Why 529s Make Sense

Here's another piece from Kiplinger's on why 529 college savings plans make sense. Their thoughts:

Two new tax laws make 529s much more attractive than custodial accounts. The 529 earnings are now permanently tax-free when used for college costs. And a change in the kiddie-tax law requires parents to pay taxes on custodial account earnings at their own tax rate until their children reach age 18 (previously, earnings had been taxed at the child's lower rate after they turned 14). Plus, more states continue to offer income-tax deductions for 529 contributions.

And new financial aid rules give 529s a clear edge: Custodial accounts are considered to be the child's assets, and children are expected to contribute 35% of their assets for college costs (the number shrinks to 20% next year); 529s are parental assets and only tapped at 5.6% in the financial aid formulas.

Because of these new rules, it's better to invest the bulk of your college savings in a 529 plan.

That's what we're doing -- putting the bulk of our college savings in our 529 plan. And even though we've been contributing to Coverdells for years, our 529s have almost as much money in them as the Coverdells. Why? Because the Coverdells are limited to $2,000 contributions a year while the 529s  have much, much higher contribution limits (more than what most people will save for college in total.)

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

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Our glorious government, helping the rich get richer and the poor get poorer. Is this the greatest, most awesome country on earth, or what?