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The 529 Plan to Save for College

Using a 529 plan to save for college has become one of the most popular options for parents saving for their children's college education. There are some major reasons why. But first, you may be asking, "What is a 529 plan?"

A 529 plan is an investment plan that exempts gains from dividend income or capital gains from federal taxes. If you are a resident of the state in whose plan you are investing, you may be eligible for deductions on your contributions. The funds in the plan have to be used for education purposes such as tuition, books and dorm rooms.

There are two types of 529 plans.

The first is the college savings plan where your contributions grow an the investment vehicle, with the gains from sales or dividends shielded from federal tax. You can use the funds for any college in the country that is accredited.

The second is a prepaid state tuition plan that allows parents pay for college at current prices.

529 Plan Benefits

Tax Free
Earnings on your 529 investments can be withdrawn for education purpose and you will not have to pay a dime of federal income tax.

Tax Deferment
All of the earnings in your 529 account (capital gains and dividends) can be fully reinvested over time, greatly increasing the power of compounding. Since you don't have to pay taxes year after year, your account can snowball and grow at a faster rate than a regular taxable account.

Investment Management
You do not need to know everything about PE ratios and balance sheets. Some of the most reputable money management firms like Vanguard and T. Rowe Price run the funds invest your money.

Everyone is Eligible
No matter what your income, or what state you live in, you can invest in these plans. If you live in a state where you do not like the options, you can invest in another state's plan that has better investment returns. The key here is that you have invested in a 529 plan, it does not matter if it is not in your state. However, you should know that if you do invest in a state's plan that is not your primary residence, you may not be able to deduct the contributions to the plan from your state income taxes.

Flexibility
The money in your 529 plan can be used for any accredited college, university or graduate school, AND trade schools, vocational schools, as well as room, board, books and other school related supplies!

Sounds Great! But...

Some of these plans have fees that I think are too high. Examine the expenses of your state's plan. There have been stories in the news of brokers charging huge fees that are completely unnecessary.

Others have made changes changes in the money managers or administrators. You may have invested in a 529 plan that has a great money manager and the state may end up changing the company managing your money.

Congress exempts these plans from federal taxes until 2010. Congress may choose not to renew the tax benefits in 2011. Unless the 529 tax breaks are renewed for 2011 and beyond, be prepared to pay for taxes on your investment if you do not use the funds by that time. Even if the favorable tax treatment of 529 plans are not renewed in 2010, you should still consider these plans because you get the tax benefits anyway until that time.

Here's another way to save for your children!

When I first found out about Upromise I was so excited! Why? Because you can save for your children's education just by doing what you are already doing! When you sign up, a portion the money that you spend already on gas, groceries, resturants, online shopping and more get's deposited in your account for their school expenses! It's a completely free way to help you save for college.

With Upromise, a portion of the money you and your friends spend every day on groceries, resturaunts and and much more will go into an account for your children's college!

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