Dear Dr. Don,
My daughter is 14 years old and a freshman in high school, and my son is 13 years old and in the seventh grade. I have saved a few thousand dollars in a regular savings account for their college, as that was all I was able to afford. I currently can put about $500 to $600 per month into an account, and am interested if a 529 plan makes sense. If so, how do I find someone to set this up for me, and is it expensive?
— Deanna Diplomas
Trying to evaluate whether a Section 529 college savings plan is right for your children or if another approach is better is a complex decision. I’m going to recommend that you take a look at the “College Savings Options” on the Financial Industry Regulatory Authority, or FINRA, website so you can look at all the different tax-advantaged options for college saving. The site also offers two podcasts — one on 529 plans and another on other tax-advantaged options.
Section 529 college savings plans come in two basic flavors: prepaid tuition accounts and savings plans that are investment accounts. Start by looking at whether your state offers a tax break on your contributions to a 529 plan, and whether that tax break is portable, meaning you can make tax-deductible contributions in any plan, or just your home state’s plan. My home state of Pennsylvania, for example, allows a deduction for contributions for in-state and out-of-state plans up to the annual exclusion limit for the federal gift tax, which is $13,000 in 2011 and $26,000 if a married couple uses gift-splitting, subject to earned income limitations. That’s unusual. Most states only allow state income tax-deductible contributions to their state’s plan.
After you check out whether there’s a tax break for contributions, look at the two types of plans. Prepaid tuition plans often work best when you expect your scholar to attend college in the state’s university system, but that’s not a hard-and-fast rule. Not all states offer prepaid tuition plans. If your state doesn’t offer a prepaid plan, there is the Private College 529 plan — but that plan limits your scholars to one of 270 private colleges and universities. It’s not likely to be the right choice for you.
If you decide to expand your search to other states offering savings plans to out-of-state residents, you’ll focus on investment choices, fees and annual expenses. Many states offer a choice between a direct-sold plan and an adviser-sold plan. In comparing plans, take a look at the College Saving Plan Network’s “Compare 529 Plans.” The College Saving Plan Network, or CSPN, is an affiliate of the National Association of State Treasurers.
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