College Savings Plans and the Class of 2010

Remember back in 2001, when the President’s new tax code went into effect, so many of the changes were set to expire in 2010? This included withdrawals from 529 college savings plans being tax free if they were used for higher education.

Well, the class of 2010 will enter college in September. So if you are saving for a child who is not going to graduate from high school this year, is the 529 still a good deal for you?

Consider the worst case scenario – in 2010 the withdrawals are taxed. A 529 is still a great way to save money for college, and defer paying taxes on income. You don’t need a lot of money to open one, states often give students who have state sponsored 529 plans bonuses for attending in state schools. Also, the burden of the tax is shifted to the student, who is usually in a lower tax bracket than the parents.

It is very likely that Congress will vote to continue to make withdrawals from 529 plans for tuition tax free beyond 2010. No politician wants to be seen as denying more than six million families a way to save for college. In the meantime, when shopping for a 529 plan, experts advise you to consider your state’s plan first, since states give tax benefits for contributions to their own 529 plans. Only in Maine can you get a tax deduction for contributions to another state’s plan. If your state’s plan is not well managed, you may do better putting your money in another plan, but you won’t qualify for any deductions off state tax.

The growth of new 529 accounts has slowed in recent years, largely because people are now nervous about how any change in 2010 will impact them. They still remain an excellent and easily maintained account for saving for college. As with any investment, you should consult with your own financial professional and consider your own situation. The likelihood is that the well managed 529 accounts will continue to be a great way to save money for college. If you are sure that your son or daughter will go to college and can afford to put the money away for a number of years, you may well find that the 529 plan continues to be good for you.