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Parents Planning for College Expenses Should Consider a 529 Plan

October 17th, 2012

For parents, the cost of college is a big consideration in financial planning.  One option to help with college savings is a 529 plan, but it is important to understand the risks and benefits before getting started.

The 529 plan is named after the section of the Internal Revenue Code that describes it, and the ability to save on federal income tax is one of its prime advantages.  When you take advantage of a 529 plan, you are creating a college savings investment account, from which money can later be withdrawn for tuition, books or other expenses related to higher education, tax-free.

In New York, the 529 College Savings Program Direct Plan is administered by Upromise Investments and the Vanguard investment company.  Investors may open an account with as little as $25, and can invest for the benefit of a child, grandchild or even for themselves.  Vanguard manages the investment portfolio and charges a fee of 0.17 percent of account assets annually.

Earnings are federally deferred and can be withdrawn tax-free for the education expenses of the beneficiary.  In New York, investors can also deduct up to $5,000 in contributions to the 529 plan from their state income taxes.  Contributions can be made to the plan through an automatic payment plan or payroll deduction, as well as by check or wire transfer.

Of course, investments are not guaranteed, and depending on the performance of the stock portfolio, it is possible to lose money with a 529 plan.  Contributors have the ability to manage their own portfolio, but parents should consider the inherent risk in market investments before choosing a 529 plan.

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