FAQs on 529 College Savings Plans and Why 529s are a Good Deal

As many of you know, I recently opened two 529 college savings plans for my kids. After doing a good amount of research (and, yes, the issues surrounding 529s are confusing), I found the best plans for us and took the plunge.

Recently, I found a series of great 529 articles at Kiplinger and thought I'd share one per day with you -- so we could all learn about this great option for saving for college.

Today, I want to highlight a piece that lists 529 plan FAQs. It contains, as you can imagine, a series of answers to the most-asked questions regarding 529s. If you're in the initial stages of educating yourself about 529s, this is a great place to start.

The one question that stood out to me was the first one that details all the benefits of 529s. A summary:

• Withdrawals for qualifying education expenses are tax-free. Also, 529 plans are treated as parental assets when it comes to financial aid. (Parents are expected to kick in just 5.6% of their assets while students are expected to contribute 20%.)

• They're simple. Choose an investment option and make contributions and the plan does the rest. Sit back while the state or a third party, such as an investment firm, manages your funds.

• Contributions may be state-tax deductible. Thirty-one states and the District of Columbia allow you to deduct some or all of your contributions. Rules vary, so check with your state for more details.

• They're portable. Depending on the state, you can choose from a number of different investing options. You also can switch investment tracks within the plan once a year. And if you don't like your state's plan, shop around. Plans are open to residents and nonresidents alike. You also can roll your savings into another state's plan without penalty.

• There are no set annual contribution or income limits. Contribution limits vary by state, and some states do not limit contributions at all -- a good option for grandparents looking to transfer assets through estate planning.

All are great reasons to open a 529 -- and reasons that made me finally take the plunge.

The piece also gives this advice:

Don't think of Coverdell ESAs and Section 529 plans as mutually exclusive. If you have the money, consider funding both. ESAs also can be spent on private school tuition or other qualified educational expenses.

Personally, we fund both each year. Coverdells only allow $2,000 per child per year, so they won't accumulate enough to pay for a good chunk of college, but every little bit helps.

For more thoughts on saving on and for college, see Best of Free Money Finance: College and Education Posts.

Comments

[juanny]

I'm still very ignorant on 529s, and am very curious about the "portability" mentioned where you can roll over to another state's plan. Does that mean that you could contribute to a 529 in your own state, take the deduction, then roll the money to another plan (assuming you like a plan from another state better) without any drawbacks? Can anyone clarify whether this is a loophole that could work?

[Pinyo]

I am thinking about starting a 529 for my son also. It's reassuring to see another person choose to do the same.