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. Copyright 2005 Richard Keir |
