Happy 529 day: tax incentives for college savings

Consumer Reports

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You can be excused for circling Memorial Day on your calender, but the financial services industry wants you to know that today is also special but in a different way: it's 529 Day in many states today. Some in the industry may be content that you simply know what a 529 College Savings plan is: According to a recent poll commissioned by brokerage Edward Jones, two-thirds of those surveyed had no idea.

So for the uninitiated, a 529 College Savings Plan is a tax-advantaged account that families can open to save for their own or their children's higher education. Nearly every state in the nation has at least one plan, and many have multiple plans. Although there's no federal deduction for contributions, any investment gains can be applied to college expenses without being taxed. In most cases, savers only receive tax breaks on contributions from choosing a plan in their home state, and then the break is on the state and local income taxes levied. If you reside in one of the states without state income tax, the nation is your oyster: you can choose from any of the over 150 plans available.

There are two major types of 529 plans: static and age-based. A static plan invests in particular mutual funds, such as a balanced fund comprised of stocks and bonds. An age-based fund manages the asset allocation over the life of the savings: they naturally become more conservative as Junior reaches high-school age, so a sudden drop in stock prices doesn't jeopardize a tuition payment.

529 plans have generally lowered expenses over the past few years, but, just as is the case with mutual funds, we believe that fund costs could be even lower. That, and lack of flexibility in selecting investments, have encouraged some savers to save for college by using a Roth IRA account instead.

It's a lot of information and choices to keep track of, and one might just prefer to shovel it under some sand and get back to beach and barbeque planning. But don't put college savings off. Like retirement savings, even a 5-year delay in saving for college makes it that much more difficult to catch up later on.

Parents' guide to saving for college

Tax-wise ways to save for college

How to handle a college student's money needs



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