College tuition and fees are on the rise. Shockingly, the cost for 4-year private schools now tops $36,000 per year on average.

But the investment is well worth it. According to the U.S. Census Bureau, individuals with a bachelor’s degree earn more than double those with just a high school diploma.

The two most popular college savings programs are 529 plans and Coverdell Education Savings Accounts. Whichever you choose, be sure to start when your child is young. The sooner you begin, the less money you will have to put away each year.

What is a 529 plan? 529 plans are investment vehicles designed to help families pay for future expenses associated with college or other qualified post-secondary training. Though contributions to a 529 plan are not deductible, these plans offer other tax advantages. All 50 states and the District of Columbia sponsor at least one type of 529 plan.

Computer technology expansion continues in 2010. The American Recovery and Reinvestment Act of 2009 (ARRA) added computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary of the 529 plan while enrolled at an eligible educational institution. Software designed for sports, games, or hobbies does not qualify, unless it is predominantly educational in nature.

More on “computer technology or equipment.” This phrase refers to computers and related peripheral equipment. Related peripheral equipment is defined as any auxiliary machine (whether online or offline) that is designed to be placed under the control of the central processing unit of a computer, such as a printer. This does not include equipment of a kind used primarily for amusement or entertainment. “Computer technology” also includes computer software used for educational purposes.

A 529 college savings plan, if you need a refresher, allows you to put aside money for a future education. The money grows tax-deferred and, at least under current law, is tax-free when withdrawn if used to pay for qualified education expenses. Contributors (usually family members) have control of the accounts, which also receive favorable treatment in financial-aid calculations.

      I am a big believer of college savings. With cost rising there seems to be a concern about who can afford college. As a parent of a range of children (a driving teen, down to a six year old with two in between), I wonder how I’ll ever pay for their school should they chose to attend. My situation is a tough one in this department, but my two oldest (both teens) have made their decisions, so I only need be concerned about a ten year old and my youngest.

Some 529 plans have gotten a bad rap lately for poor performance and high expenses, but that shouldn’t contaminate the whole crowd. For many, including myself, they are the best way to save for college.

            Using my personal situation and thoughts towards children and a higher education, I look at my clients and what they are doing or aren’t doing. I push the 529s not only as a guide towards saving for their children/grandchildren’s college funds, but as a tax break. (I push it as a tax break, but my thought process is of the recipient being able to better afford going to college if they want.)

            In July 2007 Money Magazine’s article called “529s: Best savings plan gets better” the author ask “Confusing?” then goes on “Well, yes. But it’s nothing you can’t handle by adhering to a few simple guidelines.” And she is correct. These plans are still very confusing. However she clears up some of this confusion with her 5 “rules”.  Somewhat.

            Earlier this year I wrote a guest post for Wide Open Wallet where I simply discussed (and briefly) the two types of 529 plans, and gave a brief run-down of the three states I deal with most. I was pushing the state benefits of 529s. There are some Federal breaks too. I also reposted this on my site, months later, in hopes to reach more readers.

            This month Money magazine has “Is a 529 still the top Savings plan?” (no web link for this yet.) In it they break it down by the numbers with the following example:

            “…Say you are in the 28% tax bracket, have a 5 year old and save $200 a month in Utah’s low-cost 529 which has annual expenses of 0.38%. Assuming annual average returns of 5%, you’ll have $39,100 by the time your kid is 18.”

            Then the comparing starts, showing that if you invest in a taxable account you’ll lose $2,900 in the same senario. If you’re not careful, then fees may “eat away” at your tax savings. Of course what if you have to withdraw it for anything else other than higher education? Well, you have to pay income taxes on the earnings plus a penalty of 10%.

            To sum it all up the author of “Is a 529 still the top Savings plan?” says “If you’re planning to save for college and have no reason to think your kid won’t go, a low fee 529 is the best savings tool – regardless of what anyone tells you.”

            I agree.

            Every situation is different so by no means should you run out open a 529 for your child/ren. Do some research?

College  Savings  Plans  Network

U.S. Securities and Exchange

College Savings Without the Tax Bite

529 College Savings Plans – Internal Revenue Code Section 529

Latest on 529 Plans  Thanks Nick for the site link

Then visit with your tax preparer and go over your options. Every state that has a 529 plan/s is different. Obviously please check your home state first, but don’t limit yourself to your home state.

[this was originally written by me for  Wide open Wallet)

The most asked question from clients and non-clients who called or e-mailed had to do with why the State ‘end result’ was so different than the Federal. In most cases the questions came about due to a refund from the IRS and an amount due for the resident State return. Agreeably each situation is going to vary from return to return however I found my answers going to 529 plans.

A 529 plan simply put is a college savings plan. Most overlook this immediately because, well, they don’t have children, or their children are either to young or to old to start thinking about saving for college. Phooey.

All fifty states and the District of Columbia sponsor at least one type of 529 plans. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan.

There are two types of plans:

            Plan A: You pay the cost of tuition at today’s prices for the designee/s to attend later. The earnings here are basically what the difference is in tuition today from what it will be at the designee’s start time.

            Plan B: Savings plans are different in that your account earnings are based upon the market performance of the underlying investments, which typically consist of mutual funds.

So how do they help your State return?

I could explain every States individually but will only briefly list the three main States where the majority of my practice resides. (I am current with 28 States 529 Plans)

In my home of residence, Missouri:

·         Your assets grow tax-deferred

·         withdrawals are exempt from state income tax when used for qualified higher education expenses

·         Missouri taxpayers can deduct up to $8,000 in contributions ($16,000 if married filing jointly) from their state income tax each year

Where I started my practice, Iowa:

·         taxpayers can deduct up to $2,595 in contributions (adjusted annually for inflation) per beneficiary from their state income tax. For example, a married couple with two children contributing to separate accounts can deduct up to $10,380 (that’s 4 x $2,595) for 2007

Thirteen miles to my west, Kansas:

·         Any contributor may deduct up to $3,000 for single filers and $6,000 for joint filers per beneficiary for contributions

·         follows federal treatment

·         offers state matching grants for “Learning Quest”

o   residents with household income lower than 200% of the federal poverty level ($42,400 for a family of four) can receive a match when they contribute at least $100 and up to $600 in 2007 and 2008.

With the examples above I hope you can see the benefits each has within each state varies. With one big similarity, a deduction for contributions made.

A few more quick thoughts if you please;

·         Most States require residence in order to take the deduction

·         In most cases if your designee decides not to attend college you can change to a family member of the original designee

·         Funds withdrawn for non college uses will be taxed and add back rules could apply to your States return

·         Anybody can contribute to the fund

o   Meaning you open a fund for your child/ren and Grandparents, Aunts and Uncles’, Brothers and Sisters, etc. and contribute to it/them

Okay, If you have any questions about 529 plans, I have several links listed below or I will be glad to help. Contact me I may not have the immediate answer but I’ll bet free return preparation (from my office), I can find it.

College  Savings  Plans  Network

U.S. Securities and Exchange

College Savings Without the Tax Bite

529 College Savings Plans – Internal Revenue Code Section 529

                                                                                                            Bruce “the tax guy”