When selecting a 529 Savings Plan, be sure to investigate your own state's plan since you may be eligible for specific benefits. Some states offer tax deductions or even matching contributions. But to get these benefits you must invest in your own state's plan. If, on the other hand, your state (such as in California) does not offer any benefits then you should explore the offerings of other 529 Savings Plans.
Since you can participate in any state's 529 Savings Plan regardless of where you live, you have a lot of options. Maybe too many! When you are considering the merits of each plan, focus on these areas before you invest:
Prepaid College Tuition Plans are the first cousins of 529 Plans. These plans are run by your state's Treasurer's Office and allow you to contribute a fixed amount of money on a monthly or yearly basis to buy a fixed number of tuition credits at a public college or university at today's prices. This effectively allows you to pre-pay for your child's tuition.
If prices go up (and you can bet that they will) by the time your child is ready to enter college, the prepaid program will cover any increase. Most prepaid plans require that your child be a high school freshman or younger when you start the plan.
Pre-paid Tuition Plans are good if you think that your son or daughter will attend a state college or university. The risk is that your child will want to attend a private college or out-of-state school. In this case, you will usually be refunded what you put into the plan along with some interest. Since private or out-of-state public schools often cost more than in-state schools, the amount you get back is usually not enough to pay for the more expensive choice although some states do honor reciprocity agreements, accepting another state's Prepaid Plan. It would be wise to check this out before purchasing a Prepaid Plan.
It is very important to understand what you are buying with a prepaid plan. Some states' prepaid plans cover tuition but not room and board, which can be a hefty expense. Be sure you also understand what happens if your child decides not to go to a college in your state and ask if you are able to change beneficiaries.
If you or a relative has a chunk of cash that you want to give your child or grandchild to pay for college, you are limited by the current $12,000 annual gift exclusion. This means that if you contribute more than $12,000 per year, you will be subject to gift tax. However, with a 529 Plan, you can actually make five year's worth of gifts in one year. That means that you could give $60,000 if you are single or $120,000 as a couple to your child or grandchild and count it as a gift made over five years. You will not incur any gift taxes, and your beneficiary will have access to this significant sum of money. This may be an excellent way for grandparents to transfer a large part of their estate to an education fund without incurring additional taxes.
Gen and Kelly Tanabe
Founders of SuperCollege and authors of 13 books on college planning.
By: Gen & Kelly Tanabe
Need money for college? Stressed over how to pay the next tuition bill? Searching for a way to get a degree without going broke? Whether you need a full-tuition scholarship or a little extra cash to make ends meet, 1001 Ways to Pay for College provides students and parents with the answers.