Investment Updates
Does Your 529 College Savings Plan Match Up?
Published Monday, December 22, 2008 at: 7:00 AM EST
When the Pension Protection Act of 2006 made 529 college savings plans a permanent part of the tax code, it ended most debate about the best way to invest for educational expenses. However, there are dozens of state-sponsored plans to consider, each varying in everything from investment choices and performance to plan costs and tax advantages. Understanding the differences can help you find a plan that makes the most of your college savings.
All 529 plans offer these benefits: No income requirements and very high caps on account contributions No federal income tax on investment earnings, nor on distributions to pay qualified college costs Plan owners retain control of how assets are used. If a plan owner’s child doesn’t go to college, he can name another family member as beneficiary or even take back contributions, though normally with a 10% penalty and tax on investment profits. (One strategy lets you avoid taxes and penalties by making a charitable donation of an unused plan.) Your ownership of plan assets means favorable treatment in federal financial aid formulas, increasing your child’s chance of qualifying for federal aid (though it may lower aid packages from institutions). You can lump together five years’ annual gift-tax exclusions to make a single 529 contribution. Because you and your spouse may each give up to $13,000 a year without gift-tax liability, you can jump-start a plan with up to $130,000 while also removing that money from your estate if you live for five more years.
Get past the basics and differences among plans emerge. A distinguishing feature is whether the plan is sold directly to investors or through a financial advisor. Savingforcollege.com and Morningstar.com provide databases of 529 plans and guidance on plan selection. Savingforcollege rates effectiveness on a one- to five-cap scale, and each year Morningstar names the country’s five best and worst plans. In both cases, evaluations are based on several criteria:
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