How do 529's work and what are my options for college savings?

Saving money for college (yours or your children’s) is a good thing, even when financial times are tough. Uncle Sam backs up that college-investment philosophy with a variety of savings programs that contain built-in tax incentives. Consider the following:

• Section 529 plans: Qualified tuition programs covered under Section 529 of the Internal Revenue Code allow you to save money for future college expenses for a specific beneficiary (you, your child or someone else's). Your money goes into an account, that's custodialized at an investment company (for example, Franklin Templeton or American Funds to name a few).  To make a Section 529 plan work, you have to understand its requirements and follow them, for example:
  • You’re not allowed any federal income tax deduction for the amount of your Section 529 plan contribution.
    Depending on which state you live in (and if you use its plan), you may get a current state income tax deduction for part or all of your contribution each year.
  • Interest that you earn on the money in a Section 529 plan isn’t taxed until distributions are made to your designated beneficiary. And if you use these distributions to pay the qualified education expenses of a student at an eligible educational institution, accrued earnings generally aren’t taxed at all.
  • To get these tax benefits, the money must be used for qualified expenses (tuition, room and board, books, and so on) at qualified institutions.  I.E. not The School of Hard Knocks doesn't count.

 

 

529's have become the most prominent vehicle in the college savings landscape.  Other options include Coverdell accounts, UTMA's or UGMA's, and traditional banking/ savings accounts such as CD's, or money markets.  Yet, none of the aforementioned have the flexibility of investment options and powerful benefit of potential tax-free growth that 529's have.

529's, Coverdell's and UTMA/ UGMA's are offered through a variety of investment companies and financial institutions, and marketed through financial advisors.  In some instances, employees can participate in 529's as part of their employer benefits program, but this depends on the state they are in, and their employer's benefits package.