Section 529 Plans
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I. Welcome
Later this week, I will be sending you a
email asking for your opinion on allowances.
I just want thank you in advance for helping
us out with this topic.
If you would like to suggest topics, or have any
questions that we could help with, please send us
an email: topics@101financiallessons.com
I found a great web site on 529 and other college
savings plans. It offers detailed information on each
state's 529 plans, investment results and calculators.
Check it out by clicking on the link below.
Tim Liptrap,
Vice President, Education and Development
Email: tliptrap@101financiallessons.com
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II. Editorial Calendar
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Section 529 Plans
A Section 529 Plan is one of the more popular
tools used to help parents and students save
money for college.
A "529" is short for Section 529 College Savings
Plan, which allows a person to invest money today
(after tax money) and watch it grow tax-free
until the student or it's beneficiary is ready to use
it for education.
The 529 plans are becoming popular due to the
ability to contribute large sums of money (up to
$55,000 a year for singles), unlike an IRA or 401(k)
plans. There are, however, maximum lifetime
contribution amounts (up to $250,000), depending
upon which plan you choose.
In addition, the 529 plan is portable. It can be used at
any accredited college, university, graduate school,
trade school or vocational school in the Unites States.
Another popular feature is that the owner has the
ability to change beneficiaries if the original intended
student does not go to college. Beneficiaries or donors
have full control of the money, when, where and how
much money will be distributed, unlike other plans which
the beneficiary has full control.
Note: You may open a 529 Plan with out naming
a beneficiary and can wait until the withdrawal of funds
to designate the recipient.
Eligibility
US Citizens or Resident Aliens 18 years of age or
older my open a 529 Plan.
Management
Federal legislation gave each state the power
to develop and control their own 529 plan(s).
All though each state retains control, they have hired
management firms such as Fidelity, TIAA-CREF,
and T. Rowe Price to manage the day-to-day
investment decisions, paper work, requirements,
distributions and customer service issues.
Regardless of which state you live in, you can
invest in any plan (approximately 40) offered in the
US. Each of the 529 plans offers different investment
choices, fees, management teams and rates of
return.
Note: Some states also offer their tax incentives to
their residents when they invest in their own plans.
Contributions
A 529 plan can be opened with as little as $50 a
month (if deducted from your checking account) and
in some state plans, you are allowed to invest up to
a lifetime maximum of $250,000.
Contributions do qualify for the annual gift tax exclusion,
which means that $11,000 a year ($22,000 for married
couples) can be contributed to a beneficiary as a gift-tax-free.
Investment products
Depending upon the 529 plan you choose will determine
the type of investment option that is available to you. Generally
you can choose between an age based or risk based investment.
529 plans are designed to be simple investment, the donor
deposits money each month and the fund manager handles
it all for you. Many investors prefer this method since it
alleviates the time and stress involved with researching
individual stocks.
As an investor, you choose the type of portfolio which
meets your needs. In some cases, you may choose an
age based portfolio, which would include higher risk
investments when the beneficiary is younger and slowly
change to bonds and a more secure investment, as the
beneficiary reaches college age.
Alternatively, a portfolio could be based on a projected
annual growth rate, such as 3%, 5% or 8% a year.
Returns vary from plan to plan. For instance, for the quarter
ending December 31, 2002 the Connecticut 529 plan
(aged based) was up 6.38%, while their high risk plan was
up 5.91%. However, both are down year to date.
To see the investment results for all available 529 plans, visit
Savingforcollege.com (http://www.savingforcollege.com).
Rollovers / Distributions
The 2001 tax laws allowed individuals to rollover 529 plans
from one state plan to another, once every twelve months.
If you choose to take distributions with out using it
for educational purpose, you may be subject to 10%
federal tax penalty and other taxes.
Resources
To learn more about Section 529 Plans
I recommend visiting either:
UPromise (http://www.upromise.com)
This site works with merchants, manufactures, credit
card companies and loyalty card (grocery stores) and helps
you earn money towards a 529 Plan.
Savingforcollege.com (http://www.savingforcollege.com)
This site is packed with information about college savings
plans, current tax laws, rates of return and links to all the
529 plans available.
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IV. Teaching 529 Plans
child how to budget and save money for a future
purchase (i.e. a college education).
Although there are many products available to help
a student save money, such as bank accounts, CDs,
US Savings bonds, many do not provide for a tax-free
growth opportunity.
On the UPromise web site is a chart that outlines the
difference between two sets of parents who are investing
in their children's future education. Both parents invest
$250 a month and receive a 7% annual growth rate.
One set of parents has been saving for 15 years and the
other set for 10 years. By investing early, the set of parents
who have been investing for 15 years, will save $37,000
more than the parents who have been saving for 10 years.
Teaching your children how to pre-plan, use the proper
investment tools and start saving early, could mean the
difference between be burdened by debt or not.
Talking points for discussion
- Teach your children to plan ahead for major purchases.
- Have them pay themselves first by saving 10% of their
paychecks. - Start saving money early in life.
- Dollar cost averaging, by investing each month will
help minimize your market risk.
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V. Learning Activity 529 Plans
Goal:
To show students how much money they will need to save for
their college education.
Skills Exercised:
Internet research
Comparisons
Step one.
Visit www.saveforcollege.com and click the button for
"Calculators". Open the College Savings Calculator.
Step two.
Find the button for "Tuition Search" on the top right of
the screen. Enter a college name and state into the search
fields. Double click on the college name when it appears, which
will automatically enter that college's tuition into the
saving calculator.
Step three.
Keep the expected annual returns at 8.0%. Change the field
for planned contributions to $100 a month, note the results.
Try again using the $200, $300 and $400 a month.
Step four.
Use $200 a month for a contribution amount and change the
years to 15, 16 and 17.
Answer the following questions.
- By changing the number of years, how does that affect
the overall balance in your account? - If you change the amount of the deposits, how does it
affect the overall balance in your account? - How can you start saving for college?
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Thank you for being a subscriber!
Enjoy the rest of your week.
Timothy Liptrap
Vice President, Education and Development
http://www.101financiallessons.com
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