Archive for Monday, August 26, 2002

Learning the basics of 529 plans

August 26, 2002


No more summer brain drain. It's time to get back to the basics of learning full-time.

In honor of the traditional back-to-school preparation that many school-aged children go through this time of year, I thought it only fair to put the adults to work as well. So this is the first of an occasional series of columns that will be a financial refresher for some, or a basic examination of various financial topics for others.

Since many people are focused on sending their rugrats back to grade school right now, let's start talking about funding for their college educations. That means learning about Section 529 plans.

Many people still aren't aware of this tax-advantaged, state-sponsored way of saving for a child's college education. In a recent survey conducted for Charles Schwab and Ariel Mutual Funds, high-income investors were asked what 529 plans are used for. Some thought they were a way to save for retirement. They're not.

Turns out 80 percent of the investors interviewed weren't sure what you did with a 529 plan.

Actually, there are two types of 529s: a college savings plan and a prepaid tuition plan. Investing in a college savings plan is like investing in a mutual fund. Your money is combined with money from other investors and invested by the plan manager. A prepaid plan lets parents, grandparents and other interested parties lock in today's tuition rates, and the program will pay out future college tuition at any of a state's eligible colleges or universities (or an equal payment to private and out-of-state institutions).

There are numerous Web sites that will give you a good tutorial on these plans. One of the most useful is This site provides a comprehensive look at all available 529 plans. Look for the link to the site's 529 evaluator. You also might try, which is run by the College Savings Plans Network, an affiliate of the National Association of State Treasurers.

I also would suggest you get a copy of "The Guide to Understanding 529 Plans" (Lightbulb Press).

This $6.95 book, rich in graphics and mercifully short, provides a nice basic summary of 529 plans, including how to open an account, make withdrawals and choose an investment strategy based on your risk tolerance. Here are some of the basics outlined in the guide:

You can invest in installments or in a lump sum.

Unlike Education IRAs, no one is excluded from contributing to a 529 savings plan because his or her income is too high.

At this point (the tax law could change after 2010), earnings are not federally taxed as long as the money is used for qualified educational expenses. Graduate, professional and technical school expenses also qualify.

You can open an account for your child, a grandchild, your brother's child, a cousin, etc.

The money in any state plan can be used at any accredited college or university, including 700 international schools. By the end of this year, all 50 states and the District of Columbia will have operational college savings plans, and 20 states also will offer prepaid tuition plans to their residents, according to the College Savings Plans Network.

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