If you are a parent, grandparent, or even planning to go back to school yourself in a few years, a 529 savings plan is worth considering. A 529 gives you a way to save for college and pay no tax on the earnings in the account. Considering that 4 years of college is now pushing $100k and is only going up from here, taking advantage of government-sponsored programs is more important than ever.
Here are some of the advantages of a 529 plan:
1. Anyone can contribute to a fund -- This means that parents, grandparents, friends, and even the child can contribute to the fund.
2. Tax Savings -- The earnings are tax free, and that's a lot of savings when compounded over 18 years.
3. Easily Change Beneficiary - If the original recipient does not attend college, the beneficiary can easily be changed to be another family member.
4. No Harsh Withdrawal Penalty -- If the original designated person receives a scholarship, (or meets a few other conditions such as going to a military academy) the only withdrawal penalty is to pay the tax you would have paid anyway on the earnings. Now that's what I call a no lose proposition. (If you withdraw the money for a non-qualified reason, there is a 10% additional tax on the earnings, but not the principal.)
Now that I have you convinced that a 529 is worth thinking about, you should know that each state offers a different plan, and you are eligible to pick almost any of the state plans you desire (not just the state that you live in). However, if you (or whoever will be making the contributions) are an NC resident, and plan to stay in NC, the North Carolina 529 is an attractive option. If you are not a resident of NC, or plan on moving sometime soon, your best option is the Utah plan. Let's take a quick look at both.
There are three facets that distinguish between plans and that quickly take large groups out of the running. Those three items are total fees, tax benefits, and fund options.
The North Carolina plan offers low administrative fees, the option to invest in diversified Vanguard funds (low fees, stellar reputation), and offers a tax break to residents. (The $2500 allowed deduction for a single person and $5000 per couple results in tax savings of approximately $175 and $350 per year, respectively.) The fees for the NC plan are 0.25% of the average balance throughout the year, and are in addition to the fees (also about 0.25%) charged by Vanguard. While you also have an option for Seligman funds, their fees are significantly higher. You can find out more at the official website at www.cfnc.org/site/nc529/main/overview.jsp.
If you (or the person making the contributions) will not be a NC resident for the long term, Utah offers a very good alternative. You will not get tax credit if you are not a resident of Utah, however, their "maintenance" fee is capped at $20 per year and the funds charge a set 0.25% administrative fee. Utah also offers Vanguard funds, so it is easy to compare apples to apples when comparing with North Carolina's plan. You can find out more at the official website at www.uesp.org.
So as you can see, the only real difference is with fees and tax deductions. As a NC resident, the tax break seals the deal, but you really can't go wrong either way. The only real mistake you can make here is not opening an account.
Dan Griffin holds a Master's Degree in Business from the University of North Carolina, and is founder of SavvyDollar.org.