GreenReaper (greenreaper) wrote,
GreenReaper
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Opening a 529 plan

I figure I might be going back to college some time in the future, so this week I opened up a 529 plan with myself as beneficiary.

A 529 plan - more formally known as a Qualified Tuition Program - is a method of saving for college expenses such as tuition, room, board and books and other necessary supplies. It's basically like a Roth IRA, but for education. Since the EGTRRA act of 2001 it provides tax-free withdrawals, but only for these qualified expenses I mentioned above. Most other withdrawals cause both income tax and a penalty on earnings (though you just pay tax if due to death, disability, or certain other reasons).

The plan is usually funded by parents, grandparents, and others interested in the education of a child. Unlike some other forms of educational saving, they retain control of the plan, and can rollover the fund to any member of their immediate family if they wish - and there's quite a long list. They are considered the owner's assets, not the child's, so only count at a 5.6% rate for financial aid calculations.

You don't get to deduct it from your federal tax, but state plans may offer the contributor a deduction on state taxes for all or part of the contribution, if they are a resident of that state. This means the first plan to check is normally your home state's plan. It might not be the best choice, though, as many still have unreasonable expenses.

You also get plans that guarantee to pay for college if you agree to pay a lump sum or installment plan; effectively pre-purchasing it. This gives security - but of course, as the trade-off with any "sure thing", you would likely have had better results putting your money in the market.

CNN Money has a nice article, along with their best picks (expenses may be slightly out of date). Savingforcollege.com is a good resource, too, and you should also check out the official site of the College Savings Plan Network.

I'm a resident of Michigan, which has one of the best plans around. You can get a tax deduction for putting in up to $5000, and though Michigan's taxes are hardly the highest, it's a nice bonus. Best of all, the expenses are low - just 0.45%/year, even for the equity option. It took literally 15 minutes to setup, and 5 of those minutes were looking up my account numbers.

Not all state plans offer a similar deal, but depending on where you live, the tax benefit can make even a mediocre plan worthwhile. Shop around! And remember, like any investment, it pays to start early.

Two things you can do with a 529 plan that they probably didn't intend you to:
* Fund one for yourself and then go off on an "educational vacation" to one of the many foreign colleges and universities that are considered an authentic educational establishment (a fun way to spend your early retirement?)
* Use it to pass money on to your successors without certain penalties (there are better ways for small amounts of money, though)
Fortunately, few people are doing this kind of thing right now, which is good because changes to combat them could make 529 plans less useful.
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