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529 Savings Account
Saving for College: A Parent's Guide to 529 College Savings Plans
By Martin Weil
If you're like most parents, saving for your children's college
education is a priority and a big challenge. Tuition and related
costs at both public and private universities have been rising at 5%
per year or more, far exceeding the rate of inflation. To put that
into perspective, a child born in 2006 should plan on $110,000 in
total expenses for four years at the average in-state public
college; $300,000 for four years at a private university.
Financing these costs for one or more children is going to take
planning and, most importantly, disciplined savings. Tax-advantaged
"529" College Savings plans are the savings vehicle of choice and
offer important advantages over other options. A $3,000 annual
contribution, beginning at birth, to a growth-oriented 529 plan
should pay for one child's in-state public education, and a $7,500
annual contribution for a four-year private education. A later start
means higher annual contribution amounts.
529 Plan Advantages
- Large Tax-Free Contributions: Parents, grandparents, other
relatives and even friends can contribute up to $12,000 per year per
child, tax-free, to a 529 plan.
- Tax-Free Earnings and Distributions: All earnings in a 529 plan
are tax-free. Distributions are free from all federal income and
most state income taxes when used for tuition or other qualified
college expenses. This makes 529 plans as powerful as Roth IRAs for
long-term savings.
- Donors (parents, grandparents, etc.) "own" the 529 assets: Unlike
a custodial account that typically becomes the minor's property at
age 18, 529 plan assets are always under the control of the donor.
- 529 plan assets are more advantageous for financial aid
considerations: Plan assets are counted at a 5.5% rate by college
financial aid offices, compared to the 35% rate used for custodial
account assets.
- Unused funds in a 529 can be rolled over to another child's
benefit.
Have I caught your attention? Now the question is which 529 Plan is
best for you and your children?
Choosing a 529 Plan
All plans are sponsored by individual states, but are typically
available to residents of other states. Some states offer residents
a state income tax deduction for contributions to their own plan.
So, for residents of these states, that is the way to go. For those
without that tax incentive or residents of states without an income
tax, you can choose from just about any of the available plans.
Be aware that many 529 plans are heavily promoted by brokerages and
other financial institutions and can carry large and completely
unnecessary sales charges. Go with a plan with no sales or other
load charges. Typical annual fees for asset and account management
combined should be 1% or less.
Recommended 529 Plans
There are at least a dozen excellent options to choose from. Among
these, we like the TIAA CREF-managed plans (California and others)
and the Vanguard-managed plans in Iowa, Nevada, New York and Utah.
The Vanguard plans, with their index investment strategies, have
operating costs of less than 0.75%. A new entry is the Alaska plan
managed by T Rowe Price. It offers a choice of first-rate
actively-managed funds and at relatively low cost.
No matter which plan you choose, we strongly recommend an
"age-based" investment strategy. These strategies range from
Conservative to Aggressive. Age-based programs are dynamic asset
allocation programs, similar to Target Retirement date funds. They
are heavily invested in stocks when your child is young, gradually
converting to more fixed-income and cash as college age approaches.
This approach protects against the risk of a major stock market
downturn just as the funds are needed.
With over 31 years of investment experience, Martin Weil, Registered
Investment Advisor and Principal of MW Investment Strategy Group,
helps busy professionals and their families achieve their long-term
financial goals. For a free special report filled with
recommendations on saving for your child's college education, go to
http://www.mwinvest.com/site/contact_us.html. Martin can also be
reached at (877) 442-8777 or contact@mwinvest.com
About the Author
With over 31 years of investment experience, Martin Weil,
Registered Investment Advisor and Principal of MW Investment
Strategy Group, helps busy professionals and their families achieve
their long-term financial goals. For a free special report filled
with recommendations on saving for your child's college education,
go to
http://www.mwinvest.com/site/contact_us.html. Martin can also be
reached at (877) 442-8777 or contact @ mwinvest.com
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