5/29 Is 529 DayMay 21st, 2010 at 12:48 pm
Memorial Day is coming up, and every year there's all kinds of fun--cookouts with friends, the first trip of the year to the beach, skydiving through volcanic ash in Iceland.
This year, try something really exciting. Next Saturday, stay home, click on SavingForCollege.com, and learn about the tax benefits of saving for college. May 29 is, appropriately, 529 College Savings Day in many states.
'529' is IRS talk for the section of the code which allows families to set aside money that grows tax-free for college or vocational school expenses such as tuition, books, room & board, and fees. Mom and dad, grandmas and grandpas, and anyone else can put money into a 529 account for baby Susie (or anyone planning on attending school) through the plan of any state they choose. That money is invested, grows--hopefully--and when the tuition bills begin arriving, your payments for her schooling come from tax-free money.
Even better, 34 states now offer tax deductions or credits for 529 contributions, according to Kiplinger's Personal Finance. In my state, Indiana, there's a 20% tax credit for contributions to Indiana's 529, up to $1,000. Remember, credits are better than deductions because they lower your tax bill dollar for dollar. So if I put $5,000 into the Indiana 529 this year for our high school senior, I get $1,000 back on my state taxes next year. It's often pointless to start a 529 if Susie is already 16 years old, but the tax credit/deduction makes it well worth the effort. In fact, despite being Indiana residents, my wife and I opened our first 529 account 10 years ago through TIAA-CREF's plan in Minnesota. At the time, their fees were lower than my own state's plan, and there was no Indiana tax advantage. When both the fees went down and Indiana adopted the tax credit, we quickly switched.
529s have other advantages. The contribution maximums are much higher than the old-fashioned education savings accounts, usually up to $300,000 per account, and the federal financial aid formula counts only 5.6% of parents' 529 account balances toward their expected contribution to college. What if Susie wins American Idol at age 17, signs the big record deal and never goes to college? Mom and dad can transfer her 529 account to another family member, or just cash it in, minus a 10% penalty.
This all sounds swell enough, but the stock market drop of 2008 decimated many families' 529 accounts. That's because many were heavily weighted in stocks, just a few years from needing the money. This is not a long-term investment, folks. At most, it's a 20-year bet. When you know withdrawals are coming soon, stocks are not your best friend.
Fortunately, 529s offer low-risk investments, including age-based plans that become more conservative as the college years approach.
You know, on second thought, go ahead and heat up the grill, head for the beach, and pack your chute next Saturday. After all, holidays don't come often enough. First, however, get out your calendar and pick a day--say, June 29, and make 6/29 your 529 day. You and your future college student will be glad you gave up one day in the summer of 2010 to make paying for college easier. You may even save enough to afford another trip to Iceland.