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California Section 529 College Savings Plans
 

 

     Section 529 plans


     Section 529 plans are also known as QTP, or Qualified Tuition Plans. Right now there are two main types of QTP, the pre-paid college tuition program and college savings plans. These plans are named after the 529 section of the Internal Revenue Code, which basically states the plans are free from federal, state and local income taxes. Detailed 529 plans are backed by your individual state.

  1. Prepaid Tuition Plans
  2. College Savings Plan


Section 529 plans
1. Prepaid Tuition Plans
   This plan allows parents to lock in current rates of tuition now, that are guaranteed to increase in value as college costs rise. For example, if you purchase a full year of state college today, for your 4 year-old child, when he/she is ready to attend college at the age of 18, a full year will already be paid for, even though tuition costs may have doubled since then. Your pre-paid tuition plan is not subject to Federal taxes, and this will also benefit you. Also, individual schools are now allowing for pre-paid tuition credits and some colleges are in a national 529 plan which allows your child to choose a school with in that network. If your child chooses not to attend college, the credits can be transferred to someone else in your family, reimbursement is almost never an option.

2. College Savings Plan
   This 529 plan is a tax-exempt savings plan in which you invest your money in a low risk portfolio, not unlike a 401k plan, IRA or mutual fund. These plans offer protection against inflation and guarantee a fixed rate of return. Anyone can contribute to your fund, whether it is relatives, neighbors or even complete strangers! The college savings plan falls into unique tax status and can be a benefit to grandparents looking to plan their estate. There is a cap on how much money can be in a college savings plan, and Federal law requires the state sets this ceiling with estimations on cost of current college costs.

 

    While the Section 529 plans may sound like the answer to all your questions, there are downfalls and disadvantages. There may be annual fees associated with having a college savings plan account, pre-paid tuition plans can drastically impact your financial aid status, and early withdrawal will not only incur an income tax, but a 10% tax penalty is added to the lump sum of the withdrawal. When finding a Section 529 plan, make sure to read the fine print and select the one that best fits your need.