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You are here: Stocks Investing Guide >
College
Education Funding > 529 Plans |
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529 Plans
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Individual states also
now have plans specifically for college savings
called (for IRS purposes) 529 plans, which were
created in 1996 as Qualified Savings Tuition
Plans. Contributions can total $20,000, and
depending on the account, the account maximum will
top out somewhere between $100,000 and $250,000.
The annual exclusion for a monetary gift is (as of
2006) $12,000, and each donor can give up to five
times the amount before paying taxes so check with
your tax advisor before setting up a 529 plan. You
can choose any state's 529 plan and the money can
be used at any college in the U.S. You can switch
to another state's plan after a year
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without penalty, and if
the money isn't used for the child it was intended for,
it can be used for someone else in the family. The only
hitch is that this investment must be used for college
education-related expenses. If the money is withdrawn
for another use, the rule is that you'll have to pay tax
on it as well as a 10% penalty. You can check out the
details at
www.savingforcollege.com
Especially worrying to people who become parents later
in life is the potential effect of college tuition on
their plans for retirement. Some states have created 529
educational plans that consist of "prepaid tuition", but
investing in prepaid tuition really isn't the best idea.
Choosing such a plan means you're stuck with the school
system associated with that 529, and invariably, even if
you want your children to go to school there, they will
choose a degree that doesn't exist, or will have their
hearts set on going out of state for education, or to
France, or whatever is least convenient for you.
Besides, even "good schools" can turn bad in a matter of
a few years, and it would be a shame to be stuck with a
deal for a school you don't like. Each year, magazines
come out with independent college rating lists that
compare the best universities and sometimes the rate
program performance in each: by the time your son or
daughter is old enough to apply for school, the ranking
could change a dozen times.
The 529 plans tend to be limited in what they offer as
investment options, so you will want to evaluate them
based on what you've already learned about choosing good
investments. Comparing 529 plans will take a little
time, since you'll want to look at what every state has
to offer, not just the state where you reside. A
secondary comparison for tax purposes may also be in
order: 529 plans are considered as belonging to the
parents of dependent children, whereas Coverdell
accounts are considered as belonging to the children.
There may be some repercussions if your child wants to
apply for scholarships or grants that rely on financial
need, but since most of them are based on grades, it
probably won't matter much.
Whatever you decide to do about college funding for your
children, start by using a financial calculator to
figure out how much you'll need to invest in order to
reach your goals. Companies like Morningstar, American
and Fidelity will have information on college investment
plans.
Other sources of financial aid can be researched at the
college's financial aid office. Most students fill out a
single application form that asks about the "Expected
Family Contribution" and then returns information about
Pell Grants, Stafford loans, Perkins loans, and a
relatively new twist on the loan scene, the PLUS loan.
The major difference in the PLUS loan is that it is for
parents, not students.
The student loan lender Sallie Mae has information on
student loans. Go to
www.wiredscholar.com.
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How to stick to a household budget
and have extra
money for investing
1. Customize your budget with your current needs, wants and future goals in mind.
2. Try to think if your budgeting plan as a "spending" plan rather than penny pitching.
3. Sit down and rationally discuss budget goals and spending limits with your spouse. You are bound to disagree somethere, but it important to take the time to find common ground.
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