529 Plans - How to save money to pay for college

One of the best ways to save for college (and yes, savings should be an important part of your plan to pay for college) is through a 529 Plan. This plan is named after Section 529 of the Federal tax code that allows earnings in a state established savings plan, whose purpose is to save for higher education expenses, to be tax free. Technically these plans are called a "qualified tuition program" and they must be established and maintained by the state. However, 529 college savings plan administration is often done by nationally known financial management firms such as Fidelity, John Hancock, State Farm, T. Rowe Price, TD Ameritrade, and The Vanguard. Currently, all 50 states and the District of Columbia offer 529 college savings plan and many offer multiple plans.,
There are two types of plans, Savings Plans and Prepaid Plans.
Savings Plans are similar to an investment in a mutual fund the amount of money in the account is determined by the underlying investments. The 529 college savings plan sponsor offers one or more investment options. The investment can be a portfolio of stocks or bonds or both. Sometimes the portfolio gets more conservative and the student gets older. Since there are some many options out there, you need to review several plans before choosing.
Prepaid Plans offer participants the opportunity of purchasing "credits" or "units". These credits are connected to the in-state university's tuition. So in effect, if you've invested 50% of the cost of a college education, no matter how expensive the state tuition gets, you're still entitled to a credit of 50% of the tuition bill. Sometimes the prepaid plan is called a "guaranteed savings" because the amount of credits you have doesn't change no matter how high tuition goes. In addition prepaid plans for state universities, there are over 300 private colleges and universities that offer these programs. Many Prepaid Plans can be used for tuition at out-of-state colleges too. Read the details carefully before signing up because some plans have residency requirements.
No two 529 college plans are alike, so investigate multiple 529 plans carefully and chose a plan that meets your needs. Choosing a plan from your home state in most cases will give you additional tax benefits, but sometimes an out of state plan or one sponsored by a college will better suit your needs. Withdrawals made from 529 plans are free from federal tax
Key reasons why you should contribute to a 529 plan:
1. Your earning compound on a tax-deferred basis
2. Qualified distributions are withdrawn tax-free
3. Some states offer tax benefits on money invested in a 529 plan
4. Some states offer tax benefits on money withdrawn from a 529 plan
5. Most states exempt earnings in 529 accounts from state and local taxes.
6. You can contribute up to $250,000 to a 529 plan (this provides tax-shelter)
7. The value of a 529 plan is not included in the estate of an account owner, even though the owner retains the right to change the beneficiary of an account.
8. An individual with a large estate can donate up to $65,000 ($130,000 for married couples) in one year (in effect treating the gift as if it were made over 5 years) for each beneficiary. The donor can be a parent, grandparent, other family member or even a non-relative.
9. There is no minimum income to eligible to participate in a plan and no maximum income either.
10. The owner of the plan decides when to make distributions (and can even change the person receiving the distributions).
Important questions to ask before you invest in a 529 Plan:
1. What are the state tax benefits and incentives that are available to me?
2. What is the minimum investment?
3. How has the investment performed over time?
4. What are the different types of investments available to me?
5. Can I change the type of investment option over time without incurring fees?
6. Can I transfer my money to another account sponsor without incurring fees?
7. What are the basic fees for investing this money?
8. Are there any special fees or expenses I should be aware of?
Myths about 529 Plans:
Myth 1: You are required to send the beneficiary to an in-state university
Mythbuster: Of the two types of 529 plans, the savings plans usually offer flexibility in using the full value of the money in your account at any qualified higher educational institution (including some foreign universities). The prepaid plans are a little more complicated, since the number of credits you earned will not be able to be transferred.
Myth 2: You can only invest in you own state's program
Mythbuster: As we mentioned earlier, if your state's program has a reputation for high fees or bad management you can choose any other state's program. Of course, there may be tax benefits for staying within your own state.
Myth 3: If my student (the beneficiary) doesn't go to college I will loose all my money.
Mythbuster: You can change the beneficiary on your account to another child or even another family member. In fact, in many cases, the money can be used for advancing your own education (check with the plan). Finally, your child can attend a trade school or another post-secondary school that is not a college.
Myth 4: My child is in high school, is it too late to start investing?
Mythbuster: Because of the tax savings, compounding of earnings and other benefits it's never too late to start saving for college.
Because laws vary by state and both state and federal laws can be changed, it is important to be aware of the current guidelines before investing. Most plan sponsors will be happy to explain how the guidelines impact your particular case. In addition, your accountant and/or attorney can help explain how these laws apply to your specific circumstances.