Financial Skinny: 529 Plans

Will your family be ready when the first tuition bill arrives?

The average price for in-state tuition, fees, room and board is $17,860 for a public four-year college, according to the College Board. A private school is more than double that at an average $40,000 a year. But as we mentioned last week, the majority of parents haven’t made plans to fund thier children’s education. Of those that have, just slightly more than one quarter (27%) are saving using a 529 college savings plan – despite huge potential tax benefits. If you have college-bound children, especially considering the crisis of student loan debt, it may be wise to invest in this sort of plan.

What’s a 529 Plan?

In short, 529 college savings plans are state-sponsored, tax-advantaged investment accounts – named after section 529 of the Internal Revenue Service code. According to the College Saving Plans Network, they consist primarily of mutual funds and perform according to the market performance of their underlying investments. Typically 529 investment options are age-based and become more conservative as the beneficiaries near their expected date of college admissions.

How Do They Work?

Plan details vary by the state in which it’s administered but in all you must name a beneficiary when opening an account. Anyone can contribute to the account. Some state states have minimum contributions to open but many don’t. There are, however, maximum lifetime contributions in some states – usually around $300,000. The good news is you can establish a 529 in any state, even if neither you nor the plan’s beneficiary live in that state.

Why Invest?

Average balances for 529s grew to a record $17,174 in 2012, according to a report from the CSPN. That’s more than any other time in history. Existing 529 accounts also increased to 11.1 million last year, up about 4% from 10.7 million in 2011. Here’s why people are so excited about 529s: All earnings in them accumulate tax free. Withdrawals made for qualified education expenses (tuition, room, board, and books) at an accredited institution are also tax free. Finally, in some states, earnings from 529 plans are also exempt from state income tax and deductible when investing in a plan within your homestate.

Learn more about 529 plans from the College Saving Plans Network and  SavingforCollege.com. Both sites are  hubs for information on 529 plans and provide detailed, state-by-state listings of available plans and their features.

Photo Courtesy,  401(K) 2013.

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