A 529 College Savings Plan is one that allows parents to put aside money for the future higher education expenses of their children. This plan is one of the best ways to save because, unlike most other savings plans, education-related withdrawals are free from federal income tax. Many states have chosen to adopt the same policy and also allow tax-free withdrawals for qualified expenses.

When we had our first son, it was a no brainer to open a 529 plan to save for his college.  We have followed suit opening a new plan with each child.  Well….almost.  Our now two month old doesn’t have one yet, but soon will.

Note:  Not sure how much to save?  If not, check out my post that addresses how much you should save for college.

Performance of 529 Plans

Earnings from 529 Savings Plans are based on the performance of its investments, usually mutual funds. These plans are only administered by states. An interesting fact about 529 Plans is that you can choose to invest in one from any state. And almost every state has one. State plans are often different from each other in one or more of the following ways:

• Structure of the plan
• Type of investments offered
• Benefits for out-of-state/in-state investing

Check Your State First

If you are interested in starting a 529 College Savings Plan, you should first look at the plan your state offers. Although most states allow non-residents to invest, there are usually advantages to investing in your own state’s plan including:

• State tax advantages and deductions – some states give tax-free status only to residents
• Matching grants
• Opportunities for scholarships
• State financial aid exemptions
• Creditor protection

Definitely go with your state if it gives deductions and/or credits on your tax return. This state tax break will most likely be a bigger asset than the possible lower fees from another state. The state of Illinois just increased the state tax rate from 3 to 5%, to give me even more incentive to use our state plan. New York, Minnesota, Missouri, and Michigan offer exceptional plans for their residents. Some states are so forward-thinking that they give their residents a state tax break no matter what state plan they invest in. Pennsylvania was the first state to do this.

If your state does not fall into this category and does not offer enough incentives to its residents, there are a number of states with a proven track record. Year after year, these states have had some of the best 529 College Savings Plans:

Some of Best College Savings Plans By State

• Alaska – T. Rower Price College Savings Plan
• Alaska – University of Alaska College Savings Plan
• Michigan – Michigan Education Savings Program
• New York – New York’s 529 College Savings Program (Direct Plan)
• Vermont – Vermont Higher Education Investment Plan
• Maryland – College Savings Plan of Maryland (College Investment Plan)

Some of these plans are direct sold, meaning you purchase the plan directly from the state. This is the way to go as broker-sold plans usually include sales charges, although they offer slightly more investment possibilities. Many of the best plans are managed by Tiaa-Cref, Fidelity, or Vanguard. In fact, those plans generally charge the lowest fees.

Other Factors to Consider

There are multiple factors that will affect return on your investment including:

• How much time do you have? Are you starting a plan when your child is an infant or a junior in high school?
• What sort of fees and other charges will you have to pay?
• What is the tax bracket of your family?
• How much money are you investing?
• Is there a possibility of state tax deductions?

It is amazing that you can choose to invest in a 529 College Savings Plan from almost any state in the country. With such selection, you are sure to find the perfect investment opportunity for you and your college-bound child.

photo credit: OldOnliner

College is becoming increasingly expensive. As a result, it is likely that you will need to seek funds for paying for college from multiple sources. First of all, though, it is a good idea to be setting money aside in some sort of advantaged account. Whether this is a 529 plan or a Coverdell, it is a good idea to be in the habit of setting aside money for college. However, if you are concerned that what’s in a college account will not be enough to cover the costs of college, it is a good idea to consider additional sources of college financing.

Some types of college financing are more desirable than others, as you might imagine. Below you will find ideas for college financing — in the order you should seek them:

1. Free Money: Grants and Scholarships

Your first efforts should be geared toward getting free money to help you pay for college. The government offers grants based on your income. If you qualify, you can get government help paying for your schooling. On top of this, there are scholarships available for different accomplishments. Some of them are available because of certain qualities you might have (such as being tall, or being of a certain ethnicity). FastWeb is one site that can help you locate scholarships to apply for. Check with the school, and in your local community, for scholarships.

2. Federal Student Loans

Scholarships are harder to come by these days, so you might need additional loans. Your first stop for student loans should be the federal government loan program. You can get loans at a lower interest rate. You should first get as much as your federal financing in subsidized loans. With these loans, the government pays your interest until you are done with school. If you don’t qualify for subsidized loans, you can get unsubsidized loans. With these loans, you can pay the interest as you go, or wait until you are done with school and the accrued interest is capitalized.

3. Private Student Loans

You can also get student loans from private sources. Banks offer student loans, but their interest rates and terms are often not as favorable as those offered by the government. You can go to web sites like TERI.org to find sources for private student loans. Another possibility is to go through a site like Tuition U, which offers P2P lending as well as access to banks and credit unions across the country. Before you go to a bank, it might be worth it to check the terms you can get with peer to peer lending. In some cases, you can get better deals. Additionally, you can ask friends and relatives to help you with your education by loaning you a portion of the sum through a P2P site.

Bottom line: Finding financing for college isn’t always easy — and it can be expensive. However, there are a number of options that can help you find some of the help you need to pay for college. Start out by working toward funding yourself through savings and scholarships, and then explore other options if needed.

photo credit: catd_mitchell

Should I use my in-state 529 College Savings Plan or out of state?

This is quite a common question I get when dealing with a client’s 529 college savings plan for their child. The first thing to keep in mind, is that your child does not have to go to an in state college if you use your state 529 plan. That’s a common misconception and should be noted. For example, my son is actually participating in the state of Virginia’s plan (I’m in Illinois), but he could go to school in Indiana if he so chooses (and he gets a scholarship).

In-State 529 Plans

For in-state 529 plans, the hosting state will usually offer the residents of that state a special incentive, such as reduction of state taxable income for deposits. This may be enough incentive to take advantage of the state plan. To find out the actual specific enticements of your state, you can go to FINAID.org, collegesavings.org, or savingsforcollege.com to find out.

Taxes might make all the difference

Initially, you should check your state to find out how valuable those tax breaks may be. Upon figuring out the tax break, the next most important thing is the underlying investment options within the plan. By doing a little research, you can see if the investment options are satisfactory enough to justify getting the tax incentive by using the plans by possibly giving up investment return. You may also discover that the in-state plan may have higher fees. Obviously, this would be a consideration to use an out of state plan. Please consult a tax professional to see if the state plan is best for you.

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Recently, I just celebrated my son’s 1^st birthday party. Like any new parent I am still wondering where the first year went. Although I do not remember my first birthday celebration, I can be confident that the gifts my son received far surpassed my gifts for my first couple of birthdays (this is where I give a shout out to all our family and friends). In addition to all the wonderful gifts, we also received several checks. Of course, the little man doesn’t appreciate those checks now (I promise you that mommy and daddy do), he will appreciate them when those checks are helping him attend college.

Introducing the 529 College Savings Plan

Many people (parents, soon to be parents, and grandparents) ask me where the best place nowadays to put money away for school. For me, the 529 College Savings Plan is an easy choice. Let me run down a few of the reasons that it made sense for us and could make sense for you, too.

We will always be in control.

With 529 plans the owner (could be parent, grandparent, aunt, uncle, etc..) is always in control of the money, unlike custodian accounts under the Uniform Transfers to Minors Act (UTMA). So when little one decides at 18 he wants to take his money and run, he can run but won’t get very far.

Tax Free Is Never a Bad Thing.

Like Roth IRA’s, the money that comes out of 529 plans will be tax free as long as used for “Qualified Higher Education Expenses”. These can include tuition, room and board, mandatory fees, required books and computers, etc.

Scholarship Provisions.

If our kid becomes the next Tom Brady like I expect him to be and receives a full ride to College USA of his choice, you are allowed to pull the scholarship dollar amount out of the 529 plan tax and penalty free.

Balance Transfer.

If the above mentioned occurs or of if school just is not in your kids future, you can always transfer it another child or even another family member.

No deadlines.

Your child does not have to use it before a certain age. So if they decide to go back and apply for an MBA or PHD, it still is good.

Thus far we have blessed with any money received has gone straight into the 529 account. But then the next question is, “How much do you save for College?” That will be soon to follow.

References: IRS Publication 970