Complete Investment and Advisory Services
Joseph N. Rubinstein, MBA
Diversified Securities, Inc.
Securities offered through H Beck Inc.
H Beck Inc. and Diversified Securities Inc. are not affiliated

Consider the 529 savings plan, an increasingly popular way to save for higher-education expenses, which have more than tripled over the past two decades — with annual costs of more than $30,000 per year for the average private four-year college.¹ Named after the section of the tax code that authorized them, 529 plans (also known as qualified state tuition programs) are now offered in almost every state.

Most people have heard about the original form of 529, the state-operated prepaid tuition plan, which allows you to purchase units of future tuition at today's rates, with the plan assuming the responsibility of investing the funds to keep pace with inflation. It's practically guaranteed that the cost of an equal number of units of education in the sponsoring state will be covered, regardless of investment performance or the rate of tuition increase. Of course, each state plan has a different mix of rules and restrictions. Prepaid tuition programs typically will pay future college tuition at any of the sponsoring state's eligible colleges and universities (and some will pay an equal amount to private and out-of-state institutions).

The newer variety of 529 is the savings plan. It's similar to an investment account, but the funds accumulate tax deferred. Withdrawals from state-sponsored 529 plans are free of federal income tax as long as they are used for qualified college expenses.² Unlike the case with prepaid tuition plans, contributions can be used for all qualified higher-education expenses (tuition, fees, books, equipment and supplies, room and board), and the funds usually can be used at all accredited post-secondary schools in the United States. The risk with these plans is that investments may lose money, or may not perform well enough to cover college costs as anticipated.

In most cases, 529 savings plans place investment dollars in a mix of funds based on the age of the beneficiary, with account allocations becoming more conservative as the time for college draws closer. But recently, more states have contracted professional money managers — many well-known investment firms — to actively manage and market their plans, so a growing number of investors can customize their asset allocations. Some states enable account owners to qualify for a deduction on their state tax returns or receive a small match on the money invested. In 48 states, earnings are exempt from taxes.³ And there are even new consumer-friendly reward programs popping up that allow people who purchase certain products and services to receive rebate dollars that go into state-sponsored college savings accounts.

Funds contributed to a 529 plan are considered to be gifts to the beneficiary, so anyone — even non-relatives — can contribute up to $12,500 per year (in 2008) per beneficiary without incurring gift tax consequences. Contributions can be made in one lump sum or in monthly installments. And assets contributed to a 529 plan are not considered part of the account owner's estate, therefore avoiding estate taxes upon the owner's death.

Major Benefits

Benefits for Grandparents

By comparing different plans, you can determine which might be available for your situation. You may find that 529 programs make saving for college easier than before.

Sources:

1. The College Board, 2007
2. As with other investments, there are generally fees and expenses associated with participation in a Section 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments in Section 529 plans. The tax implications of a Section 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also note that most states offer their own Section 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.
3. SavingForCollege.com
4. If the donor makes the five-year election and dies during the five-year calendar period, part of the contribution could revert back to the donor's estate.

More College Saving Information

• College Savings Plans
• College Investment Options

CollegeAmerica 529 Savings Plan (American Funds)

The benefits of 529 savings plans and CollegeAmerica

Investment options

Managing your CollegeAmerica account

CollegeAmerica FAQs

CollegeAmerica is sponsored by Virginia College Savings Plan. But you can invest no matter where you live, and your beneficiary can go to school in any state. However, depending on your state of residence, there may be an in-state plan that provides tax and other benefits not available through CollegeAmerica. Before investing in any state's 529 plan, you should consult your tax adviser.

Investors should carefully consider the investment objectives, risks, charges and expenses of the American Funds and/or CollegeAmerica. This and other important information is contained in the prospectuses and/or CollegeAmerica Program Description should be read carefully before investing. American Funds Distributors is the distributor of CollegeAmerica.