Getting To Know The 529 College Savings PlansThe 529 plan, otherwise known as “qualified tuition plans” in Section 529 of the Internal Revenue Code, is a savings plan earmarked for college expenses in the future. There are two kinds, 529 pre-paid tuition plans and 529 college savings plans. At least one type is provided for by all states in the US and eligible educational institutions are authorized to sponsor them as well. There are some differences between a prepaid tuition and college savings plan. The prepaid plan is dependent on the tuition prices and mandatory fees only of eligible colleges and universities and is usually restricted to state residents of a certain age. College savings plans pay college tuition fees, room and board, mandatory fees and other expenses such as books and have no restrictions for educational institution or beneficiary residency or age. Enrollment is also limited to predetermined periods for prepaid plans while college savings plans allow enrollment at any time. A payout schedule for pre-paid tuition plans is predetermined while payment in college savings plans limit contributions to $200,000 at any one time. However, pre-paid tuition plans are usually state-guaranteed while college savings plans are subject to fluctuations in the market and may decline in value. Tax consequences for 529 plans depend on the home state. Earnings are exempt from federal tax and in general from state taxes as well provided the proceeds are used for eligible college expenses. Otherwise, the earnings are subject to a 10% federal tax penalty. Most states restrict tax benefits for 529 plans sponsored by the state although some allow tax exemptions for 529 plans regardless of source of sponsorship. There are fees and charges associated with 529 plans. Prepaid plans usually impose administrative fees and enrollment charges. 529 college savings plans have different asset management fees for different investment options. Direct-sold college savings plans, in which investors buy directly from the 529 sponsor, carry the fewest sales fees. The contact information for program managers for specific plans are available online e.g. College Savings Plan Network. Broker-sold plans are more expensive, depending on the class of shares purchased and the length of time the shares are held. Class A shares have lower recurring fees but have an initial or “front-end” sales load or commission which is deducted from the investment. Class B shares have nor front-end sales load but carries “back-end load” when money is taken from the investment prior to the optimal time, which is when the load becomes zero and converts automatically to Class A. Class B shares carry higher annual fees. Class C shares may also carry sales load but lower than that imposed on Class A and B. However Class C shares carry higher annual fees than both Class A and B shares and is not convertible to any other investment class. For the long term investors, Class A may be the best type of 529 college savings plan. 529 plans are considered assets and will be included in the calculation of the expected family contribution for college expenses in the consideration for eligibility for need-based financial aid. Investing in 529 plans should be considered in light of the overall financial situation because of the restrictions imposed on the use of the 529 account. Shifts in financial priorities may result in penalties and lost benefits if you invest in a college savings account instead of more flexible financial instruments such as mutual funds or custodial accounts. However, if higher education will always be a priority, 529 college savings plans or pre-paid tuition plans may well be the ideal investment. |