Updated: May 3, 2013 12:14PM
Originally published: October 8, 2001
Section 529 College Savings/Investment Plans--already the best way to save for college--just got better. Last week the IRS issued a ruling allowing more choice of investments and changes of investment within these plans, making them even more flexible. And, of course, all the money invested in 529 plans grows tax-free if the cash is withdrawn to pay for college expenses, including tuition, room and board and supplies.
These programs are started by individual states, in connection with financial services providers such as mutual fund companies and brokerage firms. I spent several days last week at a meeting of the College Savings Plan Network learning about the latest plan developments and marketing techniques, as well as the latest IRS regulations and proposed changes.
If you haven’t opened a 529 plan for your child or grandchild, this is the time to get started. You can open an account in any state’s plan--and the child can use the money to attend college anywhere. But because these plans are set up by individual states, there are some differences in investment choices and other rules. That’s why it’s important to compare.
First, though, let’s review the basics. There are two types of Section 529 plans. There are prepaid tuition plans, such as CollegeIllinois! And there are Section 529 Savings/Investment Plans, such as Illinois’ Bright Start program.
How investment/savings plans work
Money invested in a Section 529 Savings/Investment plan can be used for any college in any state. Funds can be freely transferred between children in the same extended family, so if one child does not use the money for college, another can. The donor (parent or grandparent) who sets up the account retains control. Switches between accounts to reflect changing investment strategies will be allowed once a year, or whenever funds are transferred from one beneficiary to another. For financial aid purposes, money in the account is considered a parental asset, not an asset of the student--allowing for more financial aid.
You can start with as little as $50 and add money regularly, or as much as $50,000--combining five years of the allowable $10,000 gift. That creates an interesting estate tax planning device for wealthy grandparents who want to get money out of their estates-- but still retain control, and even take back the cash (subject to a 10 percent penalty and taxes) if they need it later on.
Some plans are sold only through stock brokers, where you’ll pay a commission of about 3 percent on your investment. Others are sold on a no-load basis--through a toll-free number or on the Web. That requires you to contact the fund company directly, but you’ll save commissions.
Some states offer a break on state income taxes for either contributions or withdrawals. (Illinois just enacted an unlimited deduction from state income taxes for contributions made to the BrightStart plan, starting in 2002.)
Where to go: wwwSavingForCollege.com
Fortunately, there’s a Web site that gives you all the information you need to compare plans and understand the rules. Just go to www.SavingForCollege.com. There you can look at each state’s plan to see its features, and a quick rating service. You can even find a list of qualified consultants: brokers, CPAs, fee-based financial planners and attorneys who are experts in the field. And there’s a message board where you can post questions or share others’ experiences.
You’ll be asked to register, but the information is kept private. And you can even buy the latest edition of their helpful book on the subject online at the Web site.
There is no one best plan. Whether you get started with the advice of a broker or on your own, the time to get started is now. Set up a plan for each child, remembering you can always transfer assets from one child to another.
Sign up for regular, automatic monthly contributions to be deducted from your checking account. Get grandparents, aunts and uncles and family friends involved in making small contributions for birthday and holiday gifts. Remember, all the money in the plan grows tax-free to pay for college expenses. There isn’t a better way to save for college. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to email@example.com. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.