For years, as college costs have climbed to back-breaking levels, more families have begun socking money in tax-advantaged 529 savings plans. Now, as these 529 plans mark their 10th anniversary this year, they are fast becoming the principal way for parents and grandparents to save for college.

Why? Costs associated with the plans have dropped. Investment options have improved. Perhaps most significantly, Congress has permanently extended the most enticing feature: All the money you pull out of 529s for college — your contributions, plus the earnings — is free of federal tax.

State-sponsored 529 savings plans let you invest in a menu of stock and bond funds, just as 401(k) plans do. Forty-eight states and the District of Columbia offer at least one 529 savings plan. The plans aren’t limited to in-state residents; you can generally invest in any state plan you want. But your state’s plan often will reward you with a deduction or other state tax break. (New Jersey is one of the few states that doesn’t offer any state tax deduction for contributions.)

Congress’ vote late last year to make 529s permanently federal-tax-free is likely to accelerate their popularity. By the end of last year, assets in 529 savings plans had hit nearly $91 billion. Net sales, after slowing in recent years, are rising. By 2011, assets are projected to nearly triple to more than $257 billion, says consulting firm Financial Research Corp.

“I think we’re probably in the third inning of a nine-inning baseball game” with 529 savings plans, says Timothy Wyman, a board member of the Financial Planning Association. “They will become more important, and more folks will use them because there’s no sign that college costs are going to be going down or decelerating.”

In the past five years alone, in-state tuition, room, board and fees at public colleges have risen 23 percent to an average $12,796 a year, even after adjusting for inflation, according to the College Board.

Wayne and Nori Dempsey, of Torrance, Calif., see 529 savings plans as the most effective way to offset the galloping pace of college costs. The Dempseys, with help from their financial planner, opened 529s for their son, Sean, 2, and daughter, Holly, 1, last year. Though the kids have many years before college, it’s not too early to start saving, the couple say.

They hope to save enough in 529s so their children won’t have to take on debt during college. “Starting out life with $100,000 in student-loan debt doesn’t sound like a good way to start,” says Wayne, 34.

Yet, unlike the Dempseys, many parents don’t start saving early enough. In a new ABC World News poll of 520 adults with children under 18, nine out of 10 parents said it was at least somewhat likely that their children would attend a four-year college. But nearly half the parents who expect to pay for at least some of the costs feel they’re behind in saving, the poll found. (ABC partnered with USA TODAY to research 529 plans.)

For procrastinating parents, 529 plans offer particular appeal. That’s because parents together can front-load in one year up to five years’ worth of contributions — currently $120,000 — without being subject to gift taxes. They can do this if they don’t add any more money for the next five years. (Couples who don’t take advantage of this one-time benefit can invest up to $24,000 in 2007 without incurring gift taxes.)

Money withdrawn from 529 savings plans can be used at any accredited college nationwide. (The somewhat similar 529 “prepaid” plans also allow you to go outside your state, but are meant to lock in tomorrow’s tuition at today’s prices at state public schools.)

The 529 savings plans aren’t without their problems. Some states’ plans still impose high fees and have poor investment options. And though it’s become easier to compare plans from different states, it still isn’t simple.

“They’re not the plain-vanilla cookie-cutter option,” because each state’s plan has different investments, costs and features, says Kalman Chany, author of “Paying for College Without Going Broke.”

Adds Doug Taylor, a financial planner in Torrance, Calif.: “Sometimes, we have too many choices, and that paralyzes people because they’re afraid of making a mistake.”

Surveys also suggest that 529 providers could do a better job of marketing the plans. An August 2006 poll of 1,358 parents by investment firm AllianceBernstein found that 45 percent of parents still weren’t familiar with 529 savings plans.

Yet, financial advisers are increasingly likely to recommend these plans now that withdrawals for college are free of federal taxes permanently, says Peter Mazareas, of the College Savings Foundation, which consists largely of firms that manage 529 assets.

“Five years ago, when I would tell people at cocktail parties that I work with 529s, they would ask me what car that’s affiliated with,” says Chuck Toth, a director at Merrill Lynch. “Now, they’re saying to me, “I’m thinking about 529s.’ I’m very popular at cocktail parties.”

Source: www.app.com

This entry was posted by Taman Siswa on Sunday, February 25, 2007 at 6:32 am and is filed under College Grant, College Loans, Education News, Financial Aid. Tags: College, Student, . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.