Saving For College – 529 Plans

Posted on 02. Feb, 2006 by in Saving & Investing

Terri Cullen over at WSJ wrote an interesting article about her struggle in choosing a college savings plan for her son. In fact, she gave herself an ‘A’ for effort, but a ‘C’ for execution – which seems to be a trend among parents. For example, Terri had accumulated bonds, a Roth IRA, a savings account, and a high-yielding savings account (perhaps a CD?). Parents saving up for college are often overwhelmed with the opportunities to save up for the big “investment” and so they choose to invest in a little bit of everything – the cafeteria mystery meat approach. However, with a few minutes of reading, parents can become much more informed about college saving options.

A huge temptation right now is the hyped-up “529” plans. Here’s what Terri had to say about them:

Though financial publications (like the WSJ) trumpeted 529 plans’ tax advantages — among them, account holders can save upwards of $300,000, earnings grow tax-deferred and withdrawals for IRS-approved college costs are free from federal taxes — the sheer array of accounts were overwhelming; their terms, costs and investment offerings were confusing; and the lack of objective mutual-fund performance data was off-putting. Add to that the old sunset clause: Under the current law, the tax advantages are scheduled to expire after 2010.

In a nutshell; 529 plans can be great – but the fine print can kill you. And that’s where the homework comes in. The 529 college plans differ from state to state and when I say “differ” I mean in a very big way. For example, New York’s plan allows joint filers to deduct up to $10,000 a year in 529 plan contributions. The New York plan also allows students to attend school at any accredited college or university in the U.S.

However, New Jersey’s plan offers no state-tax deduction — instead, New Jersey residents are eligible for a one-time scholarship of $1,500 for the first semester at a New Jersey college or university.

As you can see, that’s a big difference. And since decisions now can shape the way your money grows over the next 18 or so years before little Junior goes off to college, it’s wise to do your homework before jumping on the popular investing bandwagon – in this case, the 529 college savings plan.

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