Don't Wait for New Year to Start a 529 College Savings Plan

Those who act now may benefit from state income tax deduction

LEXINGTON, Ky., Dec. 12 /PRNewswire/ -- For most people, setting financial goals is an important part of starting off a new year. The start of 2008 is an ideal time to develop strategies to reduce personal debt or adjust a financial portfolio to reflect changing market conditions. But for those who are looking to start a 529 college savings plan for a child or grandchild, there is no better time than the present. In 33 states and the District of Columbia, those who open and contribute to an account in their state's 529 plan before the end of the year can take advantage of attractive state income tax deductions or credits.

According to the College Savings Plans Network (CSPN) -- a nonprofit association representing 529 college savings programs -- 49 states and the District of Columbia offer some type of 529 program. Whether it is a traditional 529 savings plan (which allows investors to select market-based financial products similar to mutual funds), or a 529 prepaid tuition plan (which allows individuals to prepay future college tuition based on current tuition rates); contributions to 529 plans in states with state income tax deductions and credits enable investors to deduct some, if not all of their contributions from their state income taxes. To take advantage of the deduction in 2007, typically contributions need to be made prior to the end of the year. In 2006, more than $8 billion was contributed to 529 plans in the last three months of the year.

"Often, people think they have until the April 15 tax deadline to contribute to a 529 program and still deduct it off their previous year's state income tax," said Jackie Williams, executive director of the Ohio Tuition Trust Authority and past chairwoman of CSPN. "However in most states you need to make the contribution before the end of the calendar year in order to take advantage of a 2007 state income tax deduction. If you've been thinking about investing in a 529 plan, there's really no better time to act than now."

A state income tax deduction or credit is just one of many benefits of a 529 plan. Investment earnings grow federal and state income-tax free, while withdrawals used for higher-education expenses are exempt from federal income taxes. Most states also allow for tax-free withdrawals.

Another advantage is that plan owners, who are typically parents or grandparents, retain control of the account and can designate a beneficiary. If a child receives a scholarship or does not go to college, the account beneficiary can be changed to another child in the family or the contributor can withdraw the money from the account. In addition, most plans offer payment methods that make saving for college convenient and affordable.

Those who are interested in learning more about the benefits of 529 plans are encouraged to visit CollegeSavings.org. The Web site, which is administered by CSPN, offers a variety of resources and information, including an investor education component called The 529 Classroom. This special section explores the importance of saving for college and provides useful facts about 529 plans.

For those actively searching for a plan, CollegeSavings.org includes information on all state-administered 529 plans across the country. The Compare 529 Plans feature enables visitors to search 529 plans by state or by plan features. By electing to search by feature, visitors can select from several criteria, including: plan type (savings or prepaid), state tax or other benefits, fees, investment options, investment managers, minimum initial and subsequent contributions and maximum total contributions. Visitors can select one or all of these criteria to produce a side-by-side comparison of plans that suits their needs.

Users can also search 529 plans by state. This feature allows for side-by-side comparison of plans, giving consumers a quick-and-easy checklist of important attributes to consider. This feature is particularly beneficial for those considering multiple plans or two plans offered by the same state.

To round out the site, CollegeSavings.org offers a host of information, including downloadable literature, relevant news articles and links to government and nonprofit sites. The Additional Resources section is packed with third-party resources that are free to visitors.

Founded in 1991, CSPN is an affiliate of the National Association of State Treasurers. Established to make higher education more attainable, the network serves as a clearinghouse for information among state-administered college savings programs. Additionally, CSPN monitors federal activities and promotes legislation to enhance Section 529 plans for the benefit of plan savers.