Also known as qualified state tuition programs, 529s are the newest thing in college savings. They are offered in all 50 states, although you needn't necessarily use your own state's plan--although there could be state-tax benefits if you stay with an in-state plan.
Individual states sponsor 529 plans. The state sets contribution limits and investment guidelines that the plan must follow. These plans are then administered by an investment company of the state's choosing. Fidelity, TIAA-CREF, and Vanguard all administer 529 plans, for example.
Because there's such variety among plans, you need to do some legwork. You don't need to become footsore, though--check out Morningstar.com's 529 plan data at http://529.morningstar.com/state-map.action. It includes both qualitative and quantitative analysis of state plans, offering recommendations for both in-state and out-of-state investors.
The answers to our college-savings-plan questions:
- The amount you can contribute varies from plan to plan. The best news: Anyone can contribute to 529 plans, regardless of your current income.
- When it comes to investment options, each state has its own roster. If the lineup in your state's plan doesn't suit you, choose a plan outside your home state.
- Withdrawals for qualified expenses are tax-free from federal taxes.
- You're in control, because you select the plan and can determine how much you'll contribute.
- Proceeds of the account can only be used for education. However, you can transfer the account to another child if the original recipient doesn't use it.
These plans are great, especially for high-income investors. Many plans allow you to contribute as much as $200,000 or more up front (though the gift tax may apply for large contributions), and withdrawals for qualified expenses aren't taxed under current law.
Evaluate a 529 plan's investment options as you would any mutual fund. Understand how they invest, examine their performance, and understand all fees associated with them. And remember that you can shop around--you don't have to invest in your state's plan.
State Prepaid Education Plans >>