529 Plans: Getting 529 College Savings Plans to Work for You

529 Plans: Building Your Child's Future Today ...

by Laura Pickford Ramirez

If you're like me and you've procrastinated at starting a state sponsored 529 college savings plan for your children or grandchildren, now is a great time to start. Think about the power of compounding interest: if you start with $100 and contribute the same amount monthly to your child's account, you will accumulate over $60,000 at 10% interest in 18 years. Since 529 plans accumulate savings tax free, you'll save almost 30% more than you would with a taxable college savings plan.

Currently, there are two types of plans: the prepaid tuition plan and the 529 college savings plan. The prepaid tuition plan pays for college tomorrow at today's prices. While some prepaid plans will allow you to transfer the funds to other colleges, 529 plans offer much more freedom and allow your child the flexibility to go to any school she wants.

With 529 plans, the benefits are many. You can contribute no matter how much you make and in some 529 college savings plans, you can accumulate as much as $250,000.00 per child. Some states allow you to open accounts with just $15 and other members of your family can also help contribute to the pot. Since many 529 plans don't have residency requirements, you can have multiple 529 college savings plans in the same beneficiary's name.

529 plans

One of the things about these plans that parents most appreciate is that the account holder maintains control of the account until the child reaches age 18, 21 or 25. If your child opts not to go to college, you can transfer the funds to another beneficiary, such as a sibling, cousin, nephew or even to yourself. If your child receives a full scholarship, you can take the money back for other uses, but then the earnings become taxable.

Regardless of the penalty for non-college-related-withdrawals, 529 plans give you more control than other plans. You decide when to make withdrawals and can reclaim funds for yourself at any time, although non-qualified withdrawals are subject to income tax at your normal rate, plus a 10% penalty. If you need money in an emergency though, it's accessible with 529 plans.

Best of all, 529 plans allows your money to grow tax free and when a distribution is made to cover college costs such as tuition, books, supplies and equipment, fees or room and board, that withdrawal is not taxable.

When considering a college savings plan, many parents are concerned as to how it will affect their child's ability to qualify for financial aid. Since 529 plans are seen as an asset of the parents, it affects the financial aid formula, but not as much as you might think. If you have a 529 college savings plan, you will be expected to make college contributions of 6% or less of the total value of the account for each year your child goes to college. Compare this to a 35% assessment against assets when your child has a custodial account or an account in his own name.

If you haven't started saving yet, consider the face of your teenager when you admit you failed to plan for his college education. I know many young adults who are angry at their parents because they did not plan ahead. These young men and women embark on their future weighed down by tens of thousands of dollars of debt.

Give your child the best possible start by signing up for a 529 plan today.

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