The College Search: 529 Savings Accounts

A 529 account (the name comes from the section of the federal tax code covering the account's rules) operates like any other investment account. You make contributions and then select how you want the money invested. Usually, these accounts are tied to the stock market at first, but can be set to automatically adjust to less risky investments as the date of your child's college enrollment draws near. The big advantage of 529 accounts is that when you withdraw funds for your child's education, the withdrawal is not taxed. Therefore, all that interest you earn over your years of investing is yours to spend on your kid's college bills; the government doesn't take a dime.

Certain 529s are administered by state governments. These accounts have the extra attraction of offering an annual tax deduction on your state return of money you've put into the account during a given tax year.

You can use the money from a 529 account to cover all sorts of college costs, not just tuition. Dorm fees, meal plans, and text books also qualify. Although I haven't done it yet, withdrawing the money for qualified expenses is apparently simple. A college financial aid officer can help you with the details. Most funds also have websites that include complete instructions. 529s are also very flexible. You need not have multiple accounts for multiple children. In most cases, it only takes a click of a mouse to reassign a 529's funds between your kids.

529 Advantages

Multiple websites I've surveyed note further advantages of 529 accounts. For example, savingforcollege.com (a division of Bankrate.com), notes that even though the money you have in a 529 is earmarked for your child's college bills, you the donor, maintain control of the funds. In other words, it's still your money, not your kid's. Also, most plans have no cap as to what you can put in. So, if you're an extremely motivated saver, the sky's the limit. And if you move to another state, it's usually possible to rollover your account into a new one run by the new state, thus caring over the tax benefit.

529 Disadvantages

But there are negatives that deserve your attention. Many 529 accounts carry fees and service charges. The one I'm in, for example, charges a percentage of the total value of the account as an annual service fee. The percentage isn't great, but I've found that this is an incentive to go ahead and spend some of the money on my older kids, rather than hoard it all for the younger one. Also, if your 529 is tied to the stock market, its value will fluctuate with the rise and fall of the economy, which can make budgeting a little difficult. 529s are also numerous, and it takes a lot of research time to read about all of them, and to decide who's offering the best deal. You might want to start by examining accounts tied to your home state (since you get that deduction on your state return for contributions you make), and then compare those funds to other 529s to see if that tax deduction is really the best incentive. The main things to identify and compare are service and maintenance fees, which differ from fund to fund.

But what if you don't have a lot of extra cash to invest in one of these accounts? There's a really neat way to get many of the merchants you patronize every day to make contributions for you. It's called "Upromise" and I'll write about that in another blog.