Thinking about investing in a 529 plan? Join the club. Since 529 plans became exempt from federal taxes in 2002, the market for them has exploded into a multi-billion dollar business.
But as smart as these plans are, finding the right one for you can be tricky business. After all, there are more than 80 plans available nationwide to choose from. And simply understanding how these plans work can require a little tutoring.
For a specific review of each plan, visit the Saving for College web site.
First, some background. The 529 plans have been around for awhile. They evolved in the 1990s out of the rule that the federal government can't tax money that's given to a state. Michigan, Wyoming and Florida were the first to come up with legislation offering these plans as an incentive for parents to save for in-state college education. Since the federal government couldn't go after the money, the accounts were designed to be tax deferred. The Internal Revenue Service balked initially, but Congress ruled in 1996 that the plans were legal. The approval of these plans was granted in section 529 of the IRS tax code.
Current plans are still sponsored by individual states, but many are open to all comers -- in state or out of state. Many are also administered by familiar investment houses like Fidelity and T. Rowe Price, and most are sold through financial advisers (for a commission, of course).
Is one of these plans right for you? We aren't saying they're perfect. Investing in a 529 plan can sometimes compromise other financial aid. And like an IRA, the plans can limit your flexibility: Should you want to withdraw your funds for something other than college-related expenses, you'll have to pay taxes plus a 10% IRS penalty on earnings. It's also important to note that there are good plans and bad plans, making the process of choosing one a little complicated. But don't worry, this guide will help you understand the difference.
No comments:
Post a Comment