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Need to Know About 529 College Saving Plans

filed: September 22, 2008

An important way for people to save for college can be accomplished through a qualified tuition plan (also known as 529 college savings plans). In offering a tax-advantaged savings plan expressly designed to encourage saving for future college costs, 529 plans are sponsored by states, state agencies, or educational institutions. It is through Section 529 of the Internal Revenue Code where these types of plans get their name and the authority to operate.

Every state and the District of Columbia sponsors at least one of two types of college savings plans which are either set up as pre-paid tuition plans or as college savings plans. Additionally, there is a group of private colleges and universities who sponsor their own pre-paid tuition plan.

Tax Benefits and More

One of the advantages in investing in a 529 plan is the potential to receive special tax benefits. Earnings in 529 plans are not subject to federal tax and, in most cases, are free from state taxation as long as withdrawals are applied to cover eligible college expenses, which includes tuition, room and board, fees, and books.

College savings plan administrators are permitted to charge fees to cover their expenses, with fees varying from plan to plan. You need not be a resident of a particular state to use most plans, but you'll lose your state tax deduction benefit if you are not a resident of that state. Still, significantly lower rates with another state's plan could make shopping elsewhere worth considering.

The Benefits of a Pre-Paid College Savings Plan

For 529 college savings plans that allow participants to pre-pay their college tuition, there are a number of benefits which makes this option worth considering:

• Tuition prices are locked in at eligible public and private colleges and universities.

• Tuition and fees are covered, but some plans go a step further and allow you to lock in rates for tuition and board. Still other plans allow you to use excess funds for other college related expenses.

• Plans are typically backed or guaranteed by the state.

• Lump sum or incremental payments are automatically paid to the college.

The Benefits of a Regular College Savings Plan

• Although locking in college costs isn't possible with a regular college savings plan, these plans allow participants to use their funds for all college related expenses including room and board and textbooks.

• Most college savings plans have high contribution plan limits, usually more than $200,000, which is the current cost of the top end of the education spectrum.

• There are no age limits with regular plans as both adults and children can participate.

• Year round enrollment available.

Contact Your Financial Advisor

Of course, before enrolling in any plan you may want to contact your financial advisor for a recommendation on which plan is right for you. He'll consider your current income, monthly contribution, tax benefit, and a whole host of other considerations to help you save the most amount of money and realize the best gains with your contributions.

As part of a comprehensive strategy for college savings, a 529 plan makes sense for the average American family, ensuring that your child gets the best education possible through careful planning on your part.

For More Information:

• view the financial aid chart for parents
• view the financial aid chart for undergraduates