Thankfully, securities regulators have been examining more closely the sales of 529 plans, an increasingly popular way for families to save for college.
But even as those overseers are doing their part to ensure 529 plans are properly sold, we investors still bear most of the burden of finding independent research on one of the best ways to save for college.
And I have just the resource. The December pick for the Color of Money Book Club is “The Best Way to Save for College: A Complete Guide to 529 Plans” by Joseph Hurley (Savingfor college.com, $22.95).
This is the one of the best books on 529s and is written by the most knowledgeable person I know on these plans. I mean that. Hurley, who is a certified public accountant, is the founder and chief executive officer of Savingforcollege.com, a Web site that concentrates solely on providing the most up-to-date and readable information on 529 plans.
Hurley is both a champion and critic of everything about state-sponsored 529 plans, which gained federal tax-exempt status in 2002.
That status, which was slated to expire in 2010, was made permanent by Congress this year.
“Section 529 plans provide some powerful and unique tax advantages not available with other college-saving options,” Hurley writes.
There are two types of 529 plans: prepaid tuition plans and savings plans. A prepaid tuition plan allows people to pay a child’s tuition in advance. The more popular savings plan allows people to invest in a tax-free investment account. Money withdrawn from a 529 investment is free from federal tax (and in most cases free from state and local taxes as well) when used for qualifying college costs. Additionally, many states offer a deduction for state residents who make contributions to a 529 plan.
Although the 529 plans are state-sponsored, you can invest in any plan regardless of where you live. And money invested in a 529 plan can be used for a state or private institution. Every state and the District of Columbia now offer at least one 529 plan.
Personally, Hurley has opened more than 50 of the 529-plan accounts spread among 32 different states. Don’t try this yourself. It’s not necessary. Although he only has two children (ages 20 and 16), Hurley opened the accounts to get a first-hand look at how the plans are run. He says in his book that most of the money he and his wife saved for their children’s college education was placed in 529 plans.
There’s a lot you should know about these plans before you select one, and Hurley walks you through it step by step.
He starts with a glossary. I like that. It’s right up front to help investors get familiar with the terms they will see and hear when opening an account.
Hurley then gives some historical background on 529 plans. Don’t skip this section, especially when he describes the changes some states have made in the wake of investigations by the Securities and Exchange Commission of mutual fund trading.
This is relevant because regulators are monitoring the sales of 529 plans. Recently, NASD, the private-sector regulator for the securities industry, fined Chase Investment Services Corporation of Chicago and MetLife Securities Inc. of New York $500,000 each for failing to establish procedures to supervise the sales of 529 plans. The firms were also ordered to pay more than $660,000 to compensate customers. Chase is paying $288,500 and MetLife will pay $376,000.
That action was the latest in NASD’s crackdown on how 529 plans are sold. Last year, NASD fined Ameriprise Financial Services, formerly American Express Financial Advisors, $500,000 and ordered it to pay about $750,000 to customers. Ameriprise was also fined for not adequately supervising the firm’s sales of 529 plans.
In settling with NASD, none of the firms either admitted nor denied the findings, but consented to the entry of NASD’s findings
Despite these enforcement actions, 529 plans remain one of the top ways to save for college. Why? Hurley sums it up nicely. Everyone can participate in a 529 plan regardless of age or income. You can accumulate more than $250,000 in these tax-shelter accounts for just one child’s future college expenses. And Lord knows, the way the cost of college keeps rising, you might need that and more to get a college degree.
In addition to the tax advantages, contributions to a 529 plan can be treated as if they were made over a five-year period. As Hurley explains, this means that $60,000 can be contributed to a 529-plan account without trigging a gift tax.
Thanks to another recent change, a 529 plan – whether it’s prepaid or a savings plan – is considered a parental asset in the determination of federal financial aid. That change became effective July 1.
Hurley also does a good job of comparing 529 plans to other college saving options. Best of all, there is an extremely useful state-by-state comparison of all available 529 plans – prepaid and savings. Because there are constant changes to these programs, you should verify the details with the plan’s sponsors. You can also check for updates at www.savingforcollege.com.
When it comes to 529 plans, Hurley’s book is where you should start your own investigation.
Washington Post Writers Group
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