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Introduction to 529 Education Plans

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According to the SEC, 529 plans are tax advantaged education plans, legally called “qualified tuition plans,” designed to spur people into saving for future education costs, i.e. kids (don’t read anymore into that!). Sponsored by government agencies, they’re authorized by Section 529 of the Internal Revenue Code, hence their name. The 529 plans come in two varieties – a pre-paid tuition plan and a college savings plan. Prepaid tuition plans are exactly what they sound like, they let you prepay tuition or credits at participant colleges. The college savings plans are a little broader and are essentially plans where the saver can save and invest money for a future student beneficiary, independent of which school they go to. The trade off is of school choice and the ability to lock in tuition in today’s rates, with the savings plan you get choice but not rate lock and with the prepaid plan you get rate lock but limited choices.

The tax benefits of participating in a 529 plan are decent but not incredible. Earnings are not federally taxed and usually not state taxed if you use it for education purposes; if you don’t, they are taxed at your marginal rate plus a 10% penalty (the standard penalty for these types of things). The states themselves may also add in a financial incentive to participate such as grants or matching funds but many of them only do that if you use their state’s 529 plan.

In Maryland, the two different plans are called the The Maryland Prepaid College Trust and the Maryland College Investment Plan. The Prepaid College Trust is the pre-paid tuition plan and the College Investment Plan is the college savings plan, each are managed by T. Rowe Price, more on those two plans in a later article.

No one read anything into this… just looking ahead. :)

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8 Responses to “Introduction to 529 Education Plans”

  1. Mike says:

    Congats on the new addition to your family!

    Diaper comparison shopping posts in 3..2..1..

  2. The plan may not be the best college education plan but it is better than no plan at all. Other alternatives, student loans for the kids or home equity line of credit. Definitely not the parent’s retirement plan…

  3. SAHM-CFO says:

    Any comment as to which is better for the MD plan? The prepaid or the T Rowe acct?

    • jim says:

      I’m going to take a look a closer, more in-depth at the two programs sometime in the future, right now I have no idea.

  4. broknowrchlatr says:

    “The tax benefits of participating in a 529 plan are decent but not incredible”

    I’d lean more toward incredible. Compare a buy and hold strategy (call it Plan A) versus this (Plan B). Say you have $10k to save for college, 10 years to invest it and have federal and state income taxes totalling 30%. Lets also use the unreliable 10% return. For plan A to contribute $10k, a person has to have $14,286 in pretax money. So, Plan B already has a comfortable lead. At 10% interest, these grow to $25,937 and $37,053. The optimal tax option for Plan A is to buy and hold, only havign to pay capital gains tax. Plan A can really invest in anything. After capital gains on the return as it is paid out, Plan A ends up with $23,547 to pay for college expenses. Plan B ends up with over 50% more. I’d call that a substancial benefit.

    In my state there is no prepaid college plan. But, at first glance, the returns will be similar and the investmenat plan gives you more options, including not going to college at all.

  5. Patrick says:

    Man, that stinks that we can’t fund these 529′s before a child is born. If enough representatives believe life begins at conception…then shouldn’t a 529, as well?

    Go figure.

  6. I’m looking into this for my nephew. I like to think that I’m financially savvy, but it’s just far too complex – especially with all the other college savings plans out there (Coverdells and the like).


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