You may have heard of the prepaid tuition plans where money is paid into an account that locks in today's tuition rates. Like them, section 529 plans are for the benefit of a designated beneficiary's higher education expenses in the future. Unlike them, 529 plans allow money to be invested and grow!

Since the investment is allowed to compound using Uncle Sam's deferred taxes, and it is taxed at the beneficiary's tax rate upon withdrawal, a significant tax savings is likely. In 1999 Congress tried to make the withdrawals tax-free, but President Clinton vetoed the idea.

From a control perspective, these plans have significant advantages. In a section 529 plan, the contributor maintains complete control of the money, even being allowed to withdraw money (with penalty) from the account or to change beneficiaries. In a more typical minor's trust, when the minor reaches the age of majority, the custodian loses all control, and the money is the minor's to do with as he or she pleases.

The maximum gift to a minor's trust before a gift tax return must be filed is $10,000 per year per giftor. In a section 529 plan, the contributor may give up to $50,000 at one time per beneficiary, with no gift tax consequences. Despite the contributor's complete control over the funds, a contribution to a 529 is treated as a completed gift-immediately excluded from the contributor's estate, resulting in a potential estate-tax savings.

The investment opportunities in 529 plans differ between states, and contributors are not limited by any residency requirement. So it makes sense to examine the different state plans and pick one, or several, that meet your investment style and long-term needs.

In most cases, once the investment is made, it cannot be changed. For example, in Iowa's plan a mutual fund family uses an index approach, based upon the beneficiary's age at the time the contribution is made. For example, a 5-year-old's portfolio would be 80% stocks and 20% bonds, a 10-year-old's, 60% stocks and 40% bonds; and so on. Other states use actively managed mutual funds or even FDIC-insured accounts with CDs, so their investment performance could be significantly different over time from those using indexed accounts. Several states allow the contributor to make a one-time election between the age-based plan and a static asset-allocation investment style.

If you will contact my office, we will be happy to fax you a list of state plans and contact information.

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