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529 College Savings Plans — How They Work

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Section 529 of the Internal Revenue Code lets you setup an investment account to pay for your childs college education. All of the earnings from this account are tax exempt can be used to pay for tutition and other expenses when you kid(s) go to college. $200 billion is expected to be invested in 529 plans in 2007. Public college tuition expected to reach an average $25,000 per year in 18 years from now. These plans let you put money aside now and hedge against this inflationary effect. Some states have programs that let you pay tuition at current prices as long as your child enrolls in a college or university in that state. Instead of being an investment account it's just a better deal that the future price which will of course be much higher. Many parents prefer the investment account option as it gives you more control over the money. You also are not resricted in your choice of colleges. With the investment account you have full control of the money, anyone can contribute to the account, and it can be transferred to another family member if your child doesn't go to college.

Choosing the right plan

There are many options when choosing a 529 plan. The main thing to worry about are fees. Plans sold through brokers may have very high fees. Savingforcollege.com has a nice 529 plan comparison tool. We recommened setting up a plan directly with an online broker. TD Ameritrade has a quick and easy solution that lets you pick and manage investments yourself. See Education 101 - investing for college at TD Ameritrade.

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The investment account option is the best. Invest the money yourself and picks the stocks you want. Choose safe stocks that pay dividends.

Posted by Jason T on 8/21/06, 12:06 PM

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