Tuesday, August 25, 2009

529 Plans

With school starting this week I thought I would make some comments on my research on 529 plans or qualified tuition plans. Yes, it will probably be 18 years before any of this money is used, but as college expenses continue to go up seems like now is the right time to get started.

At some other time I'll touch on Savings Bonds, Coverdell Plans, and Uniform Gifts to Minors. This time I'll just stick with 529 plans. I see three categories of 529 plans. The first are state sponsored pre-paid tuition plans. In Texas, the current version is the Texas Tuition Promise Fund. With a pre-paid tuition plan you are locking in to today's rates for tuition. With the typical pre-paid plan you purchase credits can be used directly at state schools. With most of the pre-paid tuition plans if your child ends up at a private school or out-of-state school the money can still be used, but you'll likely get a lower conversion rate. Then are state sponsored and private college savings plans. Every state and the District of Columbia sponsors a college savings plan. Some states have both pre-paid plans and college savings plans, others just have college savings plans. Often there are tax or other advantages to investing in state 529 plans. There are also private 529 plans. These are college savings plans that are managed by groups like Vanguard and USAA.

All 529 plans are similar to Roth IRAs. Your contributions are money that has been taxed and is non-deductable. Any proceeds are not taxed (at least by federal government) as long as proceeds are used on qualified college expenses. Most states that have an income tax (Texas does not so this is not much of an issue) give you a break by not charging tax on state sponsored 529 plans. Money that is not used for qualified expenses is subject to income tax and 10% penalty.

Pre-paid plans are a little more restrictive as they can only be used to pay for tuition and required fees. Proceeds from college savings plans can be used for any qualified college expense. This includes items like books, computers, and room and board.

A couple other notes around all 529 plans. The account holder (custodian) is the owner of the plan. The beneficiary can be changed with out any penalties.

Everyone's situation is different and I would recommend that you do your research and homework before investing in any plan. There is a lot of information out there and there are details available for every possible plan out there. For Nate, I'm going to have both a pre-paid component and college saving plan component. Now I've just got to figure out the mix in which I'll invest each year.

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