All About 529 College Saving Plans | Reader's Digest

All About 529 College Saving Plans

Saving for college? Learn what a 529 is and how it can help you with your college savings plan.

from Condensed from Reader's Digest, | December 2009

Named for its address in the federal tax code, a 529, which is a college savings fund, comes in two varieties: a savings account and a pre-paid tuition account. Savings accounts, or investment accounts, are invested by professional managers in stocks and bonds, CDs, and money market accounts. Assuming you start well ahead of time, a 529 savings account is a better choice than a prepaid plan, which, while it locks in current tuition prices, can lose value if you move to another state. You can invest in any state’s plan (they all have at least one); 32 states, plus the District of Columbia, provide an additional tax deduction if your child is educated in state.

Earnings in 529 plans are tax-free as long as the money is spent on higher education. It’s cheaper to enroll in a savings plan through the state than it is through a broker. Browse state plans at savingforcollege.com, or compare them side by side at collegesavings.org. Fees vary widely (0.3 to 3 percent or more). Low fees can make an out-of-state plan a much better deal, even if you lose the state tax deduction, which in many cases is minimal—$100 or less.

As the recent market crash shows, 529 accounts can plummet in value when stock prices fall. Guard against losses by choosing an “age-based” plan that invests more conservatively—fewer stocks, more bonds—as your child gets closer to college age. Certificates of deposit, money market accounts, and regular old savings accounts are safer investments, although they usually earn 3 to 6 percent less than plans that invest in the stock market. But in some states, you can choose these investments through a 529 plan while also pocketing a tax break.

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