It's really hard to believe. September is almost here, and the kids are getting ready to go back to school. For many of you, the school that we are talking about is college. But even if it's primary school, sooner rather than later, college tuition will loom large for every parent out there. Today private colleges can run as much as $35,000 a year. So if educating your child is one of your priorities, the time to save is now.
In my opinion, the best way to do this is with a so-called 529 Savings Plan. Below is an article written for you by Joseph Hurley
. Joe is the author of The Best Way to Save for College: A Complete Guide to Section 529 Plans. He is quoted frequently in newspapers across the country as the nation's expert on 529 Plans, and it is an honor to have him participate in our newsletter. Please read what he has to say carefully. How to Use a 529 Plan to Save for College
By Joe Hurley
If you're saving for college, there is one particular type of investment program that you need to know about. It's called a "529 plan" and it is a college savings program run by a state. Your own state is likely to have a 529 plan, because currently there are 41 states operating these plans and seven more states in the process of developing them. Only Georgia and South Dakota have failed to enact legislation authorizing a 529 plan.
Here's what you get with a state-run 529 plan. Your money is invested either in a contract that promises to pay for at least part of the future tuition costs for your child (this is called a prepaid tuition plan) or in a mix of stock and bond mutual funds (this is called a college savings plan). Either way, the value of your investment grows tax-free until withdrawn. In the years when withdrawals are used to pay for college costs, the growth is taxed to the student, not to you.
The combination of tax-deferred growth and your child's lower tax bracket can provide a significant financial benefit to you. And don't be concerned that the 529 plan only works when your child is sure to attend an in-state public college or university. Your account can be used to pay for any accredited college in the country, and probably graduate school as well.
When thinking about 529 plans, there are at least two major decisions to make. One is whether a 529 plan is a better way to save than other options available to you, such as an education IRA, a custodial account under the Uniform Transfers to Minors Act, or U.S. Savings Bonds. The other decision is which state 529 plan to use.
There are two dozen states that make their college savings plans available to everyone no matter where you live, and you can even have accounts in more than one state. Since every 529 plan is unique, you may find program features and investment choices in other states that appeal to you more than those in your own state. For instance, some states have hired an investment company, such as Fidelity, Merrill Lynch, or TIAA-CREF, to design and manage the investment portfolios that hold your money. Other states manage the funds within their own agencies. Here are some of the things you should compare when shopping for a 529 plan:
- The level of investment risk and potential return
- The cost of participating in the plan
- The quality of the program materials
- The ease of changing account beneficiaries or the account owner
- Any age restrictions or limits on the types of education expenses covered
- How to get out of the plan
How to get out of the plan if you want to later on (if you want either to change to another state plan or pull the money out because the beneficiary no longer needs it for college)
Be sure to look at what you would be giving up, however, if you decide to invest in another state's plan. Your own state may offer special state-level tax benefits, financial aid advantages, or even matching contributions to you for using the in-state 529 plan.
If you make a contribution to a 529 plan, you are not allowed to make a contribution to an education IRA for the same child. For many families, the education IRA is not a very attractive vehicle, anyway. A 529 plan allows you to contribute $100,000 or more for each beneficiary regardless of age or income level. An education IRA limits contributions to $500 per child and places age and income limitations on participants. Even worse, the tax exempt withdrawal of funds from an education IRA prevents you from claiming the Hope Scholarship or lifetime learning credit.
Custodial accounts are popular as a way for parents and grandparents to hold taxable securities and shift any taxable income to the minor child. The huge advantage that a 529 plan has over a custodial account is that you, the account owner, will always have control over the 529 plan account. Your child has no right to the account even after he or she turns 18 or 21. In addition, the 529 college savings plan is treated much better in determining eligibility for federal financial aid (prepaid tuition plans may fare worse, however).
If all this sounds confusing, it's because it IS confusing. One of the best sources of information about 529 plans can be found on the Web at www.savingforcollege.com.
For those of you who want more information on other strategies for paying for college, check out the following Web sites:
A primer on tax-wise ways to save to college, including trusts, state plans, IRAs and aid packages - SmartMoney.com
Winning Ways to Get Scholarships and Grants - MoneyCentral.msn.com