficiary gets closer to the time he/she will need to access the account.
The next installment will be directed towards the other 529 option, a prepaid tuition plan. If you have children, grand children, nephews and nieces I would recommend you take a serious look at the ever popular plans.
Good Luck and Happy Investing.
Comments
529s a Joke
October 14, 2009
I think 529 plans are another Wall Street joke. First, they are expensive with high enrollment fees and managements fees. Second, studies have shown that their approach of shifting money into less risky assets as the child gets closer to college doesn't work well. Most 529s went down with the broader market last year so if you needed money for your kids's education, you were stuck.
It's far better to create your own diversified portoflio of index funds, bonds, and cash. It's not hard to do and can save you a bundle.
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