Some big questions have recently been answered about 529 plans, not the least of which is the extension of their tax-free status by Congress. Uncertainty on these issues had slowed contributions to these once wildly popular plans. According to Boston-based Financial Research Cooperative, growth in the number of new accounts slowed to an average quarterly rate of 4 percent in 2005 from an average of 21 percent in 2002.
529 plans are complex to sort out without some sort of help, and it’s tougher still to determine whether one state’s plan is invested more competently than another’s.
Currently, 62 senators and more than 120 members of the House of Representatives have been co-sponsors of bills to make the legislation permanent, according to the National Association of State Treasurers.
What is a 259 college saving plan?
529 college savings plan is named after a federal law which came into account in the year of 1996. This law basically allows a parent to create a tax-deferred college saving plan. The best part is that it starts with $25 in some of the states.
Their current tax advantages
The biggest advantage of this tax is that it can let you transfer funds to any other 529 plan if you change the beneficiary as well. In August 2006, Congress made permanent the tax advantages of 529 plans, which had been set to expire at the end of 2010.
There are gift and estate related benefits which you can’t ignore.
Who can contribute?
This is a very attractive aspect of a 529 college savings plan.
The 529 plans require cash contributions that can be transferred from your checking or savings account. Automatic payroll deduction is becoming more frequent as well, so check your plan’s options.
Who keeps control on funds?
The person who opens the account keeps control of the fund. So as a parent you have all the control.
How to evaluate a 259 plan?
Today, some states will allow you to put in close to $300,000 over the life of the plan. Fees vary from state to stale, and they’re very important to watch.
Management fees of 2 percent or more are common in some states, and if you wouldn’t settle for that in a mutual fund, you shouldn’t settle for it in a 529 plan.
529 Plans and financial AID
Don’t be surprised if the school requires full disclosure of 529 funds a portion of which could be deducted from that total aid package. It’s worth some research ahead of time with your schools of choice.
When 529 plans go bad in overview of problems in the 529 world?
In all truth, investors in 529 plans face the same market risks as those who invest in 401(k) plans. When poor investment choices are made, these critical funds can be in jeopardy.
529 plans also face the 401(k) dilemma too many choices and a need to watch fees. However, with the proper research and advice.
In May 2006, the National Association of Securities Dealers issued an alert “that investors may be short-changing themselves by investing in 52 college savings plans with high fees, plans that currently do not offer them state tax benefits, or both.” The organization pointed out that some brokerage firms offered only a limited number of plans and barred more attractive options from other states that could have lower sales charges, expenses, or the possibility of better tax advantages.
A 2004 study by the University of North Carolina at Wilmington showed that state-sponsored 529 plans with the highest fees ironically seemed to draw the most investors.
Why prepaid tuition plans need to be checked carefully?
Prepaid tuition plans allow you to pay into a state or regional tuition savings plan to ensure yourself against full increases in tuition in the future. If you’re sure Junior will attend a state school or a school within a particular group of colleges with prepaid plans, they make some sense.
But these plans have had their share of woe, even more than 529 college savings plans. During the last market slump, many of these tuition plans lost money and couldn’t meet the annual tuition increases being made at those schools. As a result, participants had to cough up more cash for the tuition bill they thought they had locked in at a lower rate. Second, prepaid tuition plans got nastier treatment by financial aid officers than 529 savings plans aid counsellors looked at 529 savings plan assets as property of the parent, while 529 prepaid tuition plan assets were viewed as student assets. That meant that withdrawals from a prepaid tuition plan reduced federal financial aid eligibility dollar-for-dollar.
There’s been an effort to remedy this. Yet there is still some dispute on how universities will distribute aid money that they own to students, particularly at private schools, which distribute a larger part of their endowment to students to cover tuition.
It’s all very complicated, and it underscores why you should get help with any 529 savings strategy. But here are some general questions to ask of any prepaid program you’re investigating:
• How solvent is the state or regional plan?
• How is the plan’s money invested?
• How has the plan done since inception?
• Has the plan ever had to return principle to investors because it wasn’t meeting obligations during a market downturn?
• Check the fine print. If a plan guarantees your tuition costs as long as annual tuition costs don’t exceed 5.5 percent a year, and then the actual tuition increase turns out to be 6 percent, then what happens?
• Under what conditions might the prepaid tuition plans liquidate?
• What happens to participants’ principal if it does?
• What happens if your kid decides he wants absolutely nothing to do with the schools in the plan?