529 plan

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans are termed "qualified tuition plans" by the IRS, which authorized the plans in 1996 in Section 529 of the Internal Revenue Code. 529 plans are sponsored by states and private education institutions. There are two types of 529 plans: pre-paid tuition plans, which can be offered by states or private institutions, and college savings plans which can only by sponsored by states. 529 savings plans can be sold directly to investors without sales charges, or can be sold through advisor sold plans with sales charges.

529 Prepaid Plans
Prepaid tuition plans, sometimes referred to as Prepaid Education Arrangements (PEAs), allow families to buy all or part of a public in-state higher education at present-day prices. The value of the investment is guaranteed by the state to meet or exceed annual in-state public college tuition inflation. Plan costs can vary, depending on how close the student is to college. There are two types of Prepaid Tuition Plans, a units plan and a contract plan. A units plan allows you to buy units of tuition (for example, a unit could equal one percent of state college tuition or a set number of credit hours). A contract plan lets you purchase contracts for one to five years of tuition. Account holders can usually contribute to either of the two plans in a lump sum or in installments. . In 2004 individual educational institutions were permitted to begin offering their own prepaid tuition plans. The Independent 529 Plan is a national prepaid tuition plan offered by a group of several hundred private colleges.

Benefits of Prepaid Savings Plans:
 * Guaranteed. Accounts are guaranteed by state governments to at least match in-state college tuition increases.
 *  Low-risk. Prepaid savings plans are considered a safe investment option for families that know where their children will go to college. They usually outperform typical savings accounts or CDs.

Downsides of Prepaid Savings Plans:
 * Limited to state residents. Participation in the plans is often restricted to state residents or alumni of state colleges and universities.
 * Geared toward in-state public institutions. Your principal plus earnings may not cover tuition and fees if the student decides to attend a private or out-of-state college or university.
 * Conservative. For long-term college savers (with at least five years until their student attends college), there may be more productive investing options.
 * Refund/cancellation costs. Pulling out of a prepaid tuition plan can result in stiff penalties, including a cancellation cost and/or loss of interest.
 * Narrow definition of college expenses. For some plans, funds can only be applied to tuition and fees. Expenses such as room and board, course fees, and books, fall on the family to cover. Other plans allow funds to be used for such expenses if a family ends up with excess tuition units or if tuition and fees are reduced by scholarships.

Bear in mind that each 529 plan has its own set of rules and restrictions, which are subject to change. Make sure to request the most recent plan details from the plan administrators.

529 Savings Plans
529 savings plans are state-managed investment accounts, whose funds can be used for "qualified education expenses".According to the IRS "qualified expenses" are the amounts paid for tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution  They also include the reasonable costs of room and board for a designated beneficiary who is at least a half-time student. The cost of room and board qualifies only to the extent that it is not more than the greater of the following two amounts.


 * The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
 * The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Benefits of 529 Saving Plans:


 * Open to anyone. There are zero residency restrictions and no cap on income level
 * Easy to manage. Set up an account and your money is managed for you.
 *  Low impact on financial aid. Savings are treated as a parental asset when aid is determined, which means that only 5.6 percent or less of the account's value is factored into calculating the Expected Family Contribution (EFC) for each academic year.
 * Can be used at most schools. Funds are good at most accredited public or private colleges or universities, community colleges, graduate schools, in the U.S. Some plans also recognize accredited vocational and international colleges.
 * The account holder controls the money. The parent or grandparent controls the money for the life of the account, even after the beneficiary turns 18.
 *  Large contributions are possible. Some plans have contribution limits as high as $305,000 per beneficiary.
 *  Gift tax exemptions. Contribute up to $12,000 annually without triggering any gift tax. You also have the option to make a lump sum contribution between $12,000 and $60,000, which is treated as if it was made over a five-year period.

Downsides of 529 Saving Plans:


 * Risk. These plans are not guaranteed to make a profit—accounts can post losses in a tough stock market. Parents must be aware of the risks, and be prepared in case they come up short.
 * Short track record. Most programs have only been around a few years.
 * Limited choices.  Account holders have a fairly limited range of investment choices, but new options (and new plans) are being introduced constantly.
 * Less disclosure. States are not required to share their performance with investors on a regular basis.
 * Account manager fees. These are higher than average, and can be as much as 1-2 percent of annual earnings.

529 Plan Investment Programs
Age-Based Portfolios: Single Fund of Fund Portfolios: Standalone Portfolios:

Links

 * IRS Publication 970
 * College Tuition: Historical Cost Inflation
 * College Savings Bank
 * 529 Plan Fee Study
 * State Creditor Protections for 529 Plans
 * Saving for College
 * College Savings Plan Network
 * Vanguard College Savings Center
 * College Board
 * Information for Financial Aid Professionals (IFAP) Library

Academic Papers

 * Bogan, Vicki, "Are Higher 529 College Savings Plan Fees Linked to Greater State Tax Incentives?" . Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1146539
 * Bullard, Mercer, "The Visible Hand in Government-Sponsored Financial Services: Why States Should Not be Allowed to Offer 529 Plans" . University of Cincinnati Law Review, Vol. 74, 2006 Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=826105
 * DeGennaro, Ramon P., "Asset Allocation and Section 529 Plans" . International Journal of Business, Vol. 9, No. 2, 2004 Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=423800
 * Kaplan, Richard L., "Back to School: The New Parameters of Funding a Grandchild's College Education" . Journal of Retirement Planning, pp. 25-36, January-February 2008 Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1092230
 * Luna, LeAnn and Alexander, Raquel Meyer, "State-Sponsored College 529 Plans: The Influence of Tax and Non-Tax Factors on Investors' Choice" (January 31, 2005). Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=657422