(John Keegan for USN and WR)
When it comes to you 529 college savings plan, these are the small things that count. Just ask Randy McCarey. The Milwaukee father was at one time saving his daughter’s tax-deferred 529 paise.
McCready already signed up with Uprise, one of the many discounted programs that give parents every time they save in college. He earns 1 percent per gallon when he fills his gas tank at Mobil or Exxon stations. What’s more, because McCreary already uses his Citibank Apromise MasterCard, he gets an additional 1 percent off.
In August, Gas Rebate raised $ 2.77 in a 529 account to her 5-year-old daughter Molly. “I know, it doesn’t sound much,” says McCarey, director of financial aid at the University of Wisconsin-Parkside. “But it’s surprising how quickly it all adds up.” In five years through Upramies, McClory has saved over $ 1,600 in Molly’s 529. In the grand scheme of things, $ 1,600 is probably a drop in the bucket of what many colleges need to pay. But parents who use the 529 plans – and have been told that people sponsoring these tax-saving savings and investment accounts – are realizing that it is the little things that matter.
Since the introduction of the 529 schemes, these accounts, which are offered by almost every state, have grown in popularity. Approximately $ 105 billion has been invested in 80 or so 529 plans that parents can choose from (you are not limited to just your state plan) at nearly twice the 2004 level. 529 assets are expected to double again by 2010 according to an estimate by the Financial Research Corporation.
The development follows major reforms for 529, which was named in 1997 for the section of the tax code giving rise to accounts such as 401 (k). Withdrawals from 529 were taxed at the rate of a child. not anymore. First, the federal government temporarily made withdrawals for qualified educational expenses completely tax-free. Last year, Congress made tax-free withdrawals permanent.
Stacking up college-savings rebates
Three major college rebate programs help shoppers save for school, some money at a time.
* Discounts are not included in over 7,000 restaurants.
Source: USN and WR
What’s more, property held in 529s and most college savings vehicles is not considered a child, even though the student beneficiary technically owns the account. This is a big help when it comes time to apply for college financial aid, as the federal aid formula treats up to 20 percent of a child’s property to be paid for college as fair play (5.6 percent for parents ).
“The big battle has been won,” says John Heywood, a head of the Vanguard Group, who heads the mutual fund company’s education savings plans. Now, states and parents should focus their attention on small issues:
Fee. Competition among financial services firms is reducing the 529 plan fees and expenditures, often with state plans put in rebellion for firms that manage them. Take Fidelity. Last year, the mutual fund giant won the contract for California’s Direct-Sale 529, managed by TIAA-CREF (sold through a separate California 529 plan brokers). Nishtha agreed to expand the plan’s investment options and include a low-cost index-fund option, which charges just 0.5 percent in annual management fees compared to funds previously offered.
While the difference in annual fees of 0.5 percent and, say, 1 percent may seem minor, it may climb up. Suppose you invest $ 20,000 in the same investments in two different 529 plans. And suppose both earn 8 percent a year. But Plan A charges 1 percent of the total annual management fee, giving you a net return of 7 percent annually. And Plan B charges just 0.5 percent for a net profit of 7.5 percent. For over 18 years, you will earn $ 5,900 more in Plan B.
Investment Options. More schemes are now offering families the option of investing in actively managed funds or low-cost index funds, which simply invest in all stocks or bonds in one market index. And banking products like certificates of deposit have moved to 529. Plans in Arizona, Hawaii, Montana, and Ohio offer all parents the choice to invest college savings dollars in CDs, saving parents from market losses as their children near college age Will appeal to protect
Tax deduction. While more than 30 states offer state tax to their residents to invest in 529, most of these breaks are available only to parents who opt for the state plan. But now some states, including Kansas, Maine and Pennsylvania, are offering state tax cuts to residents who put money into any 529 plan. It is too soon to tell if this is the beginning of a real trend, but similar tax parity laws have been introduced in about a dozen other states.
concession. Whatever states do, parents can help themselves by using 529-bound waiver programs. They include Upprize, Babymint and Little Grad. Each site offers discounts every time you make a purchase at a fellow merchant, and those savings can eventually be credited to a college savings account.
Of course, families can save more by purchasing low-priced merchandise than hunting for discounts for name-brand goods. And some basic credit cards offer customers a discount of 2 percent on many purchases.
But Lisa Roll, a sub-member who works as a financial advisor, wonders what are the odds that you will take every last penny of savings through a basic rebate credit card and give it to your child. For 529. “That way, at least, you can put everything on autopilot,” Roll says. And getting college finance on autopilot is certainly a small way parents can get amazingly large savings in their 529.