Saving for College

Tax-free 529 college savings accounts may not stay that way, but they'll still be a smart way to plan for your child's future.
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This story appears in the November 2005 issue of Entrepreneur. Subscribe »

So-called 529 college savings accounts--inelegantly named for the section of tax code that gave them life--have been attracting parents of school-age kids since the code was enacted in 1996. The accounts grow tax-deferred, and withdrawals used for qualified higher education expenses became tax-free in 2002. The investing public has taken notice--last year, assets in the plans soared 49 percent to $52.3 billion and rose another 6 percent in the first quarter of this year, reaching $55.4 billion.

"I always thought 529s were a good deal, [even] before they became totally tax-free," says Joe Hurley, founder and CEO of LLC. Now, he says, they're virtually a no-brainer for parents or grandparents who want to set a little something aside for Junior's education.

The law that made 529s tax-free is supposed to phase out at the end of 2010, but if you're worried, don't be. The odds of Congress letting this popular tax-saver expire are close to nil. Sometime in the next five years, legislators are almost certain to make it a permanent part of the code.

In the meantime, consider that tax-deferred college savings accounts would still be a good deal for most of us. Contributions, for example, remain under the control of the donor until used, which means Junior can't take the money and buy a new car. The money is similarly considered part of the donor's assets when it comes to financial aid calculations, which means your student can qualify for more aid. The accounts also offer some helpful estate-planning benefits. And finally, at least half the states offer tax deductions or credits to residents who contribute to in-state plans.

Just remember that not all 529s are created equal. Compare investment options, tax benefits, fees and services of various state plans at Hurley's site, It's a free service that rates programs on a scale from one to five, depending on how they fare on various criteria. Many of the best 529 programs are sold directly to investors rather than through a broker, so the more homework you do on your own, the better off you--and Junior--will be.

Scott Bernard Nelson is assistant business editor at The Oregonian and a freelance writer in Portland, Oregon.

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