Section 529 Plans May be Here to Stay
Wednesday, August 9, 2006 at 6:52PM Section 529 Plans (often referred to as tax advantaged college savings plans) got a big boost last week when a sweeping pension bill was approved by Congress. The President is expected to sign the bill into law giving Section 529 Plan investors a sigh of relief. As it stands now the rules allowing tax free distributions from Section 529 plans for education expenses will expire after 2010. That would mean that the investment earnings in such plans would accumulate tax free, but once the money is pulled out (for education purposes or otherwise) the earnings on the portion distributed would be included in the gross income of the beneficiary (usually the college student). The new legislation makes the tax free distribution for education expenses permanent.
Probably the best summary I've seen of the differenty 529 plan types is from the Motley Fool. It does a good job of highlighting the differences between 529 savings plans, 529 prepaid tuition plans and Coverdell education savings accounts.
Section 529 Savings Plans are probably the most popular today. Because the plans are setup and administered by the states there are a tremendous variety available. And just becuase you live in Florida doesn't mean you can't invest in a 529 plan in say, Virginia. One of the biggest differences between various state plans is the contribution limit. Unlike IRA's or other retirement plans 529 savings limits are based on the total account balance, not the amount contributed in a single year. For instance, you can make contributions to a Florida 529 savings plan until the balance reaches $341,000. You can write one check or several. It doesn't matter. Iowa limits it's plan balances to $239,000. You can also transfer balances from one state to another so the student is limited to picking a school in the state where the account was setup.
When choosing a state savings plan also note the fees and whether there are requirements for residents vs. non-residents. Some states with a state income tax allow 529 contributions to be used as a deduction so you'll want to take that into account as well. One very good resource for comparing the features of various state plans is Savingforcollege.com. Kiplinger's also has a very good article on 529 Plan FAQs.
One final note. Some plans, many in fact, are sold by brokers. Just as when purchasing other products from people paid to sell them you should be on your toes and bring a healthy level of scepticism with you before making a commitment. Both the NASD and the SEC have launched inquiries into questionable sales practices related to 529 plans.
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