529 Plans, By the Book

By Michelle Singletary
Sunday, December 3, 2006

Thankfully, securities regulators have been examining more closely the sales of 529 plans, an increasingly popular way for families to save for college.

But even as those overseers are doing their part to ensure that 529 plans are properly sold, we investors bear most of the burden of finding independent research on 529s.

And I have just the resource. The December pick for the Color of Money Book Club is "The Best Way to Save for College: A Complete Guide to 529 Plans" by Joseph Hurley (Savingforcollege.com, $22.95).

This is the one of the best books on 529s, and it's written by the most knowledgeable person about these plans I know. I mean that. Hurley, a certified public accountant, is the founder and chief executive of Savingforcollege.com, a Web site that concentrates solely on providing the most up-to-date and readable information on 529 plans.

Hurley is both a champion and critic of everything about state-sponsored 529 plans, which gained federal tax-exempt status in 2002. That status, which was slated to expire in 2010, was made permanent by Congress this year.

"Section 529 plans provide some powerful and unique tax advantages not available with other college-saving options," Hurley writes.

There are two types of 529 plans: prepaid tuition plans and savings plans. A prepaid tuition plan allows people to pay a child's tuition in advance. The more popular savings plan allows people to invest in a tax-free investment account. Money withdrawn from a 529 investment is free from federal tax (and in most cases free from state and local taxes as well) when used for qualifying college costs. Additionally, many states offer a deduction for state residents who make contributions to a 529 plan.

Although the 529 plans are state-sponsored, you can invest in any plan regardless of where you live. And money invested in a 529 plan can be used for a state or private institution. Every state and the District of Columbia now offer at least one 529 plan.

Personally, Hurley has opened more than 50 of the 529-plan accounts, in 32 different states. Don't try this yourself. It's not necessary. Although he has only two children (ages 20 and 16), Hurley opened the accounts to get a firsthand look at how the plans are run. He says in his book that most of the money he and his wife saved for their children's college education was placed in 529 plans.

There's a lot you should know about these plans before you select one, and Hurley walks you through it step by step.

He starts with a glossary. I like that. It's right up front to help investors get familiar with the terms they will see and hear when opening an account.

Hurley then gives some historical background on 529 plans. Don't skip this section, especially when he describes the changes some states have made after investigations by the Securities and Exchange Commission of mutual fund trading.

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