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Computerized Investing > July/August 2003

On the Internet: College Financing and 529 Savings Plans

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by CI Staff

Studies have shown that earning power improves with the level of education. Whether you are looking into college for a grandchild, child, friend, or yourself, there are steps that can be taken to lessen the financial burden of higher education. Different savings plans and tax laws exist to help, but the common denominator between them all is always to start saving and start early.

One popular savings vehicle is the 529 plan, a qualified tuition program that is named for the section of the tax code that authorizes them. There are two types of 529 plans: prepaid tuition plans, which allow you to prepay future tuition and fees at today’s costs; and college savings plans, which allow you to contribute to an account set up to pay qualified expenses at any eligible college or university. Each state offers its own versions of these plans, and the rules differ. Contributions to 529 plans are made with aftertax dollars (no tax benefit for contributions), but then grow tax-free at the federal level. Withdrawals from 529 plans to pay for qualified education expenses are free from federal taxes. There may be additional state tax benefits for a 529 plan from your home state. Note that the tax-free withdrawal provision is set to expire in 2011 unless renewed by Congress.

Several Web sites can be quite helpful in answering common questions and obtaining important information on 529 plans. The following sites provide financial calculators, how-to guides, and Q&A sections to aid in your quest to finance higher education.

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