as the saying goes, you can borrow for school, but you can’t borrow for retirement. A handy rule of thumb: Plan to cover college costs with an equal mix of 529 funds, current income (including your kid’s part-time job), and financial aid. “Look at it that way, and it all becomes more achievable,” says Williams.
As for Bruce Sneed, he feels that those hefty college bills will be within striking distance when the time finally comes. He’s combining 529s with Coverdell Education Savings Accounts, Roth IRA-type vehicles that let you put away $2,000 a year for each child. Put all those savings together, and Bruce feels the educational futures of little Laurence and Kendall are pretty secure. “We want to help them as much as we can and keep them out of debt,” he says (he’s also thanking his lucky stars that his eldest son secured a track scholarship). “You can do it, but you need to live below your means, set aside what you can—and start early.”
Which Plan is Best?
There are two types of 529 plans. In addition to savings plans, many states also offer prepaid tuition plans that allow participants to purchase tuition credits, based on today’s rates, that are paid out when the beneficiary is in college. The tuition is based on the rates charged by in-state public colleges, so there are some
|Â||College Savings Plan||Prepaid Tuition Plan|
|College Costs||No preset target for college expenses||Protects against inflation by locking in tuition prices|
|Investment Options||Plans provide a variety of options||None|
|Covered Expenses||All qualified education expenses, such as tuition, room and board, fees, and books||Limited to tuition and mandatory fees; a limited number of plans provide additional coverage|
|Contribution Limit||Most plans permit contributions in excess of $200,000||Payment schedule and limits are determined by plan’s contract|
|Investment Risk||Investment returns are not guaranteed||Typically guaranteed by the state|
|Tax Advantages||Earnings not subject to federal tax if used for qualified education expenses, many states offer state tax benefits||Withdrawals not subject to federal tax if used for qualified education expenses, many states offer state tax benefits|
|Penalties for non-qualified withdrawals||Withdrawals could be taxed as ordinary income, plus a 10% penalty on earnings||Withdrawals could be taxed as ordinary income, plus a 10% penalty|
529 Plan Resources
- College Savings Plans Network, www.collegesavings.org: An affiliate of the National Association of State Treasurers, this site offers details of the plans offered by all 50 states and the District of Columbia, including their investment strategy, risks, and fees.
- Investment Company Institute, www.ici.org: A Guide to Understanding 529 Plans is downloadable on the Investor Education Resources page of the site. The booklet provides a useful overview and includes a checklist of what to look for when searching for your college savings plan.
- Morningstar, www.morningstar.com: The Chicago-based mutual fund tracker