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The 529 Plan: How These Three Numbers Could Shrink Your Child’s College Bill

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I asked a handful of people if the number “529” meant anything to them. I got several interesting responses.


Is it a missile?


An airplane?


A peptide code for an AIDS vaccine?


No, it’s none of those things—but a 529 might help you send your child to college.


The 529 account—the brainchild of federal and state governments—was developed to foster investment in higher education and is named for Section 529 in the Internal Revenue Code. Investors deposit after-tax income into an account that has a range of investment options, including mutual funds. Distributions aren’t subject to federal income tax, as long as the money is used for higher education.


The U.S. Securities and Exchange Commission outlines two types of 529 accounts: the pre-paid tuition account and the college savings plans. With the pre-paid tuition plan, tuition and fees at participating institutions are locked to the date when the account is started. With this account, there are several obstacles: residency requirements and age/grade limits are the most prominent.


“If you purchase half a year of tuition today, you’ll get half a year of tuition your child can later use at a member college,” according to the Independent 529 Plan Web site, an administrative Web site offering troubleshooting for pre-paid tuition plans.


The college savings plan allows funds to be used for “all higher education expenses,” according to the SEC, and all college savings accounts under Section 529 can be applied to tuition and fees at any accredited U.S. university, as long as the fees qualify as “higher education.” Most state accounts only require $25 to start.


A common misconception is that the public plans, which vary from state to state, can only be applied to public higher education in that state. This is, in most cases, false. However, it does pay to research the plans in each state to make sure that the disclaimers won’t inhibit your child from going to school where he or she wants.


You might be asking yourself, why would I want to invest my money in an account administered by a state other than my own? The answer: because accounts in different states have different perks and downfalls.


The perk for investing in your own state’s fund is that most states allow income-tax deductions for contributions made by state residents. For example, New York taxpayers investing in their state’s 529 plan can deduct up to $5,000 for singles and $10,000 for married couples from their federal income taxes.


Jen Kelly, a Georgia resident and mother of three, started with a Georgia college savings plan (not pre-paid tuition) when her first child, now seven, was born. She has subsequently started a 529 plan for each subsequent child.


“I’m not from Georgia, so I didn’t want my kids to be restricted to certain schools,” says Kelly, who earned an undergraduate degree from Georgetown University and an MBA from Emory University. She praises her parents for taking out loans to send her and her two siblings to private schools.


Kelly explains that she and her husband divided their children’s college savings into three accounts—rather than a lumped 529—so that the accounts could all adapt to the market as each child grows.


“Each account has an age-adjustment index that becomes less risky as the kids get older,” she says. “When they’re 16, you’re going to need that money in a year or so.”


If your child (who might not be born yet) reaches college-age and decides not to matriculate, the money can still apply to any member of that family involved in higher education. (Haven’t you always wanted that Master’s degree without taking out the loans?)


The investment plans (New York offers twelve plans ranging from conservative to aggressive) blend stock and bond options to maximize the growth of the account depending on the age of the beneficiary.


On the Web: http://www.sec.gov/investor/pubs/intro529.htm

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