Section 529 College Savings Plans

Section 529 College Savings Plans

Section 529 Plans are state sponsored investment plans designed to help families save for college (the programs get their names from Section 529 of the Internal Revenue Code). Every state in the country now either has a Section 529 Plan in place or is planning to unveil one in the near future. You can find out if your state has a plan and learn about its features by clicking here. Setting up a Section 529 Plan can be as easy as opening a mutual fund. Each State decides how the money withdrawn from its Section 529 Plan may be used, and each State also decides what kind of tax breaks it may want to give for Section 529 Plans. Some State Plans allow the funds to be used for out-of-state schools and private colleges too.

Each State sets its own limit to the amount that can be contributed to Section 529 Plans. Unlike tuition payments made directly to a school, contributions to Section 529 Plans are subject to gift tax unless they fit under the annual gift tax exclusion amount. However, if someone gives more than $11,000 ($22,000 if a spouse joins in the gift) in a given year to a Section 529 Plan and in other gifts to a youngster, the IRS allows the donor to make an election to spread out the contribution amount over five years to avoid incurring gift tax liability.

Each State also picks its own investment manager for its Plan. Although Section 529 Plans have been around for only a few years, they have become very popular, and correspondingly, their performance in terms of investment returns have been all over the place. You can click on to www.savingforcollege.com to see a comparison of the investment performance of the various state's Section 529 Plans. You don't have to invest in your own State's Section 529 Plan, but if you are not a resident of the State that sponsors the Plan you invest in, you won't be eligible for the State tax breaks such as income tax deductions for contributions made to the Plan. For that reason, employees may want to make sure their employer-offered Section 529 Plan is the one sponsored by their home State.

One of the biggest drawbacks of Section 529 Plans is that you can only change investment direction in the Plan once a year and at the time you designate a different person to benefit from the plan. Because of this restriction, if the market goes on a downward spiral, there is sometimes no opportunity to change the type of investment if you've already changed it once that year. Furthermore, most Section 529 Plans are set up more than 15 or 20 years before the intended recipient starts college, and therefore some plans offer "age-based" adjustments that shifts more and more assets to safer investments as the youngster gets older. This sometimes may be a good idea to safeguard Plan assets. However, when the youngster gets closer to college age, the Plan has less time to make up for past losses and unfortunately that is precisely when the Plan shifts to slower growth investments, making it even harder to catch up. Finally, plans have different ways of calculating fees, and some of them may be hefty.

Section 529 Plans, unlike the Coverdell Education Savings Accounts (or Education IRAs), can only be used for college education. The amount withdrawn from Section 529 Plans is tax free if it is used for tuition, fees, supplies, and equipment. Furthermore, in case the young man or young woman decides not to take advantage of the Plan, the balance in a Section 529 Plan can be rolled over to another Plan set up for a member of his or her family or the Plan can be redesignated for that person. The IRS is fairly generous in this regard, for example, this includes the original recipient's parents, grandparents, brothers, sisters, brothers-in-law, sisters-in-law, stepbrothers, stepsisters, stepbrothers-in-law, stepsisters-in-law, nieces, nephews, their spouses, his spouse, and his first cousins, in addition to certain other relatives. Some State Plans even offer a refund if the youngster receives a scholarship, grant or other tuition remission.