529 Plans Can Boost College Funding

This is the second part of a four-part series on college-savings plans.

Savvy parents of college-bound children hope for the best in terms of college financial aid. However, when it comes to college funding, they know that the most effective way to assure that the money will be there is to establish a college funding strategy. A Section 529 Plan is often the cornerstone…with good reason.

First, the bad news: College costs keep going up. According to the College Board (www.collegeboard.com), tuition and fees for private colleges averaged more than $22,000 this past year (2006-2007). Four-year public universities cost nearly $6,000.¹ And, remember, that's just for one year! These numbers make accumulation vehicles such as Coverdell Education Savings Accounts — with $2,000 maximum annual contributions — look almost futile.

Key Features for College Funding

That’s why more and more parents are turning to Section 529 Plans for college funding. Sponsored by individual states with the blessing of the federal government, Section 529 Plans are tax-deferred investment programs run by the states to help families save for college.

How Good Are 529 Plans?

According to the College Board, it is important to study each plan carefully. However, “529 plans have become one of the more popular options for families saving for a child's college education, and for good reason. Though the plans differ from state to state, they are all exempt from federal income tax, and that can give a real bottom-line boost to your college fund.”²

Though each state's plan is different, they all have several features in common. Here are the basics³:

Each program is sponsored by a state and managed by a designated financial institution, which may be a bank, mutual fund or investment management company. Each offers a range of investment options specifically designed to help families save for college.
You can make contributions to a Coverdell ESA and a 529 Plan in the same year, for the same beneficiary, without penalty.
Depending on your state, maximum contribution amounts can be as high as $300,000.
There are no tax deductions for contributions. However, all earnings are tax-deferred, though non-qualified withdrawals are subject to a penalty.
Withdrawals for qualified expenses (tuition, room and board, books, supplies and fees) are received income tax-free.
The account is owned by the adult who creates it, not the student. The beneficiary can be changed as desired, giving the donor control. At the same time, however, the account is generally not included in the owner's estate for estate tax purposes, another big plus.
Unlike with Coverdell Education Savings Accounts (formerly known as Education IRAs), there are no restrictions on the donor's income. You are not penalized if you earn too much money.
The money can be used for college or graduate school, public or private, in state or out-of-state.
There are no age or time limitations imposed by federal law in terms of when the money must be taken or used.
If the money is not used, it can be directed to another beneficiary or reclaimed by the donor. However, if reclaimed, there will be a 10% penalty on top of current income tax.

To learn more about the specifics of Section 529 Plans, funding options, and how they can help assure college funding for your children, talk to your New York Life agent.

¹ '2006-2007 College Costs," The College Board, 2006.
² "529 Plans: The Basics – A Great Way to Save for College," The College
³ "529 Plans: The Basics – A Great Way to Save for College," The College

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