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Your starting point for everything you need
to know about 529 Plans.
If you have heard about 529 plans, you may
be overwhelmed with the overload of
information that is available on them and
somewhat confused on which 529 plans are
best for your family. First of all, it is
important to know what the key benefits of
529 plans are and how they compare to other
college savings plans, as well as learn the
impact of 529 plans on financial aid and
scholarships.
529 plans are clearly the
best way for families to save for college.
While other savings options, such as
Coverdell Education Savings Accounts and
UGMAs, are also available, 529 plans must be
considered by any family which has young
children and income available for savings.
Key Features of 529 Plans
What are the main
benefits of 529 plans?
Contributions in most 529 plans grow
entirely tax-free, meaning no capital gains
taxes paid. About half of the states
currently offer tax deductions on
contributions into their 529 plans.
Who can contribute to a 529 plan?
Anyone, regardless of income level, can
contribute, whether the 529 plan is for
their own kids or that of friends or family.
What is the difference between 529 prepaid
plans and a 529 savings plans?
529 prepaid plans are contracts that you buy
to lock in today's tuition rate at public
and some private colleges within a
particular state. There are restrictions on
using funds in 529 prepaid plans for
out-of-state colleges and the impact on
financial aid is worse than if you invest in
529 savings plans. 529 savings plans are
made up of mutual funds that grow tax-free
and can be used for any Qualified Higher
Education Expenses, meaning tuition, room
and board, and other miscellaneous expenses
associated with college.
What is the minimum and maximum investment
in 529 plans? You can invest as
little as $25 to open a 529 plan and invest
over $300,000 per beneficiary, but not all
at once.
What are my choices for 529 plans and
investment options? There are
currently over 75 529 plans and over 700
different investment options to choose from,
with many well-known fund managers, such as
Fidelity, Alliance, Strong Capital and
Merrill Lynch.
What are the costs associated with investing
in 529 plans? 529 plan costs
range from 0 - 2.5% of your assets per year,
plus front and/or back-end sales fees if you
buy plans through brokers. So if you have
$100,000 invested and the expense ratio is
1.5%, you pay $1,500 in that year. This is
standard practice in the mutual fund
industry. Selecting plans with lower expense
ratios is generally a smart strategy,
although how a plan performs also impacts
whether that $100,000 grows rapidly or not.
The states that govern the plans as well as
the 529 plan fund managers receive this
compensation for administering the plan and
managing your money.
How do rebate programs work with 529 plans?
Rebate and tuition discount programs like
Upromise, Babymint and Sage Scholars offer
parents "kick-backs" of 1-10% on purchases
made with affiliated retailers. Such rebates
may be invested in specific 529 plans.
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