529 College Savings Plan Best Bet

Wondering what the best way is to build up a big college fund for your kids? Ever thought about how you should be saving for college? Look no further than the 529 plan specifically created by Congress to help families overcome the fast rising costs of college.

How Do 529 Plans Work?

Think of a 529 plan like a Roth IRA for college savings. Most of the same concepts are true.

Your contributions to a 529 plan are not pre-tax contributions, just like a Roth IRA. That means that unlike your 401(k) plan contributions, the money you invest in a 529 plan does not lower your current taxes. However, some STATES allow their residents to deduct some or all of the contributions made to their 529 plan from state income taxes.

When you withdraw money from the account for an allowed purpose (education) the whole amount is tax-free, just like a Roth IRA, and unlike your 401(k) where you will owe income taxes on the whole amount withdrawn.

Otherwise, most of the same rules apply.

  • If you use the money for something other than education, there is a 10% penalty.
  • Any dividends or capital gains that occur inside the 529 plan are tax deferred.
  • You can only invest in options allowed by the plan.

529 Plan Rules and Tax Effects

  • You can use ANY state's 529 plan regardless of what state you or the child lives in.
  • You can use ANY state's 529 plan regardless of what college the child attends whether in-state, out-of-state, or not in the U.S. (certain restrictions may apply to foreign schooling.)
  • You DO NOT have to use your own state's 529 plan!
  • You MAY get a STATE (not Federal) income tax deduction if you do use your home state's 529 plan. -- If you do get a deduction, carefully consider whether there is really more value in using another state's plan. If not, feel free to use any state's plan.

When you are ready to open a 529 plan online, you can get step-by-step instructions for opening your 529 college savings plan online.

The best resource, bar none, for researching individual 529 plans is SAVINGFORCOLLEGE.COM Go there first and last when looking at choosing a 529 plan. They are not affiliated with any state and they are not affiliated with any broker, bank, or investment adivsor. In other words, they are the impartial third-party like Morningstar is for stocks. Trust them over information you find anywhere where else and definitely trust them over anything someone tells you whether they are your advisor, friend, or banker.

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