Opening a 529 Plan Is Cheaper Than A Fast-Food Lunch
In July, I attended the National Association of State Treasurers Conference in New York City. I met with a group of directors of the state-sponsored 529 college savings plans. They were promoting their new site, www.collegesavings.org, which offers the ability to compare plans, with a link to each state’s website.
For the uninitiated, savings in a 529 plan grow free of federal and state taxes, and withdrawals are federally tax-free if used to pay for qualified education expenses, such as tuition and room and board. The 529 account owner retains control of the account.
There are two kinds of plans – savings and pre-paid programs. In the former, your account can be used to pay college costs anywhere in the U.S., and some schools overseas. Each investor can contribute up to $12,000 per child a year, to a typical maximum of $220,000, although some states permit total assets of more than $300,000. In the latter, you pre-pay future tuition in today’s dollars at a specific institution.
It’s easy to start: Some 65 plans require $50 or less to open an account — a few will allow contributions of just $5 or $10. Roughly a dozen states match the contributions of low-income families. Many states offer an upfront tax deduction for the contribution. Meanwhile, 529 savings barely affect the student’s ability to receive financial aid.
The state site doesn’t give recommendations on the best plans. For that, visit www.savingforcollege.com (subscription required). Also see Morningstar.com’s annual “best and worst” of the 529 plans (registration required).
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