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Saving Money for College and 529 Plans
Copyright 2005 Richard Keir
Wanting the best for your children doesn't always make it
possible to give them the best. And when you look at the cost of
four years of college, the idea of coming up with that much
money monthly as your child attends college can be downright
scary. One potentially useful tool is a 529 plan which allows
you to not only begin to put money aside well before your child
is ready for college, but also provides tax advantages.
529 plans come in two basic varieties: pre-paid tuition plans
and college savings plans. While most pre-paid tuition plans are
limited to paying for tuition and mandatory fees, some allow a
room and board option or the use of excess tuition credits for
other qualified expenses. Pre-paid tuition plans are offered for
eligible public and private participating colleges and
universities, generally for residents of a specific state. Most
of these plans have set payment options based on the age of the
prospective student and the number of years of tuition credit
purchased.
The great advantage of pre-paid tuition is that you can freeze,
or 'lock-in' the tuition costs. Many of the state pre-paid
tuition plans are backed or guaranteed by the state, which is
not the case with 529 college savings plans.
529 college savings plans may have much higher contribution
limits, over $200,000, and can be used to cover any qualified
higher education expense from tuition to books and even a
computer, if it is required. College savings plans have no age
limits and thus are available for both adults and children.
There are also no residency requirements as such, but in some
cases a non-resident can only purchase a plan through brokers or
financial advisors.
Most investment options available in 529 college savings plans
are subject to risk. You may not make a return on your
investment or might even lose money. This is, of course, a risk
with any market-based investment.
Earnings in 529 plans are not subject to Federal tax, nor, in
most cases, state tax, as long as withdrawals are used for the
eligible college expenses. Additionally some states allow
residents to deduct contributions to 529 plans from state income
tax returns. Usually it must be a plan sponsored by the state
you live in.
However, if you take money out of a plan and don't use it for
eligible educational expenses, you usually will be subject to
income tax and to a 10% federal tax penalty on
earnings.
Planning your finances is critical to avoid ending up in a
situation where you will be penalized.
All 529 plans, whether pre-paid tuition or college savings
plans, have various fees and costs involved. Generally pre-paid
tuition plans will have fewer fees than college savings plans.
They normally charge enrollment fee and administrative fees.
College savings plans can vary in the fees charged depending on
your investment options. Usually there will be enrollment,
annual maintenance and an asset management fee. Plans purchased
through a broker may involve an additional fee which amounts to
a commission for the broker and a yearly distribution fee.
With any plan you are considering, carefully check all the
disclosure documents and applicable fees to be sure you really
know what it's going to cost. Remember that the investment
option you choose will likely affect the fees, so be clear on
how that works. If you work through a broker or financial
advisor also read the disclosure documents they provide or have
available.
There are also discounts that may be available depending on how
large an investment you make or plan to make. These are usually
called 'Breakpoint Discounts' and usually apply to plans
purchased through a broker or financial advisor.
States also offer direct purchase plans where you can buy from
the plan's sponsor or program manager without any sales fee.
Information on this type purchase can usually be obtained from
the plan sponsor or program manager or on the plans website. A
useful resource is the College Savings Plans Network
(http://www.collegesavings.org) which provides links to most 529
plan websites.
I'd strongly recommend that you begin at the U.S. Securities and
Exchange Commission
(http://www.sec.gov/investor/pubs/intro529.htm) and read "An
Introduction to 529 Plans" and use the excellent resource links
provided to find out more.
A 529 pre-paid tuition or college savings plan may be just what
you need to make a dream a reality, but it is a serious
undertaking and the more you know the more likely you'll chose
the right kind of plan for your situation and goals.
About the author:
As a writer and educator, both online and offline, Richard
strongly supports the value of quality education, whether online
or off. OnLine Learning at http://online-learning.blgz.info/ can
help you learn more about college financing and online degree
programs
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