529 Plan

[snickols]

Can someone please explain to me how the 529 plan works? Is it something that has to go through my employer and be payroll deducted?

[boosami]

No, you get one independently like an IRA. I have one from Fidelity. The money you invest in it may be sheltered from local taxation if you choose a plan from your state. Interest is tax-free if used for educational expenses (including tuition, books, housing, and more). The control of the account is always in your name, and not controlled by the beneficiary.

Since you can most likely loan yourself or pull money from your 401(k) or IRA for educational expenses (a hardship withdrawl category), in most cases it doesn't make sense to have a 529 plan until you are maxing out your retirement contributions.

If you have more specific questions, I can try to answer those as well.

[snickols]

Thank you so much!

[disneysteve]

Savingforcollege.com is the best site around to research college savings plans and answer all of your questions.

As noted, some states allow you to deduct your contributions, but not all do. I'm in NJ where we do not get a tax deduction so I have my daughter's account in the NY state plan which is administered by Vanguard.

I agree that retirement planning should always come first. You (or the student) can borrow to fund college but you can't borrow to fund retirement.

[boosami]

You (or the student) can borrow to fund college but you can't borrow to fund retirement.

Steve is absolutely right. There are plenty of other options to pay for schooling, but only you can save for your own retirement. Scholarships, grants, assisted and unassisted loans, financial aid...

[meatloafkend]

We do our 529 plan online. It's specific to our state (although we can use the money for any accredited university). It's a great way to save for college.

[tmvijai]

529 has lot of advantages comparing to other college savings like UTMA, Coverdell & state sponsored savings. You should definitely look at it. I actually have 529 and coverdall savings for my son in 2 different funds one from vanguard and another one with permanent portfolio.

Obviously you retirement should come first than 529 savings. But with the rate college expenses are inccreasing, it should be given importance as well. I don't really like the idea of withdrawing from retirement account as suggested. Also you can't really borrow money from retirement for college boarding and lodging which is covered by 529. So after retirement, 529 should be given importance.

Any question, please leet me know. I have research a lot before I opened my son's 529. Online automatic deduction to 529 savings works like a charm. I strongly recommend it.

[kork13]

So why are there different 529 plans for each individual state? If I were to get a 529 in one state, would that money have to be used for education costs inside that state?

[sweeps]

If it is a 529 savings plan, you can use it in any state.

If it is a 529 prepaid plan, then it gets complicated. Money that you put into these plans usually aren't worth as much in other states as they are in the home state.

[kork13]

so assuming you're looking for a 529 savings plan, is there any benefit of doing it from one state to the next (unless your home state offers tax advantages for using their own)?

[tmvijai]

OK! Let me clarify something. There is the investment plan and prepaid plan. Investment plan is 529 plan offered by vanguad and fidelity and others. Prepaid plan is the one offered by states and advantage for deductions from state tax and you should be able to use in other states with limitations. Put its tution only not other expenses. But the 529 plan by vanguard covers everything and no matter which state is the college.

Hope that clears the mud :-)

[jIM_Ohio]

so assuming you're looking for a 529 savings plan, is there any benefit of doing it from one state to the next (unless your home state offers tax advantages for using their own)?

The state tax deduction is a huge benefit if you use that state's 529 plan.

The biggest difference from state plan to state plan will be the investment choices. In the 3 plans I looked at, 2 had Vanguard funds and the third was T Rowe Price. All had reasonable fund choices.

My advice for 529's would be
a) max out 401k and Roth IRAs
b) have mortgage paid down/paid off
c) invest in state 529 plan to get state tax deduction. If state has no state tax, you have much more freedom over where you invest money.

[disneysteve]

My advice for 529's would be
a) max out 401k and Roth IRAs
b) have mortgage paid down/paid off
c) invest in state 529 plan to get state tax deduction. If state has no state tax, you have much more freedom over where you invest money.

Jim, do you think b) only applies if you could have the mortgage paid off before college or would you still do that over saving for college if you would still have a mortgage when college starts? Is the reasoning that you could take a HEL to pay for college?

[tmvijai]

Jim,

It might be a big state tax deduction but state prepaid plans only covers tution fees and some boarding cost. They won't cover all the books and other big expenses. Whereas 529 plans cover whole lot of expenses. I have written a details 3-4 part articles about this one but I can't post the link because of solicitation restrictions.

You are options are good but not realistic for many.

1. 401 or retirement
2. College savings
3. Pay off loan gradually. If you have 4-6% interest, who else is going to give this cheap loan out there. It always good to have cheap home loans and have them current.

HEL's, I would recommend at all. Its a interest killer.

[sweeps]

so assuming you're looking for a 529 savings plan, is there any benefit of doing it from one state to the next (unless your home state offers tax advantages for using their own)?

A state tax deduction sweetens the deal BUT plan expenses and fees can be a bigger factor in the long term. I would rather choose a 529 plan with low expenses and no state tax deduction than a plan with high expenses with a deduction.

(Performance is an even bigger factor to be considered but cannot be predicted as easily as expenses and fees can.)