529 College Savings Plans

This is a smart and effective way to save money for your kids' education.

I'll provide the highlights of these plans.

What is 529 college saving plan?

This is a plan that helps you to save for college while providing important tax advantages.

The contributions are made in after-tax dollars (unlike 401K saving plans where deductions are pre-tax) and your money grow Federal and State income-tax free. All withdrawals used for qualified higher education expenses are exempt from federal income tax. You can use the savings at any accredited college in the Unites States to pay for tuition, fees, room, board, books, computer, and other relevant expenses.

Contributions to any Pennsylvania or non-Pennsylvania 529 plan of up to $13,000 per beneficiary in 2009 are deductible in computing Pennsylvania taxable income (check with your tax advisor).

Who can be a beneficiary?

Any family member including yourself (kids, spouse, nieces, nephews, grand kids, etc.).

The account holder (you) retains control of the assets regardless of beneficiary's age.

What happens if the beneficiary does not go to college?

You can change the beneficiary to another family member or withdraw the money (this option, however, will be a non-qualified distribution and the earnings (not the contributions) will be a subject to state and federal taxes and 10% penalty).

Making contributions

Regular contributions can be made through payroll deductions or automatic transfers from a bank account. You can also add lump sum amounts (usually $50 or more) at any time.

What are contribution limits?

Most plans have very low minimum contribution limits starting at $15-$25 per month. There's a cap of yearly contributions (currently about $350,000), but if you can afford such a contribution you probably should not worry about paying for your kid's college expenses J

Pennsylvania specific plans

The account owner or beneficiary must be a Pennsylvania resident at the time of program enrollment. There are some tax and other benefits in enrolling in such a plan if the beneficiary will attend a college in Pennsylvania (of course, the funds can still be used for a college in any other state).

Two major types of 529 Plans

529 savings program (investment plan) - you can choose from a variety of investment options (funds with different ratios of stocks/bonds, age-based portfolios) - obviously the rate of return can vary dramatically due to market fluctuations and you can actually lose money by investing in such plans. On the flip side you have more control over where your investments go, you can getter a higher return rate in the long run, usually there is no enrollment or annual fee (you will only be paying a 0.5-0.75% fund fee). This plan is for people with higher risk tolerance.

529 prepaid tuition program (Pennsylvania Guaranteed Savings Plan (GSP) - your savings are growing at the same rate as tuition cost increases (there are 5 different Tuition Inflation Levels that help to calculate tuition cost increase. For example, State-Related University Average calculates tuition inflation as an average tuition cost increase in the University of Pittsburgh, Penn State, Temple and Lincoln University; Community College Average is based on the average tuition at Pennsylvania's 14 community colleges: Allegheny County, Beaver County, Bucks County, Butler County, Delaware County, Harrisburg Area, Lehigh-Carbon County, Luzerne County, Montgomery County, Northampton County, Pennsylvania Highlands, Philadelphia, Reading Area and Westmoreland Area and so on). You don't have any control over how your money is invested - the plan managers will take care of that.

On average tuition cost was increasing by 6% annually, so that's pretty much the growth rate you should expect by investing in this program. This option is for people with low risk tolerance, because your money is "guaranteed" to grow irrelevant to the market conditions (a word of warning - here's the quote from the plan's brochure "It is important to note, however, that these guarantees are NOT backed by the full faith and credit of the (Pennsylvania) Commonwealth. Meeting the guarantee is the obligation only of the GSP Fund itself and not the Commonwealth... GSP might not be able to meet all of its future obligations and the GSP Fund might not be able to pay Account Owners the amounts to which they would be entitled. That is, Account Owners might not receive the full value to which they would be entitled"). I believe it means if the fund managers make really bad investment decisions your "inflation-protected" rate won't be any longer guaranteed J

If they do a wonderful job and the investments' return rate is say 20%, you would still be getting only your "tuition inflation" growth rate of 6% thus missing the opprotunity of higher gains.

And of course, if the government (or colleges themselves) decides to freeze tuition cost your money would not be growing at all.

Also the plan has a $50 enrollment fee ($25 if you enroll quickly after getting the materials) and there's also a $25 annual fee (waived if you make automatic contributions).

On the positive side, the funds accumulated in this plan are excluded when determining eligibility for Pennsylvania state financial aid programs.

Useful links:

http://pa529gsp.uii.upromise.com/

http://www.savingforcollege.com/529_plan_details/?page=plan_details&plan_id=45

http://www.nowu529.com/

http://www.collegesavings.org/index.aspx (includes College Cost Calculator)

http://nova.pasenategop.com/brochures/TAP-529.pdf

http://www.finaid.org/savings/state529plans.phtml#Pennsylvania

https://pa529invest.s.upromise.com/planfeatures/planfeatures.html