Tuesday, October 04, 2005

Earn an A-Plus for College Savings With a 529 Plan

With school in full swing, your children are taking another step on the road to a successful future. If you want that road to lead to college, you should consider 529 accounts, the tax-advantaged savings program designed to ease the burden of big tuition bills.

“A college education is an expensive investment,” said Elaine Sullivan, director of retirement marketing and educational savings at Putnam Investments. “While a four-year degree can add more than $1 million to your child’s lifelong earnings, it comes with a cost that’s constantly increasing.” By 2021, the price of a bachelor’s degree at a public college is expected to be close to $100,000, Sullivan said, while a private school’s tab will be more than twice that.

Offered by all states and many financial institutions, 529 plans are named for the section of the tax code that created them. Funds in the accounts can be used tax-free for qualified college expenses and grow faster than they would in fully taxable accounts. Grandparents, aunts, uncles and other family benefactors may also contribute to the accounts and possibly earn gift and estate tax benefits.

Unlike other accounts you might establish for your children, 529 plans leave you in control of the assets even after your child reaches legal age. In most cases, if the original account beneficiary decides not to go to college, you can change the beneficiary to another family member - including yourself - without penalty. Any withdrawals that are not used for qualified educational expenses - defined as tuition, fees, room and board, books and supplies - are subject to federal income tax and an additional 10 percent tax on earnings from the account.

529 programs may offer additional tax advantages depending on where you live. For example, 28 states and the District of Columbia offer tax deductions for contributions to the accounts as well as tax-free growth.

States offer their 529 programs directly or through advisors, and every program includes different professionally managed investment choices. The CollegeAdvantage 529 college savings plan managed by Putnam Investments, for example, is sponsored by the Ohio Tuition Trust Authority and offers different investment choices based on the beneficiary’s age or a defined investment objective. Investors also have the option to mix-and-match among any investment choice in the plan.

If you haven’t made a 529 part of your college savings plan, enroll in a crash course on the topic with your financial advisor today.

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