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Saving for College with 529 Plans

In my last article, I covered how important it is to start saving early for college costs, touched on a few tax-favored ways to do it, and suggested 529 plans as my favorite tool for the task. While any saving is better than none, I feel the range of available 529 plans offers the most college-planning flexibility.

It’s best to check with your accountant on the details, but big picture, each 529 plan account has an owner (parent or grandparent) and beneficiary (child, spouse or even yourself). With a few caveats, parents can each give up to $70,000 to a 529 plan account gift-tax free by accelerating the next five years of their annual $14,000 federal gift tax exemption. State-level tax breaks might also be available. While the account owner can change the designated beneficiary at any time, if the funds aren’t used for qualified higher education expenses, expect income taxes and a 10% penalty on the profits.

529 plans come in two “flavors”: College Savings Plans and/or Prepaid Tuition Plans.

Prepaid Tuition Plans: Here, you save for college by essentially pre-paying for tuition by purchasing units of semesters. For example, with the Virginia Prepaid 529, you can purchase 1 to 10 semesters at two- or four-year Virginia public colleges or universities. Tuition for those semesters are then covered, regardless of rising costs. That’s nice, but remember: Room, board and fees are extra, and your choice of colleges may be limited to your state’s public schools.
College Savings Plans: Here, your savings grow tax-free as long as you spend them on qualified higher education expenses at any U.S. college or university (including undergraduate and graduate tuition, room, board, fees, etc.). Investment selections and fees vary widely, so shop around somewhere like SavingforCollege.com before assuming your own state’s plan is the best. When a state offers direct-sold vs. advisor-sold programs (like Virginia’s Invest 529 vs. CollegeAmerica), direct-sold usually costs less.

By the way, don’t imperil your own retirement to fund your children’s college. Children have more time and possibilities: work, loans, postponing graduation, etc. As you near retirement, your menu of options begins to shrink.

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