529 College Savings Plans: What You Need to Know

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College graduationBy Mandi Woodruff

College tuition rates are heading nowhere but up these days, leaving parents and students more reliant on state-funded financial aid and student loans to finance higher education.

What might be the most accessible and simplest way to save for college -- a 529 savings plan -- is also one of the most widely misunderstood financial tools among consumers, according to a new survey by financial services firm Edward Jones.

Out of more than 1,000 respondents, more than 60 percent couldn't identify the plan as a college savings tool. Even more troubling was the fact that nearly half of respondents with children that could actually benefit from the plan drew blanks.

A 529 plan isn't the only answer to soaring tuition costs, but from the looks of this survey, consumers are sorely in need of a refresher. Here's what you need to know:

What it is: In short, a 529 plan is a tax-free savings fund that can be set up for anyone heading to college. There are two main types: A prepaid tuition plan (the only kind higher education institutions can offer) and a savings fund, according to the College Savings Plan Network. Head over to CSPN's site to try their handy tool to compare the benefits of various plan features.

Who can open one: Put frankly, anyone in the country can open a savings plan in anyone else's name -- from your niece or nephew to your best friend's kid. There's no limit to how many plans you can open, either and you can even change the beneficiary whenever you want.

How it's funded: Each state offers at least one form of a 529 savings plan (see a full list here), but a lot of doubt has been cast on whether governments would be able to meet demand from cash-strapped consumers in the wake of the recession.

However, a recent report by the College Savings Association showed plans were successfully funded at a rate of 93 percent in 2011–up by 2 percent from the prior fiscal year–which is more than plenty to meet demand. Not everyone investing in plans necessarily taps into them at the same time.

Why you want one: The best perk of 529 plans is the ability to to pay for a host of college-related expenses, including tuition, room and board, books, computer equipment, and even Internet access, all tax-free (the plan student has to be enrolled in school to qualify for the computer and Internet perks, though).

The catch: There are limits to your contributions. Generally, you can put as much cash into the fund as the beneficiary needs to meet college expenses, which will take careful budgeting to figure out (use your school's tuition calculator as a gauge). Keep in mind any contributions that exceed $13,000 in a given year might incur a federal gift tax.

Don't be afraid to shop around. Just because your state offers its own 529 plan doesn't mean you can't sniff around for better offers in other states. Students aren't required to attend college in the state where their plan is funded. MorningStar's interactive state-by-state map is a great way to compare plans.

They're not for everyone: Before deciding to invest in a 529 plan, seeking advice from a financial planner or tax consultant would be a wise choice. Basically, treat them like you would enrolling in a company retirement plan. The IRS and the College Savings Plan Network both offer helpful starter guides as well, which will give you talking points to cover.

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Eddie005

I set my daughter up with a 529 plan (Utah Education Savings Plan) through GradSave. GradSave is a online registry that lets you link a college savings plan so it can be easily shared online through facebook, twitter, etc . This way family and friends can gift directly towards her college savings with a click of the mouse.
As a parent struggling through these economic times, I highly recommend to take a look at GradSave as a savings option.

October 25 2012 at 10:13 AM Report abuse rate up rate down Reply
stinco

Ross 2,
send me a proposal please. My grandson son is age 2.
Thanks.

June 04 2012 at 4:25 PM Report abuse rate up rate down Reply
Ross 2

the best way to save for collage is a Juvenile Whole Life policy, we guarantee 4% on your money (tax free) and we are paying 7% this year (tax Free)

June 04 2012 at 2:52 PM Report abuse rate up rate down Reply
4 replies to Ross 2's comment
fredrdr

From the comments here, most better not apply for "Are You Smarter Than A Fifth Grader".

June 04 2012 at 1:21 PM Report abuse rate up rate down Reply
aamgar62

Unfortunately, the more that you save in a College plan, the less chance that you have to obtain scholarships which are nearly all need-based.

June 04 2012 at 10:44 AM Report abuse rate up rate down Reply
peggy oswitt

Obama is the sole reason for our economy and the media still says the U.S. Is in recovery!

I doubt it?

Just look around!

Paoswitt

June 04 2012 at 10:15 AM Report abuse -1 rate up rate down Reply
2 replies to peggy oswitt's comment
maedford

bush cheney are the sole reason wqe have this economy.they gutted the middle class and there is no fat left on the countrys bones.smarten up

June 04 2012 at 7:46 PM Report abuse rate up rate down Reply
jake.grafton

If you think our current President is the sole basis of our economic woes, then perhaps you should invest in a history book. America's problems began long before Obama took office. Pres. Nixon, in the 1971, unilaterally ended the gold standard for the US dollar, and since then our economy has plundered. Not to mention of course, Ronald Reagan's failed theory of "trickle down economics" which led to: high interest rates, high unemployment and a massive recession. Dems and Reps are both to blame for our current status, nonetheless, this began long before Obama showed up.

If you want a lesson in economics then feel free to visit us at London School of Economics. I won't even mention the atrocities of the Bush/Cheney Administration. Read a book.

June 25 2012 at 7:31 PM Report abuse rate up rate down Reply
Monica

Thanks for the info! Parents need be as informed as possible in all areas of college funding. Sharing and tweeting! :) M.M., http://how2winscholarships.com

June 04 2012 at 7:04 AM Report abuse rate up rate down Reply