CHET And Your 529 Tax Investment

All earnings within a CHET account are tax-deferred. This means CHET account holders do not pay taxes on dividends, interest or capital gains until they start to withdraw money -- so long as the money withdrawn is immediately used to pay tuition and expenses related to higher education.

Money withdrawn from a CHET account is taxed at the child's rate -- typically 15 percent. Most wage earners fall into the 28 percent or 31 percent tax bracket, or higher. Grandparents, through the use of "five-year averaging" (review tax laws for full details), can invest $50,000 in one year in a CHET account without paying gift taxes. You can invest up to $100,000 per CHET account over the life of each account. Education IRAs, by comparison, have contribution ceilings of $500 a year. Most attractive of all -- at least to some adults -- CHET accounts may bear the name of a child, but remain in control of the adult custodian. Tax-sheltered Uniform Transfer to Minors Act accounts, on the other hand, allow the child to immediately take possession of the money when he or she turns 18. With CHET, and other 529 plans, if an 18-year-old appears ill-prepared for college, the parent can withdraw money from the account and pay taxes and a 10 percent penalty. Parents can also pass on a CHET account to another one of their children without penalty. Or parents can wait for their 18-year-old vagabonds to mature; they can shelter their money within CHET until the child, in whose name the account is held, turns 45. If, on the sunnier side, a child earns a full scholarship through four years of college, then money can be withdrawn from CHET without penalty -- though it would be taxed. Aggressive investors, however, might see a downside to CHET's "age-tailored" portfolios. For children 1 or 2 years old, for example, CHET invests 80 percent of its dollars in stocks and 20 percent in bonds. For children 8 or 9 years old, CHET has a blend that's 55 percent in stocks and 45 percent in bonds.