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How to Get the Most from a 529 Plan

Aug 31, 2013

One of the best gifts my parents gave me was paying my way through college. It’s a heavy financial burden but luckily my parents started putting money into a 529 Plan even before I was born. They started when my oldest sister, who is ten years older than me, began junior high. Over the years, they were able to accrue enough money in their 529 plan to pay for all three of their daughters’ college finances.

The alarmingly high costs of tuition keeps rising, which should encouraging many parents to take advantage of 529 college savings plans. What many parents don't realize is that you do not have to choose your state's 529 plan; you can purchase a plan from any state.

Different Types of Plans

There are two main types of 529 plans: savings plans and prepaid tuition plans. States can offer both types, but educational institutions can only offer the prepaid tuition plan.

Prepaid plans are available to purchase tuition credits at today's rates to be able to use them in the future. Eleven states have this type of plan. Savings plans are investment plans. Assets are allocated into different investment options such as mutual funds and stocks.

Which Plan is Best?

The plan that's best for you will depend on several factors. If you have an older child, you'll want an age-based plan because as the child approaches the college age, the investments become more conservative.

If tax deductions are your biggest concern, you'll want to look into how to get the biggest deduction in your state. This may require that you purchase the state's plan though there are a handful of states that provide deductions for plans purchased in any state.

The following states have plans that have performed well consistently during the past few years: Michigan, New York, South Dakota and Utah. Utah seems to be a favorite among expert investors because of its low costs, diverse investments and age-based plan.

Managed or Passive Funds?

One of the primary factors that affect costs associated with 529 plans is whether you want a managed fund or a passive fund. With managed funds, managers pick and choose stocks for you based on how they think certain stocks will perform.

Passively managed funds have become common among direct-sold plans. Actively managed funds are common among advisor-sold plans. Actively managed funds have the highest expenses because they anticipate being able to outperform the indexes. According to CNN Money, passive fund 529 plans save on expenses and usually end up providing higher returns.

Tax Benefits

Indiana, Utah and Vermont offer state tax credits to residents who buy their plans. Twenty-seven other states allow 529 plan holders to deduct some or all of their contributions. Five states – Arizona, Pennsylvania, Kansas, Missouri and Maine offer tax breaks to their residents for investing in any college savings plan from any state.

How the Funds Can Be Used

Funds from a 529 plan can be used to pay for a student's tuition and fees, books, equipment and supplies when enrolled in one of the degree programs at an accredited institution in the United States. If the student attends school at least half time, the funds can also be used for room and board.

It's best to start saving for your child as early as possible, but if you have an older child, don't worry. Start saving now. Any money saved is less money that will be needed for student loans. Most parents and students think that no matter which course they take they will have to pay it one way or another. But if you think about it, you can either pay less by earning interest when putting aside the money ahead of time or pay more afterwards from the debt interest rates.

It’s your choice.

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