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The 529 College Savings Plan

A 529 savings plan is a special way to set aside money for college. It is set up and handled by states as well as colleges and universities. In short, it's as simple as putting money in any savings plan. This one is just earmarked for education.

There are two types of 529 plans. One is a savings plan that is similiar to an IRA. The other is a prepaid plan that allows you to prepay college tuition now.

The benefits of a 529 college savings plan is two fold. You get a tax break on the money you pay in. That can be a substantial savings right there for certain people. With the prepaid plan, you get a college education at today's rate. Since college tuition is always going up, this could be quite a savings as well.

Each state sets up its own 529 accounts. The first thing you should do is find out what plans your state offers. Generally, your 529 account is used for state colleges in the state that you have the plan in. But, you should be able to use a 529 savings plan at any qualified institution across the country. Some foreign colleges are eligible too. You may be able to set up a plan in another state, different than the one you currently reside, if you know your child will be attending college in another state. Private colleges and universities have their own 529 plans. Contact the school of your choice for the options.

Talk to your bank or financial planner about how to start.

You do not have to qualify. Everyone is eligible to set up a 529 no matter what your income level is. Right now, you don't have to worry about any maximum as you can contribute at least $300,000 per student. That's enough for practically any four year institution.

Adults thinking of returning to school can set up a 529. Even for graduate school.

Does a 529 college savings plan affect financial aid? In most cases yes, but not substantially for many. Contact your school's financial aid office. Whatever balance in your 529 account will be accessed by a certain percantage to determine financial aid. Normally not the whole thing.

If you decide not to use the money for college, and withdraw it, you will be subject to taxes. One exception is if the student has died or becomes disabled.

What happens if you use the funds, but have a balance remaining? If you withdraw it, you will be assessed the tax. If it was set up by a parent for a child, and the child is done with college, the remaining could be put in another student's name. This would avoid the tax penalty.

You need to be aware of some of the things that can go on behind the scenes. Because of the downturn on the economy, some schools are not giving the full "prepaid tuition" guarantee. Some schools to keep up with rising costs will charge more.

Things to consider about a prepaid college savings plan

Is your child for certain going to go to that college? You need to check to see if you can use those funds at another college.

There may be an age limit as to when the student must use the funds.

Watch out for the upfront fees.

Ask if you can transfer the fund to another student.

Be sure to ask what kind of a discount you are really getting by prepaying tuition. Some will actually charge you a little more than the current rate.

The bottom line, is to talk to a person who specializes in setting up 529 college savings accounts. All of your questions and "what ifs" can be answered.

But a 529 College Savings plan can really reduce the cost of college substantially.


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