New twists on the 529

Track college tuition on the wall next to a child's growth chart and you can see the costs almost literally soar through the roof.

For a child born today, experts say, parents need to save about $8,000 a year to pay for a private-college education.

So the checks for child tax credits that recently arrived in mailboxes may have been just in time to start - or boost - an investment account for that golden diploma.

Changes in tax policies in recent years have made 529 college savings plans - named after a section of the Internal Revenue Code - a popular option. No federal tax is paid on gains in these investments, as long as the funds are used for college expenses.

Another attractive feature is the way a 529 account figures into financial-aid formulas. Because it's considered the adult account-holder's asset, only about 5 percent of the money will be considered available for the family's expected contribution to college costs. That compares with about 35 percent for students' assets in the case of a Coverdell Education Savings Account, for instance.

The tricky part of 529 plans is that there are so many to choose from. For state schools, you may have the option of a prepaid tuition plan that can lock in today's cost.

Now, even private colleges are getting in on the 529 action. Starting Sept. 3, you will be able to invest in an Independent 529 Plan, prepaid tuition for any of the nearly 300 private colleges that are participating, including many of the Ivy League schools.

The colleges assume the risk and reap the rewards of any changes in the market, and when you redeem your certificate, it pays for a certain percentage of tuition at one of the schools, no matter how much the price has increased. (You don't have to decide on a particular college in advance, and you can roll the money over into another 529 plan or receive a refund with a capped return.)

The most popular 529 plans currently are the savings accounts. You can shop around and opt for any state's plan, but many states offer additional tax incentives for their residents to invest locally.

By the end of 2002, assets in 529 plans totaled some $19 billion. By 2010 they could grow to $400 billion, says Bruce Harrington, vice president of MFS Fund Distributors in Boston, which manages Oregon's 529 plans.

If you're just starting to learn about 529s, you're not alone. "Our research shows there's still a huge group of people [40 percent of Americans] who don't know what a 529 plan is," Mr. Harrington says. And of those who do know, 60 percent haven't yet invested in one.

One risk with 529 savings plans is that the federal tax shield might expire in 2010. "The general sense is that it will get extended beyond 2010, but we don't know for sure," says Jennifer Ma, a research economist at the TIAA-CREF Institute in New York.

The ground is also shifting a bit as some states debate whether they should exempt all 529 earnings from state taxes, or only earnings in their own plans.

One advantage over other investment options is that the lifetime-contribution limits are usually more than $200,000. In Coverdell accounts, you'll enjoy the same tax-free earnings, but you can put in only $2,000 a year.

Page: 1 | 2