529 College Savings Plans

The process of becoming educated on 529 plans is not necessarily an easy one. They are a relatively new concept, and while the income and gift tax rules at first glance seem fairly straightforward, there are many issues that come to light once an in-depth investigation begins. The many existing tax incentives for higher education make for a very confusing landscape. The fact that each state designs its own 529 plan with unique features only adds to the confusion. Here are the primary reasons why 529 plans should be in your arsenal of financial planning tools:

The main advantages of a 529 plan are, growth of the account on a tax-deferred basis, withdrawal of funds Federal tax free, when taken out of the Plan to pay for college. Unlike so many tax incentives that are phased out for high earners, there are no income caps barring participation from 529 plans. There are no age limits, either. In fact an individual can contribute to a 529 plan for herself no matter how old she is.
Substantial amounts may be contributed into a 529 account for one beneficiary, over $250,000 in some states. This makes sense, of course, when you consider the cost of four years of undergraduate education and perhaps graduate school as well. And what happens if the money is not needed for college? The options are to roll it over to benefit a different family member, or to just liquidate and terminate the account. If a "non-qualified withdrawal is made (not used for college), the account owner will pay a penalty to the state, generally 10% of the earnings portion of the withdrawal. When you compare the value of the tax deferral benefit over a number of years, the threat of penalty should not be much of a deterrent.
The donor to the 529 plan account maintains control over the timing and amount of withdrawals, and can even take the money back upon demand. Despite this revocability, tax law treats the donor’s contribution to a 529 plan as a completed gift to the designated beneficiary, and the value of the account is removed from the donor’s estate. The contribution qualifies for the annual gift exclusion and a special election under section 529 allows the donor to contribute as much as $55,000 into an account today and apply five years’ worth of annual exclusions.
If the state in which you reside offers a 529 plan, other benefits may be available. Some states will allow an income tax deduction for some or all of the contributions to the plan, along with the tax exemption for the earnings used for college. Depending on the state, there may also be asset protection, financial aid benefits, or locking in resident status for public university tuition.

Most states offer 529 Plans and some have opened their 529 plans to non-residents. Their features and investment approach can vary considerably. One common investment approach used by the states is to apply an asset allocation with a blend of stock and bond mutual funds that will automatically adjust to become more conservative as the designated beneficiary gets closer to college age. Some of these states are now also offering an option to select a specific asset allocation that will not change over time.

The best place to start your research is on the Web at http://www.savingforcollege.com .There you will find articles about 529 plans, links to the states, investment performance results, and an active message board. For information on Georgia's Plan go to: http://www.gacollegesavings.com