529 accounts -- tell me...

[Soarin_04]

...the good, the bad and the ugly preferrably in English not business / banking speak, please? Type slowly and use small words please!

Right now, my sons have their savings in money market accounts, and some in CDs. A friend of the family just gave them a huge check and told me to invest it in a college account for them and even though I've been trying to get to the bottom line of the positives and negatives of these, I can't seem to find one simple enough to wrap my brain around.

Any advice or insight?

Thanks in advance!

 

[PatsMom]

529 accounts allow money to grow without being taxed. Unless the tax laws change, gains withdrawn from the account for qualified education expenses are tax free. There are some rules on gifting limits but unless you are going to invest very large sums of money they wouldn't apply.

I don't know what state you live in but some allow a tax deduction if you contribute to your home state's plan. That is only a good idea if it is a good plan. Do some research before you pick one. There are several run by Vanguard and Fidelity that have good fund options and low expenses. A good web site to do the research is www.savingforcollege.com Lots of information there.

The rules require you to name a beneficiary when the account is opened so you may want to open 3 accounts. but if you are uncertain of how much each child might spend on college, you could open one account with the oldest child as the beneficiary. When the time comes, you can divide the account as you see fit between the siblings. There are no issues with gifting rules if they are in the same generation.

You can pick investment options or go with an age based option that gradually changes the asset mix to be less aggressive as the children near college age. But check out the underlying mutual funds. A few plans I've seen have absolutely no international exposure which is a big score against that plan in my opinion.

 

[PrincessBelle09]

I am definitely not an expert having not yet dealt with one of these (no kids), but from what I know of 529s, they can excellent for college savings as long as you're in the income limit (it's something like $200k). I think you can put in up to $5k per year per child. They have a great return on investment and the money is tax-free.

There are two types of 529s. The first 529 is basically a pre-paid plan that is offered by your state. It keep ups with tuition inflation (typically around 7%), so you're buying tuition credit at today's rates and the credits will purchase your child's tuition when they head off to school. There are some benefits that come along with the pre-paid, but the growth is typically not as high the the straight savings and the limitation is that it can only be used for in-state tuition. You can draw on it for an out-of-state school, but from what I understand there are penalties. As far as I can tell, the pre-paid is only good for public universities. The other type is a savings account that has an interest rate of about 12%. It is not earmarked for a particular school or type of school, so it offers much more flexibility.

Wikipedia offers an overview: http://en.wikipedia.org/wiki/529_plan

 

[PatsMom]

I am definitely not an expert having not yet dealt with one of these (no kids), but from what I know of 529s, they can excellent for college savings as long as you're in the income limit (it's something like $200k). I think you can put in up to $5k per year per child. They have a great return on investment and the money is tax-free.

There are two types of 529s. The first 529 is basically a pre-paid plan that is offered by your state. It keep ups with tuition inflation (typically around 7%), so you're buying tuition credit at today's rates and the credits will purchase your child's tuition when they head off to school. There are some benefits that come along with the pre-paid, but the growth is typically not as high the the straight savings and the limitation is that it can only be used for in-state tuition. You can draw on it for an out-of-state school, but from what I understand there are penalties. As far as I can tell, the pre-paid is only good for public universities. The other type is a savings account that has an interest rate of about 12%. It is not earmarked for a particular school or type of school, so it offers much more flexibility.

Wikipedia offers an overview: http://en.wikipedia.org/wiki/529_plan

Wikipedia is incorrect if that is where you got the information you posted. There is no income limit to contribute to a 529 plan. A Coverdell ESA has an income limit, but not a 529. The amount you can contribute is limited by the plan and is generally over $250,000 in total for each state for each beneficiary. There are gift tax issues with large contributions but you can basically gift five years worth of the exemption amount at one time. Which means if a couple is making gifts to a chld, they could contribute $110,000 and just need to file a form to document their use of the annual exemption amount.

The prepaid state plans are so limited we don't generally recommend them so I am not familiar with their rules.

 

[ICF]

I know on our plan thru Indiana, that we can get a 20% tax refund (not credit) on the 1st $5000 that is deposited.

So, by maxing out at the $5K amount, we automatically get an extra $1000 on our tax refund.

 

[It's A Small World]

Check out Vanguard.com. Their 529 investment info is very down to earth. We have our girls 529 accounts with them.

 

[Soarin_04]

Thanks! Looks like I still have a lot of homework to do.