What is a 529 Plan? 529 savings plans allow a parent, other relative or friend to open a tax-deferred college savings plan with as little as $25 to start in some states. All 50 states now offer their version of a 529 college saving plan, and you can usually access the details through your state treasurer’s office.  A 529 college savings plan is NOT the same thing as a 529 prepaid college tuition plan. Prepaid tuition plans are just that – tax-deferred savings plans that allow you to save for tuition for in-state schools.

Do 529 plans have tax advantages? Asset growth in a 529 plan is tax-deferred. Under the tax law passed by Congress in 2001, any withdrawals from 529 plans after 2002 through the year 2010 are tax-free if used to pay for a beneficiary's college tuition, fees, books, supplies, and — for students enrolled at least half time — room and board. The 2002 federal tax law change also allowed account holders to roll over funds from one state's 529 plan to another state's plan once every 12 months, if they move or if they’re unhappy with the current plan. One can transfer funds to another 529 plan at any time as long as the beneficiary is changed.

How can a whole family benefit? Everyone up and down your so-called “lineal family tree” can benefit from the tax breaks and educational rewards of these plans. In fact, if your child gets a full scholarship to Harvard, that means any close family member can use the money in that account to go to school themselves – great for career-changers. Better still, parents, grandparents, siblings and friends can make deposits to these plans and get a tax benefit.  One important note – all funds must be distributed to the initial beneficiary or transferred to another family member before the initial beneficiary turns 30.

Does my kid have to go to school in that state where the plan is? No.

How do I pick the right plan? Your financial planner can help you sort through the details of various state plans. There are various online services that now rank the offerings of each state’s plan.

How much can I put in? Over $230,000 per beneficiary in many state plans.

What about fees? They vary from state to state, and they’re very important to watch. Most states have a no-load option in addition to advisor-sold plans, so review and discuss those alternatives.

Who picks the investments? Each state typically selects qualified, nationally known investment managers to create the plan choices in each state. Most state treasurers’ offices feature direct links off their Web sites to their particular in-state plan with instructions on how to open accounts. The funds can be invested in a variety of investments from low-to-aggressive risk.

Who retains control of these funds? The family member who opens the account.

Do 529 Plan savings hurt financial aid?  They could, depending on the school and how they value these assets. Don’t be surprised if the school requires full disclosure of 529 funds—a portion of which could be deducted from that total aid package.

What happens if there’s an emergency? You’ll pay. The money in a 529 savings plan can only be used for higher education costs without negative tax consequences. If the money is used for any other purpose, the earnings are taxed at the account owner’s ordinary tax rate and subject to a 10 percent penalty

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December 2006 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community (www.fpanet.org/public).