| If you're like most parents, saving for your children's | | | | child's benefit. |
| college education is a priority and a big challenge. | | | | Have I caught your attention? Now the question is |
| Tuition and related costs at both public and private | | | | which 529 Plan is best for you and your children? |
| universities have been rising at 5% per year or more, | | | | Choosing a 529 Plan |
| far exceeding the rate of inflation. To put that into | | | | All plans are sponsored by individual states, but are |
| perspective, a child born in 2006 should plan on | | | | typically available to residents of other states. Some |
| $110,000 in total expenses for four years at the | | | | states offer residents a state income tax deduction |
| average in-state public college; $300,000 for four years | | | | for contributions to their own plan. So, for residents of |
| at a private university. | | | | these states, that is the way to go. For those without |
| Financing these costs for one or more children is going | | | | that tax incentive or residents of states without an |
| to take planning and, most importantly, disciplined | | | | income tax, you can choose from just about any of |
| savings. Tax-advantaged "529" College Savings plans | | | | the available plans. |
| are the savings vehicle of choice and offer important | | | | Be aware that many 529 plans are heavily promoted |
| advantages over other options. A $3,000 annual | | | | by brokerages and other financial institutions and can |
| contribution, beginning at birth, to a growth-oriented 529 | | | | carry large and completely unnecessary sales |
| plan should pay for one child's in-state public education, | | | | charges. Go with a plan with no sales or other load |
| and a $7,500 annual contribution for a four-year private | | | | charges. Typical annual fees for asset and account |
| education. A later start means higher annual | | | | management combined should be 1% or less. |
| contribution amounts. | | | | Recommended 529 Plans |
| 529 Plan Advantages | | | | There are at least a dozen excellent options to |
| - Large Tax-Free Contributions: Parents, grandparents, | | | | choose from. Among these, we like the TIAA |
| other relatives and even friends can contribute up to | | | | CREF-managed plans (California and others) and the |
| $12,000 per year per child, tax-free, to a 529 plan. | | | | Vanguard-managed plans in Iowa, Nevada, New York |
| - Tax-Free Earnings and Distributions: All earnings in a | | | | and Utah. The Vanguard plans, with their index |
| 529 plan are tax-free. Distributions are free from all | | | | investment strategies, have operating costs of less |
| federal income and most state income taxes when | | | | than 75%. A new entry is the Alaska plan managed |
| used for tuition or other qualified college expenses. This | | | | by T Rowe Price. It offers a choice of first-rate |
| makes 529 plans as powerful as Roth IRAs for | | | | actively-managed funds and at relatively low cost. |
| long-term savings. | | | | No matter which plan you choose, we strongly |
| - Donors (parents, grandparents, etc.) "own" the 529 | | | | recommend an "age-based" investment strategy. |
| assets: Unlike a custodial account that typically | | | | These strategies range from Conservative to |
| becomes the minor's property at age 18, 529 plan | | | | Aggressive. Age-based programs are dynamic asset |
| assets are always under the control of the donor. | | | | allocation programs, similar to Target Retirement date |
| - 529 plan assets are more advantageous for financial | | | | funds. They are heavily invested in stocks when your |
| aid considerations: Plan assets are counted at a 5.5% | | | | child is young, gradually converting to more |
| rate by college financial aid offices, compared to the | | | | fixed-income and cash as college age approaches. |
| 35% rate used for custodial account assets. | | | | This approach protects against the risk of a major |
| - Unused funds in a 529 can be rolled over to another | | | | stock market downturn just as the funds are needed. |