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