529 College Saving Plans

[Kaida]

My friend is pregnant and asked me to look into 529 savings plans for her unborn child. She was thinking of getting a 529 savings plan, but there is so much information out there, neither of us know where to start looking. Do you have a 529 plan? Which one? How did you go about deciding for that plan?

We both live in Virginia.

[disneysteve]

savingforcollege.com is the site for researching stuff like this.

[snshijuptr]

I also like Kiplinger's 529 tool. It makes a recommendation for the top funds and makes a recommendation for every state:

Best 529, College-Savings, Prepaid Plans

[dczech09]

You want to go with an option that is state specific yet does not limit the investment options. For instance, I opened up a 529 for my nephew in Minnesota. The account is invested in mutual funds through TIAA-Cref and I can chose my mix, or pick a target-age "fund of funds."

Personally I like the 529 plans more than the Coverdell (ESA) as the 529 does not have the income restrictions. Also, lets say the beneficiary decides not to go to college; you can change the beneficiary pretty easily with a 529 plan. This makes it extremely versatile

[MonkeyMama]

529 plans are generally better for the wealthy (or wealthy grandparents - more who they were designed for).

ESAs are generally better if you are putting away smaller amounts. You can put away $2k per year. ESAs are far more flexible with about everything except the amount you can contribute.

I looked and Virginia actually has some highly rated 529 plans (most are pretty expensive and so I'd say most are terrible).

The state of Virginia allows state deductions for contributions, so that is another plus for Virginia. You have to use a Virginia specific 529 plan for the tax break. Otherwise, you can invest in any 529 plan.

529 PROS:
**Can earmark money for kids' college without giving the money to them (retain control over the funds, better for financial aid).
**Earnings are tax-deferred and are tax-free if used for college
**You can put large amounts of money into 529 plans; no income limitations

529 CONS:
**If the money isn't used for college, the earnings are taxed and penalized
**529 plans tend to be inflexible and expensive. Very limited choices in most 529 plans, high broker fees in most plans. Something like you can only change your investment choices twice a year?

Sum up? The 529 plan is a good option if you have a large lump sum to invest early on, and you KNOW someone will use the money for college. IT is a good option if the earnings will be large (likely for someone who starts investing smaller amounts with a new baby) and expect college to be expensive. Better for people with more potential beneficiaries (in case primary beneficiary gets a full scholarship or doesn't go to college! OR goes to community college and state, etc., etc.).

[MonkeyMama]

Originally Posted by dczech09

Personally I like the 529 plans more than the Coverdell (ESA) as the 529 does not have the income restrictions. Also, lets say the beneficiary decides not to go to college; you can change the beneficiary pretty easily with a 529 plan.

These are good points about the differences between the two.

[Like2Plan]

If you decide to go with VA plan, you have many choices.

There are 4 types of 529 plans in VA
There is the prepaid tuition plan called VPEP which is designed to cover tuition and fees. This plan works best if your child goes to a Virginia state school--it is backed by a statutory guarantee.

The next 3 plans can be used for tuition and fees, room and board and books:
There is a VEST plan which has many, many investment choices.

There is College America Which is only sold through advisors.

There is a new plan that is called College Wealth--it is more like a savings account--in an FDIC insured account with "competitive interest rates starting at 2%".

You can write off up to 4,000 per account per tax year on your VA state income taxes (and you can carry over amounts above 4,000 into the next tax years).

[Like2Plan]

We are VA residents.
We bought a total of 4 years of VPEP for our DS in 2002.
(We bought 2-one year plans and 1-two year plan. )

For the Two year plan, we paid: $9,324.00 (All the contributions received a state tax write off--which equates to about a 5% discount.)

Fortunately, our DS decided to go to a VA state college. The plan covered tuition and fees.
So far, the amount distributed for 1.5 years was close to 18,000 and there is one more semester left on it (the pay out will be 6,000+ for the last semester).

The refund value just prior to using the plan was $11,074 (so nothing spectacular if you don't use it for a VA state college). They do offer an option to convert to a community college plan or roll over to a different 529 plan, so there is a lot of flexibilty.

[feh]

One thing to consider - you don't have to buy a plan provided by the state in which you reside. I live in WI, but our 529 is from Utah, as an example.