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