Save for College with a 529 College Savings Plan

If you're sending  a kid to school this fall, there's a back-to-school product that every mom and dad needs to get -- a 529 college savings plan. A 529 college savings plan assists households make post-secondary education more achievable. Opening an account with 529 savings plan takes about 15 minutes, and the benefits are well worth the effort.

529 College Savings Plan

Whether the student in your life is moving towards a liberal arts degree at the University,  trades program at the Community College, or another program in another state completely, you now can make those expenses much easier to pay for in the future. 

What you do today can help in reducing the amount of financial obligation your student may  need to borrow tomorrow.

Growth is Tax Free

The 529 college savings plan is found in the federal tax code. With these strategies, you contribute money that gets invested and has the chance to grow tax-free over the years. 



Contributions and profits in the account can be withdrawn, tax-free, for certified instructional expenditures such as tuition, books, charges, room and board as well as computer systems. The account can be utilized at any school in the nation that is qualified to get federal financial assistance for its trainees.

Contibutions May Be Tax Deductible

If you save through The 529 college savings plan your contributions are deductible in some states that have an income tax. With a steady contribution and and some patience over the years you ccan actually end up with a tidy some of money for college.

Even small amount of money can go a long way. Contributing simply $25 each month from a young age can amount to countless dollars by the time your kid finishes high school. However if you're getting a late start, don't worry-- every bit helps.

By the way, anybody-- grandparents, other loved ones-- can add to your 529 account too.

The time to start saving for college is when your child is born. However saving now for future college costs is something that will repay in spades in the future.

Visit Whatisa529Plan.com for more information.

529 Plans Diversifying with ETFs

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Diversification is the backbone to any investment plan. 529 plans are going to give investors more diversification by adding ETFs. They need to attract more investors and give them a larger choice of investments to purchase for their college savings plan. 

The 529 savings plans are a tax-advantage method for saving toward future college expenses. Parents can build a college savings fund that pays for a person’s room, board, mandatory fees, books, computer and tuition. Contributions in the 529 savings plan are not subject to federal tax as long as the money is used for college expenses. Today, mutual funds make up the largest share of the college-savings 529 industry.

Last year, on average, 529 plans lost almost 1% while the S & P 500 stock index returned about 2%. This caused a pull back in contributions. This addition of ETFs will not only hopefully attract more investors but also will give savers a more positive growth. 

Recently, Nebraska introduced four ETFs in three of its 529 plans. One of New York's plans recently added six ETFs, while Nevada's Upromise 529 moved almost exclusively to ETFs and away from mutual funds, which still dominate the college-savings industry. The addition of ETFs by 529 plans will give investors choices that will satisfy views that 529 investment choices are to risky.

What do the critics say?

The positive news is that they like the lower expenses ETFs offer. 529 plans with ETFs have an average expense of 0.61%, compared to the industry average of 1.12%. They claim 529 plan investment managers are adding ETFs in an attempt to make quick and easy changes to portfolio allocations at a fraction of the cost. ETF products can be traded throughout the trading day while mutual funds can only be reconstituted at the end of the day. 

Don't worry, the addition of ETFs are not changing the rules, you won't be allowed to buy and sell your investments in your 529 plan. 

These changes will attract more money in to the plans. You will have more choices in your investments. Diversification will benefit your 529 plans overall growth and help to minimize any market fluctuations. 

Related articles

• 10 Frequently Asked 529 Plan Questions (50plusfinance.com)
• 529 Plans Use For K-12 Education Proposed (whatisa529plan.com)
• How To Mess Up Your 529 College Savings Plan (whatisa529plan.com)
• 5 Top Rated 529 College Savings Plans (whatisa529plan.com)

Helping Your Grandchildren with College Expenses

Although most of us don’t have enough financial freedom to completely finance the college education of our grandchildren, there are still ways we can invest some money for their future schooling.

If you are interested in setting aside money for your grandchildren’s education, be careful to consider all the options available to you (savings and investment plans and tax-free gifting). One plan may be perfect for one person but not the best choice for you, so make sure you understand how every option works before making any decisions.

There are three options in particular that many grandparents find beneficial for their savings goals; 529 plans, savings bonds and tax-free monetary gifts.

529 Plans

With a 529, grandparents can put away money for their grandchildren’s education through either a prepaid plan or a savings plan. Prepaid plans allow you to purchase tuition credits. These credits match today’s inflation rates, so their performance is based on how much the cost of tuition rises by the time your grandchild goes to college. Not all states offer the prepaid plan. With a savings plan, all growth is based on the performance of (usually) mutual fund investments. As the beneficiary gets older, the investments in a savings plan become more conservative, just like a retirement savings account.

Distributions from 529 plans to pay for qualified college expenses are exempt from the federal income tax. Investors who contribute to a 529 plan in their state of residence also often receive state tax advantages, exemption from state financial aid calculations and other benefits. Donors maintain control of the account, and most plans allow benefactors to reclaim the funds for any reason, at any time with no penalties. However, if a non-qualified withdrawal is made, the earnings will be subjected to an income tax and an additional 10% penalty tax.

Savings Bonds

Government savings bonds can be given to your grandchildren as birthday or Christmas gifts when they are very young. This gives the bonds plenty of time to mature before they are cashed in for college. The most common type of bond purchased to fund education is the T-note. It earns a fixed rate of interest every six months and is issued in terms of two, three, five, seven and 10 years. This means that you can’t cash in your purchased bonds until they have reach those terms, but the longer you allow them to sit, the more interest they will earn. The minimum purchase amount is $100.The income earned from interest is subject to a federal income tax but exempt from any state or local income taxes.

Tax-Free Monetary Gifts

If you are interested in giving a larger sum of money to a grandchild who will be attending college very soon, you may want to choose the tax-free monetary gift route. Most monetary gifts are subject to a tax, but grandparents can avoid that tax by giving their gift directly to the educational institution their grandchild plans on going to. Donors must make sure that the beneficiary is serious about graduating from that school, though, because there aren’t any hard rules that require schools to return the money if the child drops out. However, if the student has serious plans to graduate, a tax-free gift is the best way to transfer wealth and know that it will be used for its intended purpose.

For more information on college savings plans for your grandchildren, contact your local licensed financial advisor.

Nadia Jones is an education blogger for onlinecollege.org. She enjoys writing on topics of education reform, education news and online learning platforms. Outside of the blogging world, Nadia volunteers her time at an after school program for a local middle school and plays pitcher for a local club softball team. She welcomes your comments and questions at nadia.jones5@gmail.com.

• The Best Way to Save for College: A Complete Guide to 529 Plans 2011-12 - Book Review

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• Roth IRA vs. 529 plan - Which is Better for College Savings?

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Should You Move Your UGMA/UTMA Accounts to a 529 College Savings Plans

English: Graduation (Photo credit: Wikipedia)

Both UGMA and UTMA accounts, together generally referred to as UGMA accounts because they're so similar, pale in comparison to 529-plan accounts, which were created in 1996.

"The biggest reason is tax savings." says John Wiggins of WhatIsA529Plan.com, "All the earnings from investments in a 529-plan account are tax exempt, while only a portion of the earnings in a UGMA or UTMA account are tax exempt."

Under one scenario, the 529-plan account would actually be owned by the UGMA or UTMA account. Experts in college saving say the tax advantages associated with 529-plan accounts, and the fact that the stock market has been so weak lately, make such a move doubly attractive.

In a 529-plan account, investments grow tax free and, under the Tax Relief Act, distributions for educational expenses are taken tax free as well. Only a portion of the earnings in UGMA and UTMA accounts are tax free.

When a child is under 14, the first $750 of earnings each year is exempt from federal and state taxes, the second $750 is taxed at the child's rate, and the rest is taxed at the parent's rate. If the child is 14 or older, all earnings are taxed at the child's rate.

Liquidating UGMA and UTMA account assets, however, and then taking the proceeds and putting them into a 529-plan account can bring a host of problems - most of them relating to ownership.

UGMA and UTMA accounts are custodial accounts, the contents of which belong to the child, meaning the assets of the 529-plan account purchased with the proceeds of the liquidated assets of a UGMA or UTMA account would belong to the child.

Normally, the assets of the 529-plan account belong to the parent.

UGMA and UTMA accounts also present a problem with respect to financial aid for college. Most financial-aid formulas impose a penalty for assets owned by the student.

They also pose a problem for parents who just need to get ahold of the money in an UGMA or UTMA account. Because the accounts are irrevocable gifts, the assets in them must be used for the child.

A 529-plan account is not irrevocable, although there is a 10% penalty on earnings for taking the money out before the child reaches a certain age.

Of course, issues of ownership can be sidestepped by just spending down an existing UGMA or UTMA, using the proceeds for the child's needs and buying a 529-plan account with new dollars independent of the UGMA, says Joseph Hurley, founder of Savingforcollege.com.

Even Mr. Hurley admits that such a solution might not work for a child from a family that just doesn't have the money to sink into a 529 plan.

Of course, the custodian of a UGMA or UTMA account could just liquidate the account and move the money into a 529-plan account without telling the 529-plan administrator where the money was coming from, suggests one financial adviser.

Such a move would be illegal, and the adviser recommends against it, but because there are no "UGMA or UTMA police," he says, he believes the practice is widespread.

Whatever the approach, it appears that 529-plan accounts are financial advisers' tool of choice for college savings. Consequently, it would be natural to assume that UGMA and UTMA accounts are on their way out. But Mr. Hurley says he doesn't think that's the case.

While many people use UGMA and UTMA accounts to save for a child's education, unlike 529 plan accounts, they are not necessarily intended for that purpose.

"Small custodial accounts still can be very useful," he says. "You don't have to use them for any particular purpose."

Here is a side by side comparison of 529 Plans and UGMA/UTMA Accounts:

	529 College Savings Plan	UGMA/UTMA Account
What you can do	Invest tax-free for college.	Invest on behalf of a minor for any purpose.
Ability to change beneficiaries	Yes.	No.
Controlled by	Person establishing the account.	Custodian, until the child is of age.
Uses	Qualified college expenses.	Any expense that benefits the child.
Impact on federal financial aid eligibility	Considered asset of parent or other account owner.	Considered asset of child.
Contributions state tax-deductible	Varies by state.	No.
State tax on earnings	Varies by state.	Depends on child's age.
Federal tax on earnings	No, if used for qualified expenses.	Depends on child's age.
Penalties for nonqualified withdrawals	Federal income tax plus 10% penalty tax; state penalties vary.	No.
Contribution maximum per beneficiary	$200,000 to $300,000 or more, depending on state.	None.
Investment options	Portfolios consisting of a variety of investments, including age-based options that adjust automatically.	UGMA: mutual funds and securities. UTMA: mutual funds, securities, real estate, royalties, patents, and paintings.
Estate planning impact	Contributions are removed from estate.	Contributions are immediately removed from estate.
Income limitations	No.	No.

Whatever decision you make be sure you contact your financial adviser for consul and help with doing this.

529 College Savings Plan - 3 Factors to Check Before Picking a Plan

If you are thinking about opening a 529 College Savings plan for your child you may be confused by the shear number of choices you have to pick from. You do not have to pick the 529 plan from your resident state. You are able to choose from any states 529 plan but be sure to check if your home state offers special tax incentives.

529 plans in themselves are not confusing but picking one that suits your needs and your pocket book may take a little extra time.

According to WhatIsA529Plan.com, there are 3 factors to look at to make sure you pick the right plan that does what you want it to, for the least expense.

1. Investment Options. There are as many types of plans as there are ways to invest in them. The plan you may chose has a wide selection of investments from conservative to speculative. Picking the right one for your goals and age of the child is imperative. You can even pick the types of investments whether they be within the U.S. or globally. Picking the right ones means the difference between good growth and poor growth. It would be smart to get some good advice and recommendations from knowledgeable professionals before investing.

2. Costs. Costs subtract from your bottom line. A percentage or 2 can really add up over the life of a 529 Plan. Don't let that 1% slip away into someone elses pocket, it belongs in yours, so shop around to get the smallest expense costs.

3. Tax Benefits. Before selecting a 529 Plan out of state be sure to check your in state plan. If it has tax benefits on your state tax return it pays to invest within state even if you prefer an out of state plan. Check with your states tax rules to see if you can still invest out of state and claim the tax deduction.

There are currently 21 states where residents can choose any 529 plan without considering the impact of a state tax deduction: 

No state income tax -- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming

No deduction for any 529 plan contributions -- California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota and New Jersey

Deduction available for contributions to any 529 plan -- Arizona, Kansas, Maine, Missouri and Pennsylvania

All other states give a state tax benefit for saving to the "home state" 529 plan.

529 plans are a great tool for funding college expenses, and selecting the right plan can be complicated. A good starting point is your home-state plan if you get a state tax benefit. If you live in one of the 21 states listed above, I recommend using the Nevada, New York, Utah or West Virginia plans, as those states offer passive investment options at a low cost.

5 Reasons to Invest in a 529 Plan

 (Photo credit: Wikipedia)

According to a recent survey 50% of American families do not have a monthly budget, save for retirement or college expenses. The lack of personal finance knowledge in America is a major problem. A new survey by brokerage firm Edward Jones claims that 62% of these households never heard of a college savings 529 plan.

The 529 plan is the best way to save for a child's education. It's the primary way to accumulate a nice tax-free investment account for your child's education. 

According to the Edward Jones survey, the number of people who understand what a 529 plan is rises with a family's income. Only 27% of those surveyed who make less than $35,000 a year knew was a 529 plan was versus 57% for those making between $75,000 and $100,000. And 62% of respondents earning more than $100,000 a year were familiar with 529s.

• Roth IRA vs. 529 plan - Which is Better for College Savings?
• 10 Frequently Asked 529 Plan Questions

5 Reasons to Invest in a 529 Plan

1. When you invest in a 529 plan, it's safe from federal income taxes and almost always state taxes as well. As long as the cash remains inside the account no taxes are generated.

2. You can take out money for qualified college expenses such as tuition and room/board without paying taxes.

3. The states offer their own 529 plans and about three dozen of them offer residents some sort of tax deduction for their contributions. Consequently, you should look first at your own state plan if your state offers a tax benefit. If the state plan is weak, look elsewhere. 

4. For competitive reasons, the costs of 529 plans have been dropping, which is great for investors. When evaluating plans, make sure you look at what the built-in cost of these plans will cost you because you won't be getting an invoice. The fees are withdrawn automatically.

5. These college savings plans routinely include age-based investment options. Age-based investing is easy because the accounts automatically grow more conservative as the children near their college years. 

Roth IRA vs. 529 plan - Which is Better for College Savings?

Roth IRA (Photo credit: Philip Taylor PT)

In USA Today they had a story that compared Roth IRAs to 529 Plans.  It said when it comes to saving for a child’s college education, a Roth IRA might be a better investment than a 529 Plan. I agree the column is right in suggesting that anybody who is thinking about saving for a child’s college expenses should consider a Roth IRA instead of, or in addition to, a 529 Plan.

The 529 Plan

A 529 Plan allows contributions to grow tax-free and distributions to be made without any taxes or penalty, if the distributions are for qualifying educational expenses.  So if you take $5,000 today, put it away in a 529 Plan for your child’s college, and it grows to $10,000 in 10 years, you can use that $10,000 for college and not owe any tax on your $5,000 in growth. But what if you need the money, or your kid decides not to go to college?  Well if you end up taking a withdrawal from the 529 Plan for something other than qualifying educational expenses, the earnings become taxable, and there’s a 10% penalty assessed on the earnings portion of a withdrawal.  

Benefits of the Roth IRA

Roth IRAs are designed for retirement savings, but are flexible because of the withdrawal rules.  At any time after the Roth IRA is established, an individual can withdraw contributions that were made to the Roth IRA for any reason without any penalty.  If an individual has had a Roth IRA for at least five years, contributions and earnings can be withdrawn without any penalty and without any taxes if the distribution is a qualified distribution (examples of qualified distributions include distributions after the individual has reached age 59 1/2, or a withdrawal to help the Roth IRA owner or a qualifying family member buy a first home for the individual or a family member).

Where they Differ

Distributions from a Roth IRA to pay for qualifying educational expenses aren’t treated quite the same as qualifying distributions, since the earnings portion of the distribution is subject to tax. This is a key difference between the Roth IRA and the 529 Plan, where earnings distributed for qualified educational expenses aren’t subject to income tax.

Which is Best?

Roth IRAs easily have 529 Plans beat if you want flexibility. 529 Plans are state-sponsored programs and come with limited investment options which typically include mutual funds, CDs, and bonds.  With Roth IRAs, investors can actively manage the account and have a much broader array of investment options.

In addition to earnings being subject to income tax when distributed for educational purposes, Roth IRAs have a few other shortcomings as compared to 529 Plans.  529 Plans allow for significantly greater annual contributions. Roth contributions are capped at $5,000 for individuals under 50, or $6,000 for individuals 50 and over. 

If you are considering setting up or continuing to fund a 529 Plan for a child, you should consider contacting a financial planner to discuss whether a Roth IRA might be a better option for you.  Not only can a financial planner help you determine whether a Roth IRA is appropriate, but he or she can also help you navigate the rules regarding contributions and withdrawals.

10 Frequently Asked 529 Plan Questions

 (Photo credit: Wikipedia)We can usually find something to complain about when we discuss our taxes or the government. But when they do something right we should tell everyone about it. One of those things they did right was to establish 529 plans for college savings. The ability to save for college tax free is a great opportunity. It not only encourages you, it rewards you by not having to pay taxes on the growth.

I find that there is some confusion about how 529 plans work so I listed ten frequently asked questions:

What Is a 529 Plan?
529 college savings plan allows family members to save money for a child's education, invest that money and remove the income from their initial investment tax-free for educational expenses.

Do you need to have a child before starting a 529 Plan?
A 529 plan is a good investment option for anyone who wants to cover educational expenses, not just those with children. If you know that you want to have children or adopt, you can start a 529 at any time and the funds will be available to you when you finally do become a parent. If you don't want children or end up not having them due to life circumstances or health, you can use the funds you have in the plan for your own betterment and career advancement.

Can I have more than one 529 Plan?
Each 529 plan has both an owner, who is the one contributing to it and a beneficiary, who is the person who can withdraw the money for college expenses. There are no limits for how many times a child can be listed as the beneficiary on a 529 plan. For example, a child's parents and grandparents might each open a plan for that child. In addition, there is no limit for how many plans a beneficiary can open.

Can You Have 529 Plans for Both Kids or Just One Plan?
Having a separate 529 plan for each child allows you to devise a custom investment strategy for each child's financial needs. If one child is a newborn or toddler, you may invest more aggressively in a 529 plan, as you have more time to recover potential investment losses from higher-risk investments. If you have a child who's in middle school or high school, you may choose to move investments under that child's 529 plan to more conservative investments to minimize losses.

Can You Pay a Mortgage With a 529 Plan?
You cannot use withdrawals from a 529 plan for anything other than qualified high education expenses (QHEE). In general, the IRS lists QHEE as tuition and fees, supplies, such as textbooks, items necessary to do schoolwork, such as a laptop used primarily for education purposes, and room and board for students attending school at least half-time. Thus, you may not use 529 savings to pay for your mortgage.

What Are Qualified Expenses for 529 Plans?

Tuition and Expenses You may pay for tuition and expenses related to an eligible educational institution with money that you saved, and interest earned, in your 529 plan. The IRS defines an eligible educational institution as just about any accredited public, nonprofit and private post-secondary schools. Eligible expenses can include books, supplies or equipment necessary to enroll or attend the institution.
Technology As of 2009, computer technology is an expense that can to be paid from 529 plan funds. This was added to the list of eligible expenses under the American Recovery and Reinvestment Act of 2009. Computer technology includes any computer and related equipment such as a scanner or printer. This eligible expense does not include software or related devices used for entertainment or hobbies.
Special Needs Expenses If the person benefiting from the 529 plan has special needs or requires special services to attend school, those costs are eligible, according the the IRS. The special needs must be connected to being enrolled at an eligible educational institution. An example of an eligible expense would be the cost associated with making a room handicapped-accessible for a student living in a dorm, if the school has not already adequately done so.
Room and Board The IRS allows you to use the money saved and earned in a 529 plan to pay for room and board as long as the student is enrolled at least half-time. However, there are some limitations. The amount spent on room and board must be no greater than the amount determined by the institution as the allowance for room and board, or the actual amount charged for room and board by the institution for institution-owned housing. Otherwise, the expenses may not be eligible.

Can I Use a 529 Plan for High School?
As of 2011, the Internal Revenue Service does not let taxpayers use a 529 plan to pay costs for high school. You may only use contributions to a 529 plan to pay expenses at an eligible institution. In general, eligible institutions consist of any accredited vocational school, university or college. If you withdraw money from a 529 plan to pay for high school tuition, the IRS will charge a 10 percent penalty on the distributions, on top of whatever you pay in income tax.

How to Close a 529 College Plan
Contact the plan manager for the account. You will find contact information on account statements. Inform the plan manager’s customer representative that you want to close the account. At the end of the year, the plan manager will send you a 1099-Q form stating the earnings on the account. Fill-out the Internal Revenue Service (IRS) Form 5329 – Part II. File that form along with the 1099-Q form that you received from the plan manager with your other income tax reporting forms in the same year that you close the 529 account.

How Much Money Can You Put Into a 529 Plan?
A college savings 529 plan had a maximum contribution amount of more than $200,000 as of September 2010. Although no limit for a prepaid plan exists, you contribute funds into the account in a lump sum and installment format, based on the current age of the beneficiary and the number of years of college that you want to purchase.

How to Set Up a 529 Plan for Your Child
Contact your brokerage firm about your state's 529 savings plan. You do not have to use your state's 529 plan, however. Your broker will have information on the plans available through your state. Fill out an application. Fill out an application for a 529 plan with your broker if you plan on using him as your investment adviser. 


Contribute money to the plan. You may elect to have automatic contributions deposited into the plan's account. These contributions will come from your checking account. Choose investments in the plan that are appropriate for building a savings for your child. A 529 plan normally contains mutual funds. 


A Gift for Both Parent and Child.


Saving money for college with a 529 plan is not only a benefit for the future college student, it is also a plus for the parents who have a tax free way to invest funds for their child's education. You should coordinate these investments with your financial adviser to meet your child's future savings needs.

How much should I save for college?

 Fidelity Investments released guidelines last month for how much parents should save in a 529 college savings plan. It shows both annual and monthly selections. If the plan is followed you should not have to take out any loans. 
 
The guidelines estimate what a four year in-state college would cost in 18 years from now for a parent with a newborn infant today. It used data from the College Board about the average cost of public and private colleges today and how much those costs are growing annually. It assumes a 5.4 percent annual growth rate in costs for the next 18 years. 
 
Next, using Sallie Mae data, Fidelity estimated how much in scholarships, grants and family gifts households currently earning $55,000, $75,000 and $100,000 annually could expect to receive and subtracted that amount from the expected cost. Then it estimated how much, at each of those income levels, a family would need to save to cover future college costs. Assuming they put the money in a 529 plan that gave a return in line with what the company estimates an investment in Fidelity's age based investment option should provide. 
 
The table reflects their findings and supplies their actual dollar amounts to be invested every month. 
 
 Their are no guidelines for family's making over $100,000 dollars per year. But they should examine the guidelines and interpret a plan that suits their own situation. Also the proposed savings amount don't consider the extra expenses that go with college, only tuition. Though transportation and health care are qualified 529 expenses. 
 
Fidelity Investments claims if you follow their recommendations the family making $55,000 would accumulate $48,000 for public college and $107,000 for a private college. The $75,000 family would have to save $51,000 for public college and $115,000 for a private college. The family making $100,000 would need to save $55,000 for public college and $123,000 for a private college. 
 
Now these figures are very subjective. We don't know what the final amounts would have grown to. Also we don't know if a family could sustain making these large payments for 18 years. But if they could the 529 accounts would become substantial. I am aware that it's pretty hard to estimate all this and I have to give Fidelity credit for attempting this. The amounts of monthly savings are relatively close. The family incomes are not, so the burden is on the lower wage earners. Like I said it's a place to start. w