Your Guide to 529 College Savings Plans

Monday, March 10th, 2008

The cost of college is rising. Fast. While tuition continually out paces the rate of inflation, middle class families can easily be left behind if planning for college costs doesn’t start early. To get started, check out state-sponsored college savings plans, often called “Section 529 Plans.” These plans are designed to help families save funds for future college costs. Here is what you need to know to start saving with a 529 college savings plan.

Here is the easy explanation of just what a 529 college savings plan is from the College Savings Plans Network:

A 529 plan is a tax-advantaged investment plan designed to encourage saving for the future higher education expenses of a designated beneficiary (typically one’s child or grandchild). The plans are named after Section 529 of the Internal Revenue Code and are administered by state agencies and organizations.

These plans are a great deal because any withdrawals to pay the beneficiary’s college costs are totally tax-free. And if you make substantial account contributions while your kids are still young, the tax advantages that will accumulate will drastically reduce the total amount needed to fund their future college educations.

As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits and exemptions. Every state now has at least one 529 plan available. It’s up to each state to decide whether it will offer a 529 plan and what the specifics of the plan will be.

There are distinct advantages to 529 savings plans. One advantage is that you will receive some amazing income tax breaks.

Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary’s college costs come out federally tax-free. Your own state may offer some tax breaks as well in addition to the federal treatment.

The donor always stay in control of the account. With few exceptions, the named beneficiary has no rights to the funds. You are the one who calls the shots; you decide when withdrawals are taken and for what purpose. This is advantageous for parents who start a 529 plan for their child because it allows them to keep tabs on how the money is used.

Everyone is eligible to take advantage of a 529 plan, and the amounts you can put in can be quite large. Most college savings plans now permit lump-sum contributions of well over $250,000. There are also no income limitations or age restrictions.

If you want to move your investment around you may change to a different option in a 529 savings program every year (program permitting) or you may rollover your account to a different state’s program provided no such rollover for your beneficiary has occurred in the prior 12 months.

If you are thinking about going back to college or graduate school in the future, then set up a plan for yourself! 529 savings plans are the best way to save money for college, provided you start the account early. These plans work best when parents and grandparents add to the account for their kids and grandkids when they are very young. Then just sit back and let the interest accrue!

To learn more about 529 college savings plans, visit the College Savings Plans Network and SavingForCollege.com. Smart Money also has a great 529 college savings plan estimator that you can check out.