Thursday, September 18, 2008

The 529 Savings Plan

The 529 Savings Plan differs from the Prepaid Plan in several ways.
Again, different state plans have slightly different options. The Savings Plan is essentially an investment account with tax deferment or tax-free if used for educational purposes. Plans invest in mutual funds with a variety of static and age-based options. Like the Prepaid Plan, some states have residency requirements, others do not. The minimum initial deposit can range from $25-$1000. Subsequent contribution minimums are usually $15-$25. These accounts will accept contributions up to a balance of between $200,000-$300,000 depending on the plan. Many of these plans have small enrollment fees, as well as account maintenance and program management fees generally less than 1%. There are also broker sold plans that will have higher fees, but come with the benefit of receiving advice from an experienced financial planner as opposed to doing all the homework yourself.
Some of these programs are also linked to rewards programs such as Upromise that contribute purchase rebates to the account.

These plans are more flexible than the Prepaid plans as you can contribute at will and move your investments around as you like.

Benefits of this type of plan include the following:

1. Federal and state tax breaks.
2. Donor control of the account
3. You can change plans or beneficiaries frequently offering great flexibility.
4. Generally there are no income limitations or age restrictions for the beneficiary.


1. Some plans will be considered against financial aid.
2. There are penalties for non-qualified withdrawal.
3. Treated as a gift for gift-tax purposes.

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