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New member of family? Consider 529 plan

New member of family? Consider 529 plan
(Dreamstime)

The text message from my oldest son landed in the wee hours of a recent Friday morning announcing the arrival of a baby girl.

As ecstatic new members of the grandparents club, my wife and I made a quick dash three-hour drive to meet the newest member of our family. When we arrived at the hospital, we were directed to a fifth-floor room.

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What was the first thing I saw before we entered the room to meet our granddaughter for the first time? It was the room number, 529.

What was the first thing that came to mind? College savings plans, of course. How appropriate.

And what was one of the first questions I asked my son now that he and his wife were officially parents? You are planning to open a 529 account, aren't you?

When it comes to socking away money for college, there's a lot to like about state-sponsored 529 savings plans. The accounts are easy to open, buyers have a number of investment options, federal and in most cases state tax breaks are available, and the federal government recently expanded ways to use the money.

If you have a little one in your family, this is the perfect time to open a 529 account. You have about 18 years to salt away money.

There are no annual contribution limits to 529s. However, there are maximum aggregate limits that vary by plan.

One of the advantages of a 529 is that you can aggressively invest in stocks when your child is at a young age and there's time for earnings to compound.

But don't rush into this investment decision until you've done some research on how your state plan stacks up with others. Ask about fees, minimum investment requirements, and investment choices.

When it comes to filling out paperwork, there are relatively few hoops to jump through especially if you open an account directly through the state rather than with a brokerage firm.

The college savings plans, while popular, aren't the only game in town, so you may want to compare Coverdell education savings accounts, U.S. Savings Bonds, and other investments and their tax implications.

State-sponsored 529 plans were created more than 20 years ago to help families saving for college keep up with fast-rising tuition. Distributions from these accounts are tax-free for an ever-wider range of qualified college expenses, including tuition, room and board, textbooks, enrollment fees and computers and software.

The 2018 Trump tax reforms added a provision that allows families to withdraw up to $10,000 a year from a 529 account to pay tuition for kindergarten through 12th grade without federal taxes or penalties.

At last count, 34 states plus the District of Columbia allow a tax deduction or credit to residents, usually to their home-state plan. Some states offer the tax breaks even if the money is invested in another states' plan.

As I've noted in recent columns, some states offer so-called prepaid tuition 529 accounts that lock in future tuition costs at today's rate. More than 300 private colleges also participate in a 529 prepaid tuition program.

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Already feeling overwhelmed? There are ample resources online or at the library to tap into that are strong on the mechanics and investment strategies.

One of my favorites is the www.savingforcollege.com website or its companion book, the "Complete Guide to 529 Plans."

Questions, comments, column ideas? Send an email to sbrosen1030@gmail.com.

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