“So, you've started my 529 college savings plan, right?” (Photo Credit: CC BY-ND/Janielle Viggiano/Dr. Boyce Family Finance)

The earlier you begin to save for a child’s college education, the better. A 529 college savings plan enables you to watch money grow tax-free until it’s time for college. Particularly if a child doesn’t qualify for scholarships, a 529 plan can be quite useful.

Recession creates 529 bidding war

Many 529 plan administrators noticed that the recession had kept cash-strapped parents from contributing to their compound savings accounts. Hence, fees began to drop, which resulted in a 529 savings plan price war in which the consumer is the real winner. Money goes into conservative-mix, age-based portfolios – which function much like mutual funds – and the payoff comes when the child reaches college age. These 529 plans must have state sponsorship, and each state typically has more than one sponsored plan – some have as many as five.

However, cream tends to rise to the top. Here are some of the best 529 college savings plans available, according to consumer advocate Clark Howard:

Utah: Utah Educational Savings Plan Trust

Iowa: College Savings Iowa

New York: New York’s College Savings Program – Direct Sold

The best of the rest

Alaska: University of Alaska College Savings Plan

Arizona: Fidelity Arizona College Savings Plan

Arkansas: Gift College Investing Plan

California: The Scholarshare College Savings Plan

Colorado: Direct Portfolio College Savings Plan

Connecticut: Connecticut Higher Education Trust

Delaware: Delaware College Investment Plan

Georgia: Path2College 529 Plan

Idaho: Idaho College Savings Program (iDeal)

Illinois: Bright Start College Savings Program Direct Sold Plan

Indiana: College Choice 529 Direct Savings Plan

Kentucky: Kentucky Education Savings Plan Trust

Louisiana: Start Saving Program

Maine: Next Gen College Investing Plan – Client Direct Series

Maryland: College Savings Plans of Maryland – College Investment Plan

Massachusetts: U.Fund College Investing Plan

Michigan: Michigan Education Savings Program

Minnesota: Minnesota College Savings Plan

Mississippi: Mississippi Affordable College Savings Program

Missouri: MOST (Vanguard)

Nevada: The Vanguard 529 Savings Plan

New Hampshire: Unique College Investing Plan

New Mexico: The Education Plan’s College Savings Program – Direct Sold

North Carolina: North Carolina National College Savings Program (Vanguard)

North Dakota: College SAVE 529 Plan

Ohio: Ohio College Advantage 529 Savings Plan (Vanguard)

Oklahoma: Oklahoma College Savings Plan

Oregon: Oregon College Savings Plan (Vanguard)

Pennsylvania: Pennsylvania 529 Investment Plan

South Carolina: Future Scholar 529 College Savings Plan – Direct Sold

South Dakota: College Access 529 – Direct Sold

Texas: Texas College Savings Plan

Vermont: Vermont Higher Education Investment Plan

Virginia: Virginia Education Savings Trust

Choosing the best 529 plan for your child

Consider age-based portfolios, which start strong but gradually become more conservative as the goal comes into view (the child’s age approaches 18). Another option is a Coverdell Education Savings Account, where money can be saved at a tax advantage either for college or private school grades 1 through 12. The annual limit is $2,000 and you have to manage the investment package yourself. Coverdells do not require state sponsorship. You can sign up for a Coverdell at most any bank or broker. Independent 529 plans are also available, where tuition at participating colleges are paid at current prices, to guard against the inevitable future price hikes.

Sources

Clark Howard

Private College 529 Plan

Comparing 529 college savings plans

“But where do I put the money?”

There are so many options out there that can make it confusing as to which option or options will be best for you. Let’s focus on one option, the 529 Plan, which every parent needs to know about and understand. When considering how you should invest your money, I hope that I will, by the end of this article, have outlined a new option for you. With the tax breaks helping you avoid tax debt, flexibility and ease of use, the 529 Plan should be at the very top of every parent’s list of financial options when they start researching for their child’s college education fund.

The 529 Plan

Many of us have never heard of the 529 Plan, but it can be a great way to help with your child’s college fund. It is a state operated savings fund, which offers tax incentives. Every state has some kind of 529 Plan; we will look at 2 common types.

• Savings Plans: These are most similar to a 401K or IRA. You invest money into mutual funds and/or investments. Your state’s plan will outline several choices for you to choose to invest in and depending on what you choose, your savings plan will fluctuate based on the performance of the option you chose.
• Prepaid Plans: These are a great option if your child is a bit older and knows that he wants to attend an in-state college, because with this plan you will start to pre-pay all or some of the cost for your child’s education. Some of the funds can be transferred to an out-of-state college; please refer to your state’s laws on this.

529 Plan Advantages

There are many advantages to the 529 Plan, starting with State and Federal Tax Benefits. Federally your 529 investment will come out tax free. Each state has different rules for their 529 Plan, but it is worth the time to figure out what your state offers. Also, the plan offers you the freedom of changing which investment option you choose, usually once every 12 months, so you are not tied into any one investment. After you have chosen your first investment option and made a contribution to the fund, you can set up automatic deposits, allowing you to continue to grow your investment, without having to sit and worry about when and how much you will put in next.

Financial Aid and 529

When being considered for financial aid, as of the 2009-2010 college school year, the 529 Plan will be taken into account, along with the parental assets, at a maximum of 5.64% rate when figuring the student’s Expected Family Contribution. This is another reason why the 529 Plan is a great option; it has minimal effect of the student being able to get financial aid.

Last Thoughts

Do yourself a favor and look into your state’s 529 Plan and start your child’s college fund today.

A small investment can grow into a substantial tax-free gift

Wealth education includes knowing how to give a tax-free gift of money or assets. The Uniform Gifts to Minors Act, also referred to as the UGMA, was created in order to make it easier to gift tax-free assets and money to children. Parents, grandparents and others can open a UGMA account or a similar UTMA account, which stands for the Uniform Transfers to Minors Act, in a child’s name. The account can then be used to give financial gifts, as well as to purchase investments, such as stocks and bonds for the child. The adult who opens the account is the account’s custodian until the child reaches the legal age required to manage their own account, and accounts are always governed by the laws of the particular state where they were established.

Tax-free UGMA and UTMA investments

With either a UGMA or a UTMA investment, yearly taxes are not due until the gains on the account total a minimum of $1,700 dollars. When taxes are due, however, they are based upon the child’s parent’s highest marginal tax rate until the child turns 18 and then the taxes are calculated according to the child’s lower tax rate. In fact, the initial unearned income totaling $850 is tax exempt for the child regardless of age. The second $850 in unearned income is taxed based upon the child’s current tax bracket. When the unearned income from the account grows beyond $1700, the child’s age is used to determine whether taxes will be based upon the parent’s tax bracket or the child’s.

The difference between UGMA and UTMA tax-free gifts

The difference between these two accounts are that the UTMA may allow an adult to retain control of the account for a longer period of time, such as until a child actually completes college. Also, UTMA accounts may allow the adult custodian to put off the account’s final distribution of funds until the child reaches twenty-five years old. While this is not true in the case of every UTMA account, since rules vary according to the individual state laws that govern specific accounts, many find this an attractive way of assuring that a child’s college tuition is paid for and allows an opportunity to provide for graduate school, if necessary. It is also a way to assure that money is not squandered before a child reaches a certain age.

With a UGMA account, on the other hand, the stipulations are a lot looser in that a child may access money in the account upon reaching 18 and use the money on whatever they wish. Sometimes this is used for college, while other times it is spent in less desirable ways than what the adult originally intended.

Weighing the pros and cons of tax-free gifting

With either account, it should be noted, however, that qualifying for financial aid will be more difficult for a child once they reach college age. So, this should be taken into consideration when the account is formed. As always, it is best to speak with someone qualified to explain these matters before investing, so that the adult establishing the account is aware of all of the benefits and drawbacks of doing so.

Tax-free gift options make investing easier

While the UGMA and the UTA were once wildly popular college investment and tax-free gift strategies, the introduction of the 529 Plan and the Coverdell Education Savings Account, have made them less so. However, they are widely available at financial institutions and are relatively easy to establish and to manage on behalf of a child. Investing in a child’s future is made easier when tax-free gift giving is properly understood.”

Start saving for college at about this educational level

People who pay close attention to finances as well as the tax laws have discovered that under certain circumstances the government offers significant savings to people who plan ahead for college expenses. Many of these programs have made it easier for parents to save money for college tuition by providing tax credits and investment vehicles, such as Educational IRAs. Also, relatively new college savings-plans provide excellent ways to save on taxes.

Cautious investing

Parents should exercise caution when implementing college savings-plans, as some kinds of investments may affect a family’s eligibility for other financial aid programs. Circumstances such as marital status, family income, and state of residence are used to determine a student’s eligibility for financial aid, and so are available investment funds. If family funds are available to pay for a college education, the student may be barred from obtaining government-sponsored financial aid.

College savings options

For some parents, planning for college begins the minute a child is born. Others may not realize the importance of educational planning, or may be unable to start saving until well into a child’s adolescent years. When someone starts saving for college, however, no matter how late, it’s always a good idea. The important thing to remember, regardless of when the effort starts, is that it should be taken seriously and structured in an effective way. To that end, it’s important to know what the savings options are. Useful options include:

• Roth savings plans
• Educational IRAs
• 529 plans

Time will tell

For parents who have ten years or more to go before their child will be  ready to attend college, investing in special mutual funds, stocks or exchange-traded funds may also be a good idea. However, for those who have less time to invest, this may not be the best idea. Market fluctuations may make these kinds of investments too risky in the short run and little growth, if any, may be realized. Options for investors with fewer than ten years to go before college include:

• Treasury notes
• CDs
• Money market funds
• Bonds

Minimize the risks

When people start investing money to pay for college later rather than sooner, it’s a good idea to consider investing only a portion of available savings in order to minimize risks. Investment options and the risks involved with each should be discussed with a qualified financial planner.

Anytime is a good time to invest in a child’s education

No matter how or when a parent begins to invest in a child’s future education, it is always a good idea. If you can save money on taxes in the process of investing for college, it can be a tremendous help. Different families plan for college in different ways. For some, investments may be rewarded with tax credits or other tax savings, which are added incentives to prepare early for college expenses. Whichever strategy a family adopts, investing in a child’s future education is invaluable.

It can take years to save money for your child's college education (photo: flickr.com)

While 529 education savings plans can’t really promise quick cash for college, in recent years they’ve gained prominence as an effective way for parents to provide for the future higher education expenses of their children. A 529 education savings plan is a tax-deferred investment, similar to an Individual Retirement Arrangement (IRA), except that the qualified withdrawals are related to higher education expenses as opposed to retirement.

Section 529 of the Internal Revenue Code sanctions two types of educational plans: prepaid and savings. The prepaid plans allow participants to buy credits for future, public, in-state education at present-day prices. The savings plans, like many standard investments, are basically mutual-fund investments and are tied to market performance.

2008 stock market crash

Because they’re subject to market trends, 529 savings plans were severely eroded in the crash of 2008, with many of them losing more than ten percent of their value almost overnight. Not surprisingly, the investors who suffered these losses have been reconsidering the wisdom and value of maintaining 529 savings plans.

State offers vs. private offers

529 education savings plans are administered by individual states rather than the federal government, although they may be bought and sold – or re-sold – across state lines throughout the country. This has led to two distinct markets for 529 savings plans: those issued by the state directly and those offered privately by brokers and financial planners.

Private offers

The plans sold by brokers and planners were particularly hard hit in 2008 because many of them were invested aggressively and included a number of additional fees and costs that were added on in the re-sale market. Additionally, the brokers and planners who offer re-sale plans almost always retain the incentives paid by the issuing state. Unless you intend to contribute a lot of money quickly and require a very aggressive investment strategy, these re-sale 529 plans are probably not a good idea.

State offers

Many of the state plans fared better in the 2008 crash than private plans did. In part this was because the state plans were invested more conservatively. But their better performance was also related to their overall expense and state-incentive structure. Many states offer their 529 plans at extremely low rates and also provide the additional incentive of state income-tax credits or deductions. Some state 529 savings plans are tied to offers made by state university systems as well, which provides an additional incentive.

Overall benefits of 529 savings plans

As is the case with a Roth IRA, contributions to 529 savings plans are not deducted from your federal taxes, although they may be deducted from your state income taxes. However, distributions for qualified education expenses are tax-free and earnings within the plan are tax-deferred, even if they are not ultimately applied to qualified education expenses. Coupled with the easy “hands-off” nature of the plans and the maintenance of parental control, 529 plans really can’t be beat as a way to save for your child’s future college expenses.

Should you keep your 529 education savings plan?

Even if you lost a lot of money in the 2008 crash and are now hoping for quick cash to regain your financial footing, maintaining a 529 savings plan for your child’s college education is still a good idea. If your plan was purchased through a broker or planner, you should probably have it transferred to a 529 plan offered directly by your state. Even if you live in one of the few states that do not offer tax incentives, the lower administration costs and more conservative investment strategy will make the transfer worth the effort.