Be Prepared With a 529 Plan

Many of us have heard that receiving additional schooling past high school will increase our lifetime earning potential. But over the past 10 years, tuition and fees have grown more than 4 percent faster than the rate of inflation at public four-year colleges and more than 2 percent faster than inflation at private four-year colleges, according to The College Board’s “2008 Trends in College Pricing.” That’s intimidating, but it is not the end of your dream to see the kids (or grandkids) go to a college of their choosing. The answer to this test question maybe the Section 529 savings plan.

Besides inflation, the other main obstacle to investing for a long-term financial goal is taxes. But section 529 plans are state-sponsored investment vehicles where investment earnings accumulate on a tax-deferred basis. Money can be withdrawn federal tax-free as long as it is spent on qualified higher-education expenses (such as tuition, fees, room, board and school supplies). Tax-free investment earnings can go a long way toward helping families beat inflation and achieve their college savings goals.

The tax implications of a 529 plan should be discussed with your legal and/or tax advisors, because the plans can vary significantly from state to state. Also note that most states offer their own 529 plans, which may provide advantages exclusively for their residents and taxpayers. There are no income limits for 529 plan donors, who can contribute up to $13,000 a year per student ($26,000 for married couples) without incurring gift taxes. It is also possible to contribute $65,000 ($130,000 for married couples) in a single year, as long as the donor doesn’t give any other gifts to the student for five years. Many grandparents take advantage of these provisions when doing estate planning.

As with other investments, there are fees and expenses associated with participation in a 529 savings plan, and you can invest in all different types of risk inside of the plan. From stable value to aggresive growth, there is room for everyone’s risk tolerance. However, there is also a risk that the plan investments may lose money or not perform well enough to cover college costs as anticipated. Many investors choose an allocation that aligns with the age of the child, which means that as the student gets closer to college, the portfolio would automatically get less aggressive.

My experience with taking money out of 529 plans have been without incident. It takes just a phone call to have a check issued. But you must keep good records of your expenses in case of an audit.

There are several ways to save for college, and no matter how you do it, just be sure that you are doing it. Inflation will take its toll on the value of your money—and when was the last time you heard of tuition costs coming down?

Before investing in a 529 savings plan, please consider the investment objectives, risks, charges and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. You should read this material carefully before investing.

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