529 Plan’s Future when College is not in the Future

What would happen to your daughter’s 529 plans future when college is not in the future? This is an excellent question to consider. As you look at your three-year-old daughter, all you can see is how smart, beautiful and intelligent she is.

Of course she’s going to a very good and probably very expensive college! At least, this is what you and your spouse determined even before she was born when you opened up her 529 plan. But what if (gasp) college just isn’t right for her? After all, it’s not the right place for everyone.

Well, you do have a few options. You can do nothing. You can hope and pray that she changes her mind and decides to go to college at another point in her life. Or in reality, beg and plead and badger her into going to college. If you make this choice and your stubborn little angel still has not used the 529 monies, she can be the contingent owner of the account.

Then, when you die, she will become the owner and can change the beneficiary from herself to one of her children. This 529 plan then becomes a gift from you to your grandchildren without passing through our estate.

More realistically, you would change the beneficiary from your daughter to her younger brother. Being a sibling, he would have an approved relationship to the previous beneficiary (our daughter).

Approved relationships to beneficiaries are as follows: son, daughter, grandchild, stepchild, father, mother, stepparent, brother, sister, stepbrother, stepsister, nephew, niece, uncle, aunt and the spouse of any of the before mentioned individuals. Two other options for transfers would be your daughter’s spouse or a first cousin. Needless to say, there are a lot of choices of people to transfer this 529 plan to.

You could also take the money out of her account and use it for yourselves. Vacation money, perhaps? But there will be a 10% penalty on the earnings portion of this nonqualified distribution. The penalty is not assessed on principal. The earnings on this 529 plan will be taxable at the usual income rates. The good news is that the money that you originally invested can be withdrawn without tax or penalty.

Now just a brief glimpse of the unthinkable, what would be the future of my daughter’s plan if she were to die? The rules for this are a little murky. It appears that the funds would have the 10% penalty waived if you would have the funds distributed to your daughter’s estate.

Or, once again you could change the beneficiary to your son, which would not incur a tax result. These rules would also apply if your daughter would become disabled or if you would withdraw the funds because the funds are not needed for college because our daughter has received a scholarship.

If college doesn’t become the plan for you daughter, the best option for you would be to change the beneficiary to your son. You place a great deal of importance of a college education and believe that 529 plans are the best place for you to invest for our children’s future.

For any family, the benefits of investing in a 529 plan far outweigh the risks involved. It’s just nice to know that if your children decide not to pursue a college degree that you have options to consider. This is a summary of the 529 plan’s future when college is not in the future. It’s just hard to predict what will happen in your crazy so-called life.

The 529 College Savings Plan as an Estate Planning Move

Let’s take a brief look at the 529-college savings plan as an estate-planning move. A 529 plan is not merely just a great vehicle to fund your child or grandchild’s future. A 529 plan is an excellent tool to remove money from your taxable estate. This will assist you in lowering your tax liability and keeping intact more of your estate for your loved ones once you pass.

All 50 states and the District of Columbia now offer some type of 529 savings plans. A 529 plan is a state sponsored savings plan that invests money on behalf of beneficiaries. The earnings are tax deferred from federal income tax and most states have programs that will defer state taxes. If your beneficiary uses the money from this fund for any qualified education purpose, the withdrawals will be free of tax.

There is a lot of competition between states that has lead to very large contribution limits. This is good news for you as you plan your estate. 529’s have extremely simple investment options- age based and individual portfolios. Basically, these college savings plans afford the family the ability to transfer wealth from generation to generation, free of income, estate and gift taxation.

So what makes a 529 college savings plan so attractive to an estate planner? They do not have any income limits unlike the educational IRAs. Almost everyone can qualify for a 529. And if you’re looking for a way to reduce your estate tax bill, this is a great solution.

Take advantage of $11,000 in annual tax-free gift contributions. If you’re married that means you can contribute up to $22,000 for each beneficiary in one year. This is free from federal gift tax penalties. It is advisable to look into your state laws on gift planning for 529’s as they vary.

If you need to reduce the size of your estate you could contribute up to $60,000 (five years worth of gifts) in year one of a five-year period. Or if you’re married you can contribute up to $120,000. This is a good resource to transfer wealth by reducing the size of your estate and do away with estate taxes.

The account owner is always in charge of the plan’s assets. Even though the monies added are considered gifts, the owner does keep control. The donors can even take back the money for themselves or transfer the account to another beneficiary. If the owner of a 529 account were to die, the value of the account would not be counted in the estate.

The account value would be in the beneficiary’s estate. The exception to this would be if you had made the 5-year election and passed before the 5 years was over. Then, the part of the contribution that was assigned to the years after your death would be included in your federal gross estate.

It is also very easy to move the money in an account through 529 rollovers or by changing your beneficiary. If you have a need to distribute your estate, you can set up 529 plans for a large array of family members. This includes children, siblings, grandchildren, uncles, aunts, stepfamily, cousins and so forth.

If you need to transfer wealth, look into 529 plans as part of your estate planning strategy. At the very least, the 529 college savings plan, as an estate-planning move is something to discuss in more depth with your tax professional. This is an extremely generous gift for your beneficiary. Imagine the reward of knowing you've provided someone with the gift of an education.

The Ins and Outs of Controlling a Coverdell ESA

Be sure of exactly who controls a Coverdell ESA; know all of the ins and outs. No one wants to deal with the headache of an 18 year old discovering their education fund only to run rampant making unqualified purchases. Of course, this would not be the behavior of every college student, but it will happen to someone out there somewhere. Here are some control ins and outs for your consideration.

With a 529 plan, you can keep in complete control of the account as the account owner and can even have the value of the account refunded for your use. This is a little different with a Coverdell ESA. The responsible person (parent or guardian) must administer the account for the benefit of the child.

Any money that you take out of the ESA must be for the benefit of the child. It should not be refunded to the person who established the account. Coverdell accounts are essentially an irrevocable gift.

Since the beneficiary of the Coverdell is not of age when you start contributing to the account, when the account is started an adult is named the responsible individual. This individual is typically the parent or guardian of the child. There will be policies at the financial institution you select to handle your ESA that determine the supervisory authority for the account.

The responsible individual may be able to retain that authority for the life of the account. If they wish this individual may be permitted to transfer the authority to the child at age 18.

With a Coverdell ESA, the responsible individual has more control to prevent the child from using funds for non-qualified purposes than UTMA or UGMA accounts. (Uniform Transfers to Minors Act and Uniform Gifts to Minors Act) If the account is not completely empty by the time the beneficiary reaches age 30, the balance will be paid to the beneficiary in 30 days.

In case of the death of the beneficiary, the account will be paid to their estate. This is unless there is an authorization from a legal representative to change the beneficiary to a surviving family member or spouse who is under the age of 30.

As the responsible party you have the control to change the beneficiary to another family member at any time as long as there was an agreement when the account was started. Then, you can change the beneficiary to another family member under 30 without having income tax and penalty. This includes anyone in your immediate family, including stepchildren or stepsiblings and cousins.

If you are the grandparent who has established this account you will not be able to change the beneficiary or have the account refunded for your use. Your choices are to name the parent, guardian or child as the responsible individual, you will more than likely not be able to name yourself.

You should look to restrict the powers of the responsible individual if you do not want the parent or guardian to be able to change the beneficiary. It is understandable if you want the account to stay in the name of your named beneficiary no matter what the circumstance. In this instance, you do not have the same control of the ESA that a 529 plan would grant you. This may affect your decision on which account you select.

If you have more questions on your Coverdell ESA, talk with the providers of the account. This is a great way for parents, grandparents and children to work together to pay for future education expenses. The ins and outs of controlling a Coverdell ESA are important. It’s good to know exactly who’s in control of your money.

What Contributing Grandparents need to know about 529’s

What exactly should grandparents need to know about 529 college plans? Some things just seem to go together like hot dogs and baseball, peanut butter and jelly, and of course, grandparents and 529 plans.

It’s a very lucky family that can depend upon grandma and grandpa to help with college tuition bills. College expenses aren’t exactly shrinking. The best gift that anyone could give could be your grandchild’s education fund and a 529 plan is a great way to get started.

A 529 plan is a state sponsored savings plan that invests money on behalf of beneficiaries. The earnings are tax deferred from federal income tax and most states have programs that will defer state taxes. If your grandchild uses the money from this fund for any qualified education purpose, the withdrawals will be free of tax.

Grandparents are allowed to contribute up to $11,000 per year per grandchild. So if Grandpa and Grandma have two grandchildren could place up to $44,000 in funds for the grandchildren without any gift tax liability. The grandparents would each have to set up 2 funds for each grandchild (a total of 4).

Grandparents will still have control over these funds and can retrieve the money if needed. Of course, there will be taxes and penalties on an unqualified withdrawal but the taxes and penalties will only be on your earnings, not on the amount of the original contribution.

The 529 plans have lots of investment options, which create a big decision for the grandparents to make. Grandparents typically are more conservative than the child’s parents. The most popular approach to 529 investments tends to be the age-based option. This is a simple way to save for college. You do not have to personally adjust your allocations over time.

The fund is managed according to the age of your grandchild. Younger children have more of a stock concentration. As your child gets older, the assets are automatically shifted into a higher ratio of short-term investments and more stable bonds.

Grandparents could also check and see if the 529 plan that your have set up will accept a third party contributions. This will take all of the worry about opening and maintaining your own accounts. State tax deductibility may be an issue if you go this route. Some states allow you a deduction for at least part of your contribution to their 529 plans. As a third party donor you will not be eligible for this deduction.

If you ever need to apply for Medicaid benefits, the state will look at your 529 plans as countable assets. You are eligible to take back the money you’ve invested so the money is technically available to pay medical or nursing home expenses. If you have this concern, it is an issue to discuss with your tax professional or attorney. It might be a good idea to make someone else the owner of the fund.

A big concern for grandparents is what would happen to the money in the 529 accounts if your grandchild chooses not to attend college. A great option is to change the beneficiary to another family member or even yourself. You can change the beneficiary as much as you want.

Another option is to take the money in the fund for your needs. The earnings in the account will be subject to a 10% penalty rate and will be taxable as income.  This is some of what contributing grandparents need to know about 529’s. It is a great way to invest in your grandchild’s future. You have picked an incredible gift to give to your very lucky grandchild.

Funding Options for College Bound Students

With so many funding options for college bound students, which one is best for you? Paying for college may be the largest expense a family can have, especially for families with multiple children. There are so many funding options to assist you. Here are some brief descriptions of your options.

A Coverdell educational savings account is a popular plan for college funding. You can contribute up to $2000 per year per child. If you use these funds for qualified education expenses, the earnings are tax deferred and free of federal tax. You select the investments for optimal flexibility.

Section 529 plans are state-sponsored plans that can be used to pay college expenses. This is a tax-advantage plan for approved education-related expenses such as tuition, room and board, supplies and fees. The state generally hires an investment firm as a program manager who provides various investment choices.

You invest in the appropriate portfolios that match your investment time-line and risk tolerance. The two types of 529 plans are prepaid and savings. Prepaid plans (independent) let you purchase tuition credits at member colleges, at today’s rates, for future usage. Savings plans have growth based on the market performance of your investments.

UGMA/UTMA accounts are custodial accounts opened on behalf of a minor. This gift is considered irrevocable with all withdrawals required to be for the minors benefit. The balance of the account is turned over to the minor at the age of majority.

Grants and scholarships are “free money” options that don’t have to be paid back. This is a debt-free way to fund an education. Financial need typically must be demonstrated to receive a grant. Scholarships are usually based on merit.

Work-study programs provide part-time employment from the federal government to earn money for college. This program is not only in place to help to fund college, but a work-study job can provide essential work experience.

Federal student loans are low interest, long-term loans for students. These loans offer attractive repayment options including being able to post-pone payments while attending college and in times during repayment of financial difficulty. There are federal loans for both parents and students. The best know ones are Stafford Loans for students and PLUS for parents.

A lot of people turn to these programs for their funding needs. You can also often find private loans that have low interest rates for college students. Be sure to choose a reputable lender who in knowledgeable on loan choices if using a private lender.

Tuition payment plans are an interest and debt-free way to spread payments over several months. Not all colleges offer this plan. Typically used by families who have income that will cover the gap between the amount they are billed for college and the amount of financial aid received.

Assets of a family are often used to fund college. IRA’s, savings accounts, 401k plans and stocks offer a debt-free way to fund an education. As a word of caution, before you liquidate one of these accounts, consider the earnings you may be missing out on. Use this number as a comparison to the amount of interest you would incur from a student loan plan.

Credit cards are often a popular but poor choice for funding a college bound student. This is for the simple fact that interest rates can be high. Use this funding choice with caution.

It’s important to think about your own situation as you plan to fund your education. Establishing a savings plan at an early age will make a huge difference. There are lots of funding options for college bound students. Which one makes the most sense for you?

The Pros and Cons of the Coverdell ESA for College

As you’re setting up investment plans for your child’s college, it’s smart to be aware of the pros and cons of the Coverdell ESA for College. This educational savings account is a very attractive savings plan for many people. Let’s take a look at some of the negatives and positives of this program and so you can see if it’s a fit for you.

Pro- The Coverdell Education Savings Account can be self-directed with a wider array of investment products available than a 529 plan. The account can be placed in almost any sort of investment. Typically, stocks, bonds, bank CDs, mutual funds and unit investment trusts. No part of trust assets may be invested in life insurance contracts.

Pro- The Coverdell funds are available to finance elementary and secondary school, not just college. This includes items such as tuition, fees, tutoring, books, supplies, room and board, uniforms, transportation and computers.

Pro- Earnings accumulate tax-free. Qualified distributions are exempt from federal income tax. Please note that contributions are not deductible on federal or state income tax.

Pro- Corporations may contribute. This even includes tax-exempt organizations. Regardless of income level, corporations may contribute to an individuals Coverdell account.

Pro- People can contribute to both a Coverdell account and a section 529 plan in the same year. Note that there may a gift tax implication if you give more that $12,000 per beneficiary.

Con- Contributions to the Coverdell ESA are limited to $2000 per beneficiary per year. Here’s an example, you have a son and a daughter that you want to contribute $3500 into Coverdell accounts for. You deposit $2000 to your son’s account and $1500 into your daughter’s.

Their grandmother wishes to add another $1000 but she is only allowed to put $500 into your daughters account as the $2000 limit has been reached. At $2000 a year, it would be tough to have this be your entire college savings plan.

Con- Contributions can only be made until the beneficiary reaches age 18. This may be a non-issue with some families but a 529 plan would allow you greater flexibility. There are no age restrictions for special needs beneficiaries.

Con- The money must be used by the time the child reaches the age of 30. If the funds are not used, the earnings will be taxed as ordinary income plus a 10% penalty.

Con- There is less flexibility in changing beneficiaries in a Coverdell ESA. Coverdell plans are considered permanent gifts. You cannot open up an account for your child and take back the money for your own use. Typically, the parents are responsible for the account until the child reaches 18. Then, the beneficiary usually takes control of the account. There is some ability to change beneficiaries.

Con- The Coverdell ESA is not eligible for the state tax deductions available for some 529 plans. The available 529 state tax deductions vary from state to state. Of course, a tax deduction is not the only reason to select an investment.

Con- The contribution limit is phased out for contributors with an adjusted gross income between $95,000 and $110,000 for single people and between $190,000 and $220, 000 for joint filers. A clever way around this con if you’re in this income bracket is to give the money to your child and let her open a Coverdell for herself.

After looking at the pros and cons of the Coverdell education savings fund, you can see if this is a wise investment for your child. The items that have been identified as cons are non-issues for many people. Coverdell is a good investment overall for most families. Talk with your tax profession and see if it’s right for you.

What the TIPS Means in the 529 College Savings Plans

In order to understand what the Treasury Inflation-Protection Securities (TIPS means in 529 plans it is important to understand what a 529 Plan is. A 529 Plan is an investment plan to save specifically for a college education.

The 529 Plan, named after the code in the IRS tax code corresponding to the plan, is often used by parents as a way to set aside money for a child’s future college education when they are still young that utilizes investments in stocks and other investment tools in order to not only put money aside for that child’s college education but to increase the amount of the original investment through interest rates and return rates on particular investments.

Since the 529 Plan is a state based investment, the state sets up an account with an asset management company of its own choice and the parents open a 529 Plan account with that asset management company. The parents deal directly with the asset management company, not the state. When parents sign up for a 529 Plan they have two options in terms of how they structure their investment.

The first option when investing in a 529 Plan is to prepay tuition at a participating educational institution at the current tuition rates, guarding against tuition inflation. The downside to this option is obviously that the child must then attend that particular college and won’t have a have a choice of schools when it is ready to move forward to a college education.

The child may not want to attend that particular school or may not have the credentials necessary to be admitted to that school. Parents also take the risk that school will no longer be in business by the time the child is ready to attend. The advantage is that with the huge rise in tuition costs yearly the parents will be able to lock in a low tuition rate for their child’s education.

The second investment option when investing in a 529 Plan gives parents the chance to put money into a tax-deferred earnings account that can only be used to pay for their child’s education.

The advantage of this method is that the child can attend any college they choose or can qualify for. The disadvantage is that parents will be paying the current tuition rate at the time that the child attends the college, which might be significantly more than the tuition rates offered now.

Regardless of which plan the parents choose, the basic idea of the 529 Plan is the same. Parents are investing money with the idea that the earnings on that investment will grow to meet the costs of a future college education for their child. The second option is usually the one preferred by parents.

When parents open a 529 Plan account they are agreeing to let their investment be handled by the asset management company chosen by the state. The asset management company may decide to put part of the initial investment in stock and part of the investment in fixed-income securities to maximize the return potential and the potential growth of the investment.

This type of allocation plan is preferred because it offers investors a balanced return over the period of the investment. In order to protect the investor against rising inflation costs, as much as one half of the investment that is designated for fixed income securities can be placed in Treasury Inflation-Protection Securities or TIPS which provide protection for the investor against inflation.

So asset management companies invest the money of parents who are buying 529 Plan accounts to pay for their child’s future education in Treasury Inflation-Protection Securities or TIPS to protect that investment from inflation over the course of the investment term.

Important Steps to Take when Saving for College

It’s time to look at some important steps to take when saving for college. The time to save is right now. It’s never too late to state a plan. Consider these tips for education savings.

Step 1. Start early. The sooner you start saving, the less you’ll need to save each year to reach your goal. The day your child arrives is not too soon to begin saving! You can take advantage of investments that promise greater returns. You can take advantage of volatile investments that are too risky for short-term college savings.

Step 2. Set up a budget. You should make a savings goal. Look at the Internet for a college cost calculator to get a rough idea of what you need to save. Then figure out how much you can put away each month to reach this goal.

Step 3. Save regularly. Get into the habit of investing a set amount of money monthly. This will set the habit of education future planning. Not a good saver? Have an automatic payroll deduction made or an automatic deposit withdrawn. This way the money is out of your checking account before you can use it.

Step 4. Use professional assistance. That’s what they’re there for. Unless you are a financial wizard yourself, talk with an experienced accountant, financial advisor or lawyer. Ask what they are doing for their children. It helps to know that your advisor can personally relate to your college savings strategy.

Step 5. Think about a 529 plan. Even if you haven’t started saving as early as you had planned a 529 plan or even a Coverdell ESA are still useful. The 529 plans offer many tax advantages. Your money will actually grow in a tax-deferred style and if your withdrawals are qualified, they will be exempt from federal income tax. Many states even give tax deductions from state income tax. Check with your state’s 529 provider for more details.

Step 6. Save in the parent or guardian’s name, not the child’s. This minimizes the impact of the fund on need-based financial aid. Also, this will prevent an irresponsible child from using their education savings fund or 529 for non-qualified purchases.

Step 7. Diversify your investments. For example it is better to invest in mutual funds than just stocks. Mutual funds spread out the risk over many stocks, which can prevent the drop in value of one stock from ruining the value of your whole portfolio. Or invest in both stocks and bonds. A good plan would be to have a mix of high and low risk investments.

An age-based 529 savings plan is a simple way to balance your portfolio. Younger children have a higher percentage of high-risk investments than older children. As children are just a few years from college, an age-based 529 plan would have almost all funds invested in low risk investments.

Step 8. Be flexible. A great new college program may be available just a few short years from now. Tax laws will change and your income circumstances may change, too. Review the steps you’re taking from time to time and be willing to make adjustments.

If you find that the assumptions behind your investment plan are not correct or your tolerance for risk has changed, you may need to change your investments. Don’t sell an investment just because the market is low; sell because of how the investment is predicted to do in the future.

There are so many important steps to take when saving for college. Any money you are able to tuck away today makes the road to college that much smoother for your child.

What’s Up with 529 College Plans in Texas?

States' 529 college savings incentives plans have become the newest way for families to save money for their children's future higher learning educational expenses. In Texas, there are two popular sections 529 college savings incentive plans that can help you save for the education your children deserve.

What Are the Two 529 Savings Incentive Plans in Texas?

The 529 savings incentive plans in Texas are known as Texas Tomorrow Funds. Separately, there are two funds: the Texas Tomorrow's College Investment Plan and the Texas Guaranteed Tuition Plan. Here is a brief overview of each plan so you can decide which one would work best for your family. But remember, you can also choose to invest in both plans if you so wish.

The Texas Tomorrow's College Investment Plan

This plan is managed by the Enterprise Capital Management group. The basic purpose of this 529 savings incentive plan is to provide a safe and secure tax-benefited investment vehicle for families who want to save for college. The Texas Tomorrow College Investment plan offers great flexibility, with a choice of over 20 different investment portfolios to choose from.

The Texas Tomorrow's College Investment plan allows your money to grow in a tax-free environment. It also allows for tax-free withdrawals when you are withdrawing earnings to be used for qualified education expenses.

What Expenses Are Covered by the Texas Tomorrow College Investment Plan?

The Texas Tomorrow's College Investment Plan covers all the basic higher education-related expenses, including tuition and mandatory fees, expenses related to room and board, textbooks and supplies, and some transportation costs. The Texas Tomorrow College Investment plan is very accessible, with easy year-round enrollment available. There are no age limits on this plan.

What Tax Benefits are Associated with the Texas Tomorrow College Investment Plan?

There are many tax benefits associated with this plan, including many federal tax benefits. Federal tax benefits for this plan include tax-free earnings, access to HOPE and Lifetime Learning tax benefits, as well as access to other favorable federal tax estate and some gift benefits.

Your Other Texas 529 Option The Texas Guaranteed Tuition Plan

The other section 529 plan available in the state of Texas is the Guaranteed Tuition Plan. The Guaranteed Tuition Plan helps families lock in the cost of a higher education today. It is a basically a prepaid plan where you can pay for your children's future college expenses at today's cost.

The plan allows you to use the benefits at any accredited institution of higher learning in the United States. The benefits of the Guaranteed Tuition Plan are protected under constitutional guarantee by the State of Texas. In most cases, earned distributions on the Guaranteed Tuition Plan are tax-free when they are used for most kinds of educational expenses.

What Expenses Does the Guaranteed Tuition Plan Cover? What about Tax Benefits?

The Guaranteed Tuition Plan covers only the basic expenses, which includes tuition and any mandatory fees. As for tax benefits, the Guaranteed Tuition Plan offers the same federal tax benefits as the Texas Tomorrow's College Investment Plan, which include tax-free earnings, access to the HOPE credit and Lifetime Learning credit, and other favorable federal tax credits.

What Are the Restrictions of the Guaranteed Tuition Plan?

There are certain restrictions on the Guaranteed Tuition Plan. For instance, the Guaranteed Tuition Plan has an age limit, available only for those newborn to 12th grade. Another restriction on the Guaranteed Tuition Plan is that it is not available for year-round investment.

Check the State of Texas web site for dates on when to enroll in the Guaranteed Tuition Plan. Also, to open a Guaranteed Tuition Plan account, you must be a citizen of the State of Texas.

States that Come Close to the 5-Cap Rating with 529 Plans

As your looking at plans, it’s a good idea to know about the states that come close to 5-cap rating with 529 plans. Let’s face it, the smartest thing you can do is pick the very best plans for your money. Ratings are assigned to each states program ranging from 1-cap (not very attractive) to 5-caps.

The cap system is based upon opinion and is not a formula. Different people might weigh these items differently. Case in point, some plans have different age requirements that affect their ratings. If your child meets these age requirements, this would be a non-issue.

The cap rating system prefers 529 plans that are flexible. You want a plan that easy rolls over to other state plans with no penalties and gives you freedom to change beneficiaries. It’s best to be able to have high maximums and low minimums with wide eligibility for owners and beneficiaries.

When it comes to liquidity and availability, you want to be able to use the account immediately for college expenses. It needs to be easy to deposit and withdraw from the account. Also, the ability to take out monies for items other than education without the account being closed is important.

To score high caps, the owner should be in control of the account. This means their ownership rights include being able to transfer ownership at any time and be able to name a new beneficiary in case of death.

The states that score the most caps back up their programs with additional state level benefits. In these states, there are things like state tax deductions for contributions and exemption for college used earnings. You may find exclusion of 529 accounts when you are applying for state financial aid. And of course, some states offer some great extra perks like loan programs and matching grants.

Another important scoring point is the state’s approach to investments and safety. The name of the game is lots of choices. It’s great to find well-designed investment plans and high rated portfolios. Low fees and expenses as well as age-based discounts on pre-paid tuition are key. The 5-cap states guarantee of pre-paid tuition contracts and downside investment protection.

Program resources need to have thorough and complete program materials including web site access. Having a call center is not enough; you need people there that are excited and knowledgeable about 529 plans. Finally, the cap ratings prefer successful efforts to gain favor from the IRS regarding status as a 529 plan.

The 5-cap rating is not based solely on historical returns. It does not predict the risk levels or predict future investment performance or how solvent the program funds are. This is just a measure of how useful the state’s 529 plan is based on the discussed factors.

The 5-cap programs offer great flexibility, attractive investments and benefits such as state tax breaks. These factors can add volume to your savings. In the 5-cap program, you will find very few weaknesses. Even a program rated 3-cap offers some very good benefits but may have some concerns that you need to research.

Now that you are refreshed on the positive aspects of the 5-cap rating, which states come close? The eight having plans for residents that are rated 5-cap are Alaska, Maryland, Michigan, Ohio, Rhode Island, South Carolina, Utah and Virginia.

Honorable mention should go to the 4-½ cap states of Colorado, Connecticut, District of Columbia, Georgia, Illinois, Indiana, Iowa, Louisiana, Minnesota, Mississippi, Missouri, Nebraska, New Mexico, New York, Oklahoma, Oregon, South Dakota, Vermont West Virginia and Wisconsin. Now that you know which states come close to the 5-cap rating with 529 plans, perhaps you can invest with just a bit more wisdom.

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