MONEY-SMART KIDS


The Ins and Outs of 529 Plans

Janet Bodnar

What's the best 529 plan? How does the money affect financial aid? We've got the answers you seek about these popular college-savings accounts.



I have five nephews and two nieces. Can I set up state-sponsored 529 college-savings accounts for all of them?

You certainly can. You can open a 529 account for a niece, nephew, godchild -- even the neighbor's kid. As long as you own the account, your contribution also qualifies for a state income-tax deduction if your state offers one.


I heard that it's better to have a 529 account owned by the child rather than the parent so that it's not considered the parent's asset in determining financial need. Any merit in this?

Actually, you have things exactly reversed. When it comes to calculating college financial aid, it's much better to have assets in the parent's name. In the federal financial-aid formula, parent-owned accounts are assessed at 5.6%, compared with the 20% assessment on student savings.

By law, 529 accounts are considered parental assets, so they automatically qualify for favorable financial-aid treatment.

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We would like to start a college fund for our daughter. But if she doesn't attend college, we'd like to be able to use the money as a nest egg to start her life. What college-savings plan would give us the most flexibility?

A 529 account would probably also work in your situation.

Because you're primarily interested in a college fund, a 529 would let you take advantage of a slew of tax breaks: Your contributions may be eligible for a state tax deduction, your savings would grow tax-deferred, and the earnings would escape tax altogether if the money is used for qualified educational expenses, such as tuition, fees, and room and board.

But if your daughter doesn't go to college, you still have some control over the money. You could transfer the funds to another family member and preserve the tax benefits, or withdraw the money and pay income tax plus a 10% penalty on the earnings.


We'd like to set up a college fund for our grandchildren. But I'm an investor and I'm not happy with the returns I see quoted for 529 plans. What advice do you have for setting up a private investment fund?

You could set up an investment account in your name earmarked for your grandchildren. But I wouldn't reject 529 plans out of hand.

It's true that the most popular investments in these plans are preset portfolios of stocks and bonds that become more conservative as your child gets older. But many plans let you mix and match your own investments.

If your state offers an income-tax deduction, look there first. If your state doesn't offer a deduction, you can open an account in another state with better investment options. For do-it-yourself investors, Kiplinger's likes the College Savings Plan of Nebraska. It offers 20 mutual funds from American Century, Fidelity, Pimco and Vanguard. See The Best 529 College-Savings Plans for more of our favorites.

MORE: Everything You Need to Know About 529 Plans




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