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Tax Matters
529 COLLEGE PLAN TAX BREAKS ARE PERMANENT
By Richard Zbiegien
Jan 2, 2007, 11:30

The pension bill President Bush signed into law in August made the tax benefits offered by 529 - college savings plans permanent. Those provisions had been scheduled to expire in 2010.

State-sponsored 529 savings plans allow parents and grand parents to save $250,000 or more toward a child's college education. Though contributions are not deductible from federal taxes, as long as the money pays for college expense, your withdrawals are tax- free.

But because of uncertainties that surrounded the tax benefits, many parents were reluctant to contribute to the plans. The 529 plans have been around for more than a decade, but several recent developments have made them more attractive, including:

   Lower costs. One of the criticisms of early 529 savings plans was that many of them saddled investors with high administrative costs and investment management fees. However, in recent years, costs have dropped significantly, and they continue to fall.

     Competition among financial firms to manage the plans has become intense, allowing states to demand lower fees. Moreover, the amount of money in the plans has grown, lowering expenses for those who participate.

      More investment options are available today. In the early days of 529 plans most plans offered an age-based portfolio, which shifts money to more conservative investments as the child nears college, and few other options. Most savers still choose age-based portfolios but now many plans also offer aggressive, moderate and non- aggressive versions of these portfolios. You can choose one that matches your risk level.

        In addition, several plans now offer Certificates of Deposit as an investment option. Like traditional Certificates of Deposit, these products offer a guaranteed interest rate and are federally insured for up to $100,000. However, unlike income from traditional Certificates of Deposit that are taxed at your ordinary income rate, income derived from Certificates invested in 529 plans, are tax-free.

          Finally, States are now starting to give more incentives for investing in the plan.
If your child is nearing college age, you might think that a plan would not help. However, there is a tax benefit for contributing to a Five Twenty Nine Plan, no matter how old your child may be. One place to start with about details of the state plan is at
www.savingforcollege.com