College Savings - Section 529 Plans Overview

There are many ways to save for college, but one thing is certain: it is never too early to start. One relatively new investment plan designed to help families save for college is a qualified state tuition program (QSTP), or "Section 529" plan. It offers a versatile way to finance higher education with some nice tax advantages.

There are two general types of Section 529 plans:

1. Prepaid tuition programs and college savings plans. Prepaid tuition programs are designed to hedge against inflation by paying for future in-state tuition costs in today's dollars. The Florida Prepaid tuition plan is this type. Florida's plan has options to attend in-state private schools (pays the state rate) and out-of-state schools (pays 5% interest on your money). For more information see http://www.fsba.state.fl.us/prepaid/

2. College savings plans are state-sponsored, tax-deferred investment plans usually offering a variety of investment options that allow the beneficiary to use funds at any accredited institution of higher learning in the United States. Qualified expenses are not limited to tuition under college savings plans. An example of this type is the one offered by New Hampshire. U. S. News and World Report has a summary and links to many of the states at http://www.usnews.com/usnews/edu/dollars/dstuit.htm

While each program varies from state to state, there are certain elements common to each.

• Anyone may establish an account in a qualified state tuition program on behalf of a designated beneficiary, regardless of the relationship with the beneficiary.
• The donor's nondeductible contribution(s) are held in a special account to be used to cover future higher education costs for that beneficiary.
• Earnings grow tax-free until they are withdrawn from the account. If funds are withdrawn for qualified higher education expenses, earnings are taxed at the student's tax rate, generally a lower rate than the donor's rate.
• Penalties apply on nonqualified withdrawals.

The donor is not permitted to direct investments, but the donor remains in control of all withdrawal decisions.

Section 529 plans are one of many choices for college funding. You should chart your course for college funding after carefully reviewing the full range of choices. Call us; we would be happy to review all your options with you.

Related pages:
        Prepaid Tuition Plans - Advantages & Disadvantages
        Taxes and College Financial Aid

© Copyright 2001 Raymond S. Kulzick. All rights reserved. 010318.