College Prep for your Kids - the 529 Plan
If you're like me, you are already planning for your children's college education. I found that one of the best methods is through a 529 plan; a state-sponsored program designed to help parents finance education expenses. These plans are managed by investment companies and subject to contribution requirements and investment guidelines. Early withdrawals are taxed at the child's tax rate, and anyone can contribute to a Section 529 plan, regardless of income level.
In most cases, the money is invested in a HYPERLINK "http://www.advfn.com/money-words_term_3741_portfolio.html" portfolio of stocks, bonds or mutual funds. Most states offer 529 plans and the proceeds can only be used for education. Withdrawals for non-educational purposes trigger taxes and a 10 percent penalty. The investment company administering the account controls how the money is invested, and in most cases charges an ongoing fee for services rendered.
There's news that the NASD has opened an inquiry into the sales of these plans by investment advisors and brokers. While in-state plans are not always the best option once costs and performance are considered, the NASD is concerned that some brokers may be selling consumers expensive out-of-state plans in order to win hefty commissions, in turn cheating them out of specific state tax breaks. Twenty-five states and the District of Columbia offer state tax incentives for purchasing an in-state plan.
The SEC continues to work on its own inquiry of 529 plan disclosure, and is examining the release of information about fees and costs, investment performance, federal and state tax considerations, investment options and managers, risk and limitations or penalties connected with transfers or non-qualified distributions. The SEC announced earlier this year that it created a task force to examine 529s, with a close eye on disclosure and costs. Rep. Michael Oxley, R-Ohio, the chairman of the House Financial Services Committee, wrote to the SEC that 529 plan fees are so high in some states that they outweigh the product's tax benefits.
However, when set up correctly, 529 plans can be an excellent resource to save for your child's future education. So, when you select a program and start contributing, be aware of the rules and regulations for your state and talk it over with your broker or other representative. Currently, there are two types of 529 plans: the prepaid tuition plan and the 529 college savings plan. The prepaid tuition plan pays for college tomorrow at today's prices. While some prepaid plans allow you to transfer the funds to other colleges, 529 plans offer much more freedom and allow your child the flexibility to go to any school.
If you've procrastinated about starting a 529 plan for your children or grandchildren, start one now. Consider the power of compounding interest. For instance, if you begin contributing $100 and add the same amount to your child's account monthly, you'll accrue more than $60,000 at 10 percent interest over 18 years. Since 529 plans accumulate savings tax free, you'll save almost 30 percent more than with a taxable college savings plan.
Investors have had the opportunity to contribute to 529 college savings plans since 1997. There is no shortage of plans to choose from, but do your homework before you select a specific plan. No two are the alike. Keep in mind that contribution limits vary from state to state and tax advantages differ. Get educated and get started.
Originally published in the Outspoken e-newsletter.