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529 Plans: A College Savings Alternative As higher education costs continue to soar, many parents find themselves faced with the nagging question, “Will I have enough money to pay for my child’s college education?” Although most people today are likely to agree that an investment in higher education usually reaps its rewards in higher long-term earnings—and, hopefully, a greater job satisfaction. One key concern is how to choose a smart savings alternative. 529 plans are flexible investment options with tax benefits.
These state-sponsored plans offer attractive tax benefits and allow you to contribute higher sums than with other savings vehicles, such as the Coverdell Education Savings Account and custodial accounts. The funds may generally be used for any “qualified” higher education expense, including tuition, room, board, fees, books, supplies, and equipment. You don’t necessarily need to be a resident of a state to participate in its 529 plan. In some states, you may even name yourself as the beneficiary, if you are planning to further your education sometime in the future. However, participation does not guarantee admission to college—the prospective student will still have to meet the school’s entrance requirements.
Although many details of these plans vary by state, they generally come in two forms—prepaid tuition plans and college savings plans. Prepaid tuition plans allow participants to “lock in” tuition rates at eligible state colleges or universities with a lump-sum investment or monthly installments. The funds are pooled and invested over the long term, so the earnings should meet or exceed expected future tuition increases. The contract value may also be applied to private or out-of-state schools (although possibly not at full value, depending on the state). College savings plans allow contributions to vary, and the full value of the account can be applied at any accredited institution of higher education nationwide.
For more specific information, refer to the particular state plan that interests you, and consult a knowledgeable professional. Worth “Studying” The Pension Protection Act of 2006 gave a boost to 529 plans by making tax-free distributions a permanent benefit. Since 529 plans operate under individual state laws, costs and details vary by state.
For more information and to compare state plans, do a little “homework” and visit these websites: Savingforcollege.com and Collegesavings.org.
*Investors should consider carefully the investment objectives, risks, charges and expenses of the municipal fund before investing. This, as well as other important information, is contained in the official statement. Please read it carefully before investing or sending money. An investor’s home state may offer favorable tax treatment only for investing in a plan offered by such state. Withdrawals for non-qualified expenses may be subject to additional penalties and taxes. Consult your tax advisor regarding state and federal tax consequences of the investment. Participation in a 529 Plan does not guarantee that the contributions and investment return will be sufficient to cover future higher education expenses. Investments involve risk and you may incur a profit or a loss.*