college-education

529 Plans - College Savings Best Bet

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.

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amount is tax-free, just like a Roth IRA, and unlike your 401(k) where you will owe income taxes on the whole amount withdrawn.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 captial gains that occur inside the 529 plan are tax defferred.
  • You can only invest in options allowed by the plan.

Important Features and Rules 529 Plans

  • 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 non in the U.S. (certain restrictions 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 so, carefully consider whether there is more value in using another state's plan. If not, feel free to use any state's plan.

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 definately trust them over anything someone tells you whether they are your advisor, friend, or banker.

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