Parents need to know about 529 college savings plans

When I see college graduates celebrating their achievement, I can’t stop wondering about all the loans many will be paying off for years to come.

But it also makes me relieved that my husband and I set up 529 plans for our children.

This is why I’m celebrating 529 College Savings Day on May 29 (get it, 5/29?). And the best thing is, I don’t have to buy a greeting card.

Nevertheless, I was surprised to learn that most people aren’t even aware of this vehicle to save for college, even those who are likely to have the income to make this investment. For the last three years, the financial firm Edward Jones has commissioned a survey to gauge what Americans know about 529 plans. The survey found that only 30 percent of survey participants could correctly identify what a 529 plan is about. And the awareness is dropping. In 2012, 37 percent of respondents correctly identified a 529 plan from among four potential options. Some thought it was a retirement account, a form of life insurance or a low-cost health care plan. Among those with a household income between $50,000 and $75,000, awareness was only marginally better at 32 percent. Awareness levels increased when income increased, but it still wasn’t as high as it should be. Forty-two percent of households with income between $75,000 and $100,000 could identify a 529 plan, and only 48 percent of Americans making more than $100,000 answered the question right.

Here’s how a 529 plan works. There are two types: prepaid and savings plans. The advantage to the plans is that earnings are not taxed if the funds are used to pay for qualified college expenses. In most cases, earnings are also free from state and local taxes. There are no income limitations on who can contribute to an account. And I particularly like this feature — the account owner maintains control over the money.

A prepaid tuition plan allows you to pay a child’s tuition in advance. The point is to lock in for tomorrow at today’s rate. However, be careful about funding a prepaid plan and thinking you are done. It covers only tuition and fees. What if your child wants or needs to live on campus? Room and board alone can be as much as tuition.

The 529 savings plan is the most popular. With this plan, you invest much like you would in a workplace 401(k). This means your returns are based on how your portfolio performs over the years. Most 529 savings plans offer age-based investment options in which the investments become more conservative as the beneficiary gets closer to college age. This is what we have selected for our children.

Every state and the District of Columbia offer at least one type of 529 plan. Although the 529s are state-sponsored, you can invest in any of them regardless of where you live. Many states offer a tax deduction for residents who use their state’s plan.

Start your research about 529 plans by going to the one run by your state. (For Washington state residents, the place to go is www.get.wa.gov.) Here are two other websites that provide a lot of good information — www.collegesavings.org run by the College Savings Plans Network, and www.savingforcollege.com.

On savingforcollege.com, you’ll find a quarterly analysis of the best and worst 529 plans based on short-term and long-term investment performance. If you have questions about 529 plans, register for a live one-hour webcast at 10 a.m. Thursday (PDT) hosted by savingforcollege.com.

When it came time to pay for my daughter’s tuition, fees and room and board each semester this school year, I simply made a telephone call. It took less than 10 minutes to process the payments to her school.

Each time, the customer representative ended the call by asking, “Is there anything else I can do for you?”

“Nope,” I said, breathing a big sigh of relief.

(c) 2014, Washington Post Writers Group

More in Herald Business Journal

Happy accident leads Edmonds couple to make Hunniwater drink

The latest line of energy drinks by Karin and Eric… Continue reading

Voters are on the sidelines as the port fills a vacant seat

Troy McClelland resigned from the Port of Everett commission too late for an election before 2019.

Don’t rely just on productivity measurements to value a worker

The controversies swirling around the productivity data at the national level are… Continue reading

Career Fair planned next week at Tulalip Resort Casino

The Snohomish County Career Fair is planned from 10 a.m. to 2… Continue reading

American Farmland Trust president to speak in Mount Vernon

American Farmland Trust President John Piotti plans to give a talk about… Continue reading

Agent joins Re/Max in Smokey Point

Dennis Roland joined the Re/Max Elite Smokey Point office. The Navy veteran… Continue reading

In space capsules today, little room but big improvement

Boeing and SpaceX are relying on a tried-and-true design as they each develop new spacecraft.

First Boeing KC-46 delivery to Air Force slides into 2018

Certification milestones have been missed, and problems have emerged in flight test, a source says.

SEC reveals hack, possibility info was used for trading

The regulatory agency said the hack was discovered last year.

Most Read