529 College Plans Not Completely Trouble-Free
When investing for your child's education, any port in the storm will do.
State-administered 529 college plans that give tax breaks to savers have been one of the better ports for your money since their introduction in 1996. Nonetheless, market volatility, divergent investment results and differing costs mean this is not a completely trouble-free harbor.
While assets of 529 plans are at a respectable level of around
"My husband and I set up monthly automatic transfers from our bank account in 2003 to fund our two sons' 529 plans so we wouldn't have to think about writing individual checks," said
Before youngsters can plan on attending college, parents must do homework. That's because 529 plans, though offered in all 50 states, are not all alike. They are structured differently and offer numerous choices managed by a variety of investment firms.
"The 529 plans have gotten more complex, not less complex," observed
Some 529 plans have "age-based" choices that shift their mutual fund portfolio as the college date nears, noted Brown, while others take into account risk tolerance by offering aggressive, moderate and conservative plans.
All 529 plan withdrawals for qualified education expenses remain free from federal income tax. In addition, some states also offer state tax-deferred growth and tax-free withdrawals for that purpose as well. While most plans permit investors from out of state, it is worth first looking at your own state's plan first due to the possibilities of a state tax deduction, matching grant, exemption from state financial aid calculations or other benefits.
Proceeds of a 529 plan can only be used for education, though you can transfer the account to another member of the family if the original recipient doesn't use it. While you can also get a full refund for withdrawal of the money, you must pay taxes plus a 10 percent penalty on your investment earnings.
"Make your contribution to a 529 plan on a regular basis like a car payment or another bill," advised
Paralysis is the biggest problem in planning for college because so many parents panic and do nothing, according to Chany. Though college tuition is rising at an average 6 percent annual rate, they hope that an academic or athletic scholarship will magically appear and take care of everything.
Parents should be taking even little steps forward, since a little savings is better than no savings at all, Chany said. That's where the convenience of a 529 plan comes in to get things going. Paying for college is a combination of things ranging from savings plans to filling out financial aid forms in order to maximize grant money and tax credits, he said.
"We like 529 plans because of the advantage of tax-free build-up, but you do lose control over the account," cautioned
Another consideration: If the market tanks you can deduct losses in the taxable account, but can't do so in a 529 plan, he added.
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Personal Finance - 529 College Plans Not Completely Trouble-Free
(c) 2010 Andrew Leckey