Q: What is a 529 plan?
A: Named after the section of the federal tax code that governs them, 529 plans are tax-advantaged programs that help families save for college. These plans are also known as qualified tuition programs. Every state offers at least one 529 plan and now a consortium of private colleges also offers a 529 plan. The tax advantages, investment options, restrictions, and fees can vary a great deal.
Before buying a 529 plan, you should find out about the particular plan you are considering, and be sure you understand the plan’s description of fees and expenses. Request an offering circular or official statement from the plan sponsor or your financial professional. Most 529 plans provide this document on their Web sites, where it may be called the “Disclosure Statement,” the “Plan Disclosure Document,” or something similar. You can find links to 529 plan Web sites on The National Association of State Treasurers’ College Savings Plans Network Web site or you can call them toll-free at 877-277-6496 for information on the 529 plans you are interested in.
There are two types of 529 plans – prepaid tuition plans and college savings plans. Every state offers at least one of these types of plans. Some states offer both, and now a consortium of private colleges also offers a prepaid tuition plan.
Prepaid tuition plans allow parents, grandparents, and others to lock in today’s tuition rates at eligible public colleges or universities so that they don’t have to worry about future tuition increases. You pay for amounts of tuition (years, credits, or units) in one lump sum or through installment payments. There are a number of options. Some prepaid tuition plans offer contracts for a two-year community college or a four-year undergraduate program, or a combination of the two, and can cover one to five years of tuition. Some states even allow the contract to be applied to graduate school tuition.
With college savings plans, students of all ages can save for all college costs, including tuition, fees, room, board, textbooks, and computers. These plans are not just for children. If you are considering going back to college or graduate school, you can open a college savings plan for yourself. You will save on taxes and if you end up not going to school, you can always transfer the money, tax-free, to another 529 plan for your children or spouse.
When you invest in a college savings plan, you pay money into an investment account on behalf of a designated beneficiary. Contributions can vary and are only limited by the maximum and minimum contributions limits set by most plans. Although the maximum amount of contributions differs from state to state, in the majority of states offering college savings plans, the maximum amount that you can contribute for one beneficiary exceeds $200,000. Unlike prepaid tuition plans, these college savings plans don’t lock in tuition prices. Nor does the state back or guarantee the investments. There also is the risk with most college savings plan investment options that you may lose money, or it may not grow enough to pay for college. For example, if you choose a plan option that invests in stock mutual funds, chances are that your invested funds annual performance will mirror the trends of the stock market. Thus, you may lose money during a declining market. Also, all 529 plans have various fees and expenses. Not only do these charges vary among 529 plans, but also they can vary within a single 529 plan. It is very important to take fees and expenses into account when selecting a college savings plan. Do your research before choosing a plan.
Aug. 20, 2005.