With the cost of college tuition and expenses rising at a higher pace than the rate of general inflation, planning for a child's education is one of the most important financial decisions one can make. In the past, many concerned investors have used tools such as Education Savings Accounts, mutual funds, and custodial accounts to save for their children's or grandchildren's college education. While these methods are certainly better than not investing at all, they do contain certain limitations.
A 529 College Savings Plan offers a powerful way to save for a child's future educational expenses. With a 529 College Savings Plan, assets grow tax-deferred, just like in a 401(k) plan or a traditional IRA. In addition, distributions for qualified education expenses will be free from federal tax. Investors utilizing a 529 College Savings Plan should know that non-qualified withdrawals are taxable as ordinary income to the extent of earnings and may also be subject to a 10 percent Federal income tax penalty. The federal tax exemption for qualified withdrawals of earnings is scheduled to expire on December 31, 2010, unless extended by Congress. State tax treatment may differ. Investors should discuss their particular tax situation with a tax professional.
Individuals of all income levels can open a 529 College Savings Plan, and multiple plans may be opened for different beneficiaries. There are generally no age or time limit restrictions for the participant or the beneficiary. This allows grandparents or other relatives to contribute to the beneficiary's education without being penalized.
With a 529 plan, the account owner retains complete control of the account, including control of distributions, the ability to cash out the plan and access funds, and the ability to change the beneficiary.
Since there are no guarantees that any investment portfolio, including a 529 College Savings Plan, will reach its stated goal, it is important to remember that the value of a college savings plan may fluctuate and that an investor's investment may be worth more or less than its original value.
Investors interested in investing in a 529 College Savings Plan should consider carefully the investment objectives, risks, and charges and expenses associated with a 529 College Savings Plans before investing. The official program offering statement, which includes this information, is available from an investment professional and should be read carefully before investing.