In last week’s issue of Financially Fit, we discussed the workings of 529 plans, the investment vehicles designed specifically for college savings. I also talked about the differences between the two types of plans currently being offered: Prepaid and savings.

This week, I want to tell you about the numerous benefits for both the owner, as well as the beneficiary, of 529’s, as well as give you some resources for further research.

529’s plans offer tremendous advantages and benefits:

Income tax breaks. Your investment in a 529 grows tax-free as long as the money stays in plan. But that’s not all. When the plan makes a distribution to pay for a beneficiary’s college cots, that distribution is also federally tax-free. Additionally, the state in which you reside may offer tax breaks, including a partial or full state tax deduction on contributions by its residents.

The owner of the account controls the account. Unlike other minor-related accounts, beneficiaries of a 529 – with few exceptions – have no right to the funds. Most 529’s also provide for a refund of the contributed funds to the owner, at any time, although a nonqualified withdrawal will be subject to income tax as well as a 10% penalty tax. One exception: If the beneficiary of the plan receives a scholarship and doesn’t need the 529 funds, you may withdraw the funds without the penalty (although they will be subject to income tax) .

You can change the beneficiary at any time.

529’s are a simple method to sock funds away for college. No reams of legal documents, just an easy enrollment form. Investors can make individual contributions or sign up for automatic deposits. You won’t receive a Form 1099 until the year in which you make withdrawals of funds. In the savings option, investments can be moved around or rolled over to a different plan, annually.

Everyone is eligible and contributions can be substantial, more than $300,000 in some states. There are no income limits or age restrictions. If you’ve always wanted to go back to college, you can even set up a plan with you as the beneficiary. In my state, Tennessee, the prepaid plan allows contributions of up to $235,000 per beneficiary for state residents.

Funds are not limited to paying tuition. They may also be used for fees, room and board, books, supplies and equipment.

Assets within 529 plans are protected from bankruptcy.

529 plan contributions can increase the amount of eligible gifts allowed in any one tax year. The contributions are treated as a gift to beneficiaries for gift tax and generation-skipping transfer tax purposes and qualify for the $12,000 annual gift tax exclusion. Currently, contributions between $12,000 and $60,000 may be treated as if they were made over a 5 calendar year period.

Please note that funds in 529 plans will be treated as an asset of the parent or owner in determining eligibility for financial aid. And please also be aware that the rules are subject to constant change. To ensure that you are maximizing your contributions and minimizing your taxes, please consult your personal financial advisor for help in creating and structuring your own 529 plan.

Here is a link to one of the best sites I found for information on 529 plans. This site also includes ratings of individual plans as well as lists of eligible institutions:

http://www.savingforcollege.com/college_savings_201/

Once you’ve researched the plans, here are some questions that may help you determine which plan is right for you:

Is the plan available directly from the state or plan sponsor? What are the fees? How much commission is the broker paid? How can I reduce or waive certain fees?

What are the restrictions on withdrawals? What college expenses are covered? Which colleges and universities participate in the plan?

What investment options are offered? How long are contributions held before being invested?

Does the plan offer special benefits or tax advantages for state residents? If it charges higher fees than another states’ plan, do the tax advantages or other benefits offered by my state outweigh the benefits of investing in a less expensive plan in another state?

What are the limitations of the plan? When can I change investment options, beneficiaries, or transfer ownership of the account?

What is the past performance of the plan? Who is the program manager and when does his current management contract expire?

For additional information, you will want to review the offering circular or disclosure statements for the 529 plan. This document provides detailed information about the plan’s tax benefits, fees, expenses, investment options, financial aid, limitations and risks. As well, you might wish to consult the prospectus of the underlying mutual funds in the plan. Prospectus information can be found at:

http://www.sec.gov/edgar.shtml

Additional resources:

The College Savings Plan Network, created by the National Association of State Treasurers has links to most 529 plan websites.

http://www.collegesavings.org/

For information regarding investment advisors or broker/dealers for the plan, including disciplinary sanctions, background and licensing status, go to:

http://pdpi.nasdr.com/PDPI/

And lastly, the NASD and the SEC both have reams of helpful information on the following link:

http://apps.nasd.com/investor_Information/Smart/529/000100.asp

As a vehicle for easy college savings, 529 plans can’t be beat. But with so many plans available, it would be to your benefit to carefully compare them prior to investing, and to consult your personal financial advisor to ensure that your plan will suit your individual needs.