Saving for college? Get the real deal on state 529 prepaid tuition programs, what they are, who can benefit, and how to watch out for rules and regulations.
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Average total charges for four-year public colleges and universities were $12,796 in 2006-07, according to the College Board's 2006 Trends in College Pricing report, and tuition and fees rose 6.3 percent from 2005. At four-year private colleges and universities, average costs reached $30,367, with a 5.9 percent jump in tuition and fees from the previous year. If you're planning ahead for your own or your child's college education, it's easy to get lost in a financial gale. A state 529 prepaid tuition program can help you save effectively for future college costs.
What is a 529 Prepaid Tuition Program?
State 529 tuition programs encourage you to save for higher education. Legally known as "qualified tuition plans," these programs are authorized by Section 529 of the Internal Revenue Code, and are sponsored by states or state agencies.
There are two different types of 529 programs:
• Prepaid tuition programs
• College savings plans
All 50 states and the District of Columbia sponsor at least one of these two programs, and some sponsor both. A group of private colleges and universities also sponsor a prepaid tuition program. State 529 prepaid tuition programs generally let you buy units or credits toward future tuition at participating colleges and universities. Some also allow you to buy credits toward room and board. Most of these programs are sponsored by state governments and have residency requirements.
Taking Advantage of Tax Benefits
So why invest in your state 529 program instead of putting money aside in an ordinary account? Investing in a 529 program can offer you special tax benefits. With a regular account, you would have to pay taxes on any interest your money earns. But earnings from a state prepaid tuition program are exempt from federal taxes, as long as you withdraw money only for eligible college expenses, like tuition or room and board.
Many states offer additional benefits for investing in a 529 program, like matching grants or exemption from state income taxes. In most cases, you have to invest in a 529 program sponsored by your state of residence in order to get these additional benefits. If your state has special tax benefits for investing in its program, make sure you look over the rules carefully before you take money out of your home state's program and put it in another state's program. In some states, there may be state tax consequences for these transactions.
Navigating Withdrawal Restrictions and Fees
A state 529 prepaid tuition program requires a commitment to save for higher education and not spend the money on anything else. Once you invest money in a state prepaid tuition program, you can only withdraw it for eligible college expenses or you will be charged income tax on your earnings and an additional 10 percent federal tax penalty. The 529 program in your state may have other limitations as well. Before you invest in a program, make sure you read their offering circular and fully understand any limitations that apply. Prepaid tuition programs typically charge some kind of enrollment and administrative fees as well.
The Scoop on Financial Aid
Another important factor to consider before investing in a state 529 prepaid tuition program is your future ability to get financial aid. Although every college has a different way of dealing with 529 state programs, in general, investing in a prepaid tuition program reduces a student's eligibility to receive need-based financial aid. Most colleges treat money in prepaid tuition programs as parental assets when calculating how much the family should contribute toward the cost of college. As of July 2006, assets in a prepaid tuition program can reduce your eligibility for federal financial aid as well.
Is a State 529 Prepaid Tuition Program Right for You?
Before you start saving for college through a 529 Plan, take a careful look at your overall financial situation. Do you have other immediate financial goals, like buying a house or paying off high interest credit card bills? Remember that you are likely to be assessed fees or lose tax benefits if you use the money in a 529 program for something other than higher education expenses. Once you decide that you want to save specifically for college, consider whether a state prepaid tuition program is your best option. Other college saving programs can also offer you tax advantages, including Coverdell education savings accounts, Uniform Transfers to Minors Act (UTMA) accounts, and savings bonds, or you can save for college in a taxable account.
You be the Judge: Evaluating Specific State Programs
Once you decide that a state 529 prepaid tuition program imay be right for you, your next step is to evaluate the program offered by your state, and other programs that may be available. Important things to consider are:
• Whether the program is available directly from the state or program sponsor
• What administrative or startup fees are charged
• What withdrawal restrictions apply
• What types of college expenses the program covers
• Which colleges and universities participate in the program
• What tax benefits and other advantages it offers, and whether it offers special
advantages to state residents
• Whether there are any limitations on switching beneficiaries or transferring account
holders
• How well the program has performed in the past
You can find detailed information about a particular 529 program by reading its offering circular, also called a disclosure statement or program description. Most prepaid tuition programs have offering circulars publicly available on their Web sites.
Don't get lost in the storm of financial information on saving for college. You be the judge--research your options and choose the plan that works best for you and your family. Inform yourself now, to form your future.
Author: Reena Nadler
Source(s)
College Board
http://www.collegeboard.com/prod_downloads/press/cost06/trends_college_pricing_06.pdf
U.S. Securities and Exchange Commission
http://www.sec.gov/investor/pubs/intro529.htm
Indy Mac Bank
(818) 240-7870
1475 East Huntington Drive
Glendale, CA
|