More On 529 Savings Tax Accounts Advantages
State 529 plans (the name refers to a section of the IRS Code) were authorized by Congress in 1996. You can invest lump sums or make regular monthly contributions. The plans come in two forms: (1) A prepaid tuition plan. The conservative choice. These plans guarantee that the money you save today will match the growth in tuition inflation at state-run colleges. Currently, that's an effective 3.4 percent return. You can also use the money for tuition at out-of-state schools. (Illinois has a prepaid tuition plan, College Illinois! The plan's current enrollment period ends Feb. 18. )
(2) A college-savings plan. Here, you contribute to an investment pool that has the potential of rising faster than the college-inflation rate (although there's no guarantee). You can use the money at any accredited school, for any qualified education expense. Savings plans are currently offered by 23 states, with nine more starting up this year. If your state doesn't have a savings plan, or has one with unattractive features, you can join one in another state. A few states keep your money in bonds, but most provide a mix of stocks and bonds. A typical 529 account leans heavily toward stocks when the child is young, then moves automatically toward safer bonds and money-market funds as college draws near. Some states give you a choice of accounts. Maine, for example, offers four accounts - one of which is 100 percent invested in stocks. Under 529 rules, you can't switch your money from one account to another within the plan. To diversify, you'd contribute to more than one account, says Maine's treasurer, Dale McCormick. Here's the beauty of 529 plans. All the earnings accumulate tax-deferred. When you take out the money for higher education, it's taxed in your child's bracket, not yours. Some states let you deduct your contribution on your state tax return. Other states let your earnings pass tax-free. The value of the plan is not included in your taxable estate. But you still control the money, says certified public accountant and 529 expert Joseph Hurley of Bonadio & Co. in Pittsford, N.Y. You can change the plan's beneficiary from one family member to another (including an adult seeking further education). You can even drop the plan and take your money back. If you spend 529 money on something other than higher education, that withdrawal will be taxed in your bracket. You'll also pay a penalty - typically 10 percent of earnings (sometimes more). |