February 20, 2005 06:00 AM
Flaws Showing in 529 Plans for College Savings
Excerpt: In recent months, 529 plans have been under severe scrutiny by a task force of the Securities and Exchange Commission, both houses of Congress and the National Association of Securities Dealers. Their shortcomings came to light recently as a result.
Worried about how you'll send your kids off to college? You're not alone. According to a recent survey, 44 percent of parents say they are not prepared to pay for their children's college education, though 65 percent fully expect their kids to attend.
Even scarier: 16 percent of parents plan to dip into their retirement funds to help out their kids, and another 7 percent plan to finance at least a portion of education with credit cards. Eeesh.
We have the perfect savings tool for college funding available to us -- 529 plans, those state-sponsored savings programs that allow you to sock away thousands of dollars a year in a tax-deferred account for your kid's (or grandkid's) higher education.
Well, OK, they're not quite perfect. Some might call them seriously flawed. In recent months, 529 plans have been under severe scrutiny by a task force of the Securities and Exchange Commission, both houses of Congress and the National Association of Securities Dealers. Their shortcomings came to light recently as a result.
A mini primer
There are two types of 529 plans -- the tuition prepayment plans, where you pay ahead for tuition costs that are applicable to the public universities in your state. These more-restrictive plans came on the scene in the 1980s and are now waning in popularity as the newer 529 savings plans, introduced in 1997, take a foothold in the marketplace. So far 529 savings plans have attracted $45 billion of assets nationwide.
The pros of the savings plans: Earnings grow tax-free, and when it's time to matriculate, you can take the money out without paying federal taxes, as long as the money is used for qualified education purposes. (Its federal tax-free status sunsets in 2010, unless Congress extends it, which it is expected to do.)
On top of that, the earnings may be free of state taxes, and you may also get handsome state income tax deductions for contributions made along the way.
Each state has at least one type of 529 plan, some have both types, and a few even offer several different versions of the savings plans.
Drawbacks of 529 savings plans
They are not regulated under federal securities laws, so they lack the transparency of other securities. As a result, disclosure about all the various fees involved with these plans has been inconsistent and spotty at best, making it all but impossible for people to make apples-to-apples comparisons between plans.
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