I am a big believer of college savings. With cost rising there seems to be a concern about who can afford college. As a parent of a range of children (a driving teen, down to a six year old with two in between), I wonder how I’ll ever pay for their school should they chose to attend. My situation is a tough one in this department, but my two oldest (both teens) have made their decisions, so I only need be concerned about a ten year old and my youngest.
Some 529 plans have gotten a bad rap lately for poor performance and high expenses, but that shouldn’t contaminate the whole crowd. For many, including myself, they are the best way to save for college.
Using my personal situation and thoughts towards children and a higher education, I look at my clients and what they are doing or aren’t doing. I push the 529s not only as a guide towards saving for their children/grandchildren’s college funds, but as a tax break. (I push it as a tax break, but my thought process is of the recipient being able to better afford going to college if they want.)
In July 2007 Money Magazine’s article called “529s: Best savings plan gets better” the author ask “Confusing?” then goes on “Well, yes. But it’s nothing you can’t handle by adhering to a few simple guidelines.” And she is correct. These plans are still very confusing. However she clears up some of this confusion with her 5 “rules”. Somewhat.
Earlier this year I wrote a guest post for Wide Open Wallet where I simply discussed (and briefly) the two types of 529 plans, and gave a brief run-down of the three states I deal with most. I was pushing the state benefits of 529s. There are some Federal breaks too. I also reposted this on my site, months later, in hopes to reach more readers.
This month Money magazine has “Is a 529 still the top Savings plan?” (no web link for this yet.) In it they break it down by the numbers with the following example:
“…Say you are in the 28% tax bracket, have a 5 year old and save $200 a month in Utah’s low-cost 529 which has annual expenses of 0.38%. Assuming annual average returns of 5%, you’ll have $39,100 by the time your kid is 18.”
Then the comparing starts, showing that if you invest in a taxable account you’ll lose $2,900 in the same senario. If you’re not careful, then fees may “eat away” at your tax savings. Of course what if you have to withdraw it for anything else other than higher education? Well, you have to pay income taxes on the earnings plus a penalty of 10%.
To sum it all up the author of “Is a 529 still the top Savings plan?” says “If you’re planning to save for college and have no reason to think your kid won’t go, a low fee 529 is the best savings tool – regardless of what anyone tells you.”
I agree.
Every situation is different so by no means should you run out open a 529 for your child/ren. Do some research?
College Savings Without the Tax Bite
529 College Savings Plans – Internal Revenue Code Section 529
Latest on 529 Plans Thanks Nick for the site link
Then visit with your tax preparer and go over your options. Every state that has a 529 plan/s is different. Obviously please check your home state first, but don’t limit yourself to your home state.
This is a re post from 08/04/2008
© 2008, Bruce. All rights reserved. Republishing of this post must provide link to original post.
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