Texas has opened a new pre-paid college savings plan to replace the shuttered Texas Guaranteed Tuition Plan. The new plan is called Texas Tuition Promise Fund. Details are forthcoming, and you can read more on our Texas 529 plan page.
What better time than back-to-school time to think about saving for college. Congress passed a resolution back in 2003 to make September College Savings Month. It’s a time to reflect on your goals of saving for college. Have you set up a 529 plan? Are you contributing enough to the plan to meet your goals?
For more assistance setting up a 529 plan, be sure to visit the 529 plan guide.
529 plans are a great way to save money over the long term for your child’s education. But there’s a huge tax benefit for people who’s kids or grandkids are already in college or starting this fall. This loophole works for people who live in states with state income tax benefits on their 529 plans.
Here’s an example, as illustrated by the Charleston Post and Courier. Say you have a tuition bill due in a couple weeks for $10,000. You can contribute $10,000 today to your child’s 529 account, and then withdrawal it next week to pay the tuition bill. South Carolina’s 529 plan offers a state income tax deduction for contributions to a 529 plan, so you would be able to deduct $10,000 from your income on your state income tax return this year even though you only had the money in your 529 account for a week.
Many other states also have this loophole because there’s no waiting period for getting the deduction. Of course, this doesn’t have anything to do with federal tax benefits of 529 plans, so it only applies if you live in a state with a 529 plan offering upfront tax benefits with no waiting periods.
Money Magazine has a new article, just published on CNN.com, about 529 plans. It asks if 529 plans are still the way to go. The answer: absolutely, except in very rare circumstances:
The tax breaks usually make 529s unbeatable. Say you’re in the 28% tax bracket, have a five-year-old and save $200 a month in Utah’s low-cost 529, which has annual expenses of 0.38%. Assuming annual average returns of 5%, you’ll have $39,100 by the time your kid is 18. Invest the same amount in a taxable account with equal fees and returns, and you’ll have $36,200 after taxes. In other words, you’ll lose $2,900.
The 529 comes out even further ahead if your state allows you to write off all or part of your contributions (33 states and the District of Columbia will let you do that).
If you invest in either of Wisconsin’s 529 plans, I’ve got good news for you. Last week the plans received hefty increases in the maximum you can contribute over the life of the plan from $246,000 to $330,000.
Keep in mind that this number represents the maximum you can contribute. If your investment earnings surpass these amounts you’re OK.
To read about the Wisconsin Edvest 529 plan or the Tomorrow’s Scholar 529, visit the Wisconsin 529 page.