Consider a 529 Plan to Save for College

As debate begins in Congress to make permanentthe tax exclusion for earnings used foreducational purposes from 529 college savingsplans, it's worth reviewing what this investmentvehicle can do for parents and their entire family toprepare for the rising cost of college.

•What is a 529 plan? A 529 savings plan—named for the federal law that created them in1996—allows a parent, other relative, or friend toopen a tax-deferred college savings plan with as littleas $25 to start in some states. A 529 college savingsplan is not the same as a 529 prepaid college tuitionplan. Prepaid tuition plans are tax-deferred savingsplans that allow you to save for tuition for in-stateschools. All 50 states now offer their version of a 529college savings plan, and you can usually access thedetails through your state treasurer's office.

•What about these tax advantages? Assetgrowth in a 529 plan is tax-deferred. Under the taxlaw passed by Congress in 2001, any withdrawalsfrom 529 plans after 2002 through the year 2010 aretax-free if used to pay for a beneficiary's collegetuition, fees, books, supplies, and room and board(for students enrolled at least half time). The 2002federal tax law change also allowed account holdersto roll over funds from one state's 529 plan to anotherstate's plan once every 12 months if they move orif they're unhappy with their current plan. You cantransfer funds to another 529 plan at any time aslong as the beneficiary is changed.

•How can a whole familybenefit? Everyone from you,your parents, aunts, uncles,cousins, siblings, and kids can benefitfrom the tax breaks and educationalrewards of these plans. In fact,if your child gets a full scholarship,any close family member on theaforementioned list can use themoney in that account to go toschool themselves. Better still, parents,grandparents, siblings, andfriends can make deposits tothese plans and get a tax benefit.All funds must be distributed tothe initial beneficiary or transferred to another familymember before the initial beneficiary turns 30.

•How much can I put in? You may deposit over$230,000 per beneficiary in many state plans.

•What about fees? Fees vary from state to state,and they're very important to watch. Most stateshave a no-load option in addition to advisor-soldplans, so review and discuss those alternatives.

•Who picks the investments? Each state typicallyselects qualified, nationally known investmentmanagers to create the plan choices in each state.Most state treasurers'offices feature direct links offof their Web sites to their particular instateplan with instructions on how toopen accounts. The funds can beplaced in a variety of investmentsfrom low-to-aggressiverisk.

•Who retains control ofthese funds? The parent orfamily member who opens theaccount controls the fund.

•Do 529 savings hurt financialaid? They could, depending onthe school and how they value theseassets. If your child qualifies for agenerous financial aid package, don't be surprisedif the school requires full disclosure of 529 funds, aportion of which could be deducted from that totalaid package.

•What happens if there's an emergency? Themoney in a 529 savings plan can only be used forhigher education costs without negative tax consequences.If the money is used for any other purpose,the earnings are taxed at the account owner's ordinarytax rate and subject to a 10% penalty.

This article has been produced by the Financial Planning Association (www.fpanet.org), the membership organization for the financial planning community.