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Most states and Washington D.C. offer 529 plans (many offer more than one), and each is vastly different. Expenses vary widely. So do the investment choices, outsourced to companies such as Fidelity, TIAA-CREF, Strong, and MFS. Investors can choose a plan from almost any state, but some states, including New York, Idaho, South Carolina and Wisconsin, offer state tax breaks for residents who invest in in-state plans.
Illinois charges residents a 3 percent tax on earnings from a 529 plan sponsored by another state.
Maine this year also started charging state taxes on any earnings that residents amass in a 529 plan that's run out-of-state, however the tax will expire after 2005.
Tennessee issued a ruling that makes it clear that residents will owe a 6 percent tax on interest and dividends earned in out-of-state 529 plans. The levy does not apply to any interest and dividends earned in Tennessee's 529 plan.
Missouri is bucking the trend and lawmakers are considering a bill that would allow residents to claim state tax breaks for contributing to a 529 plan -- even if it's one that's sponsored by another state. Specifically, Missouri residents would be allowed to deduct to $8,000 in annually in 529 contributions from their state income taxes. The Missouri House of Representatives passed the bill and the Senate is now considering it.
New York residents who leave the state's 529 plan, which is run by TIAA-CREF, for another plan will have to pay state taxes on any earnings they've amassed and that they roll into another program. New York allows taxpayers to deduct up to $5,000 a year in 529 contributions from their state income taxes. But effective this year, those who switch 529 plans will have to repay those tax savings. In addition, Gov. George Pataki's proposed state budget would boost New York's 529 fees to 0.65 percent up from 0.6 percent. The New York plan -- rated one of the best in the nation by CNN.com and Money magazine -- currently boasts the second lowest fees in the nation, after Iowa.
A group of over 300 private universities and colleges has opened a new 529 plan of their own. This program features the federal tax benefits of any other 529 program (that is, earnings will grow and be withdrawn tax free if used for college costs This provision is subject to potential sunset revisions on December 31, 2010. At this time Congress may change the tax-free withdrawal status for qualified education expenses). But the program will have the added benefit of allowing participants to lock in private college tuition rates when they start contributing to the 529.
Many states have long had such "pre-paid" tuition programs for their public universities and the group means to give consumers who want to send their children to private universities similar savings incentives. "The moment you put a dollar into it, you lock in the tuition at all the participating schools," said consortium president Doug Brown, adding that if a student opts for public college or university, they can roll over their 529 plan savings tax-free to cover education costs at those state schools.
The Independent 529 Plan is a prepaid tuition plan that enables you to lock in future tuition costs at over 230 private colleges (and counting) - and get a discount on today's prices. Through the Plan, you purchase certificates that can be used to pay future tuition costs. When the student is later accepted at a member college, the certificate can be used to pay the percentage of tuition you pre-purchased. Independent 529 Plan is the first 529 plan sponsored by private ('independent") colleges, and Program certificates can be redeemed for tuition at a broad array of independent colleges nationwide. It's a guaranteed plan that offers: -
Freedom from Market Risk*
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Freedom from Tuition Inflation
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Freedom from Federal Taxes**
* If you take a refund, rather than redeem your certificate for its intended purpose, the refund will be adjusted based on the net performance of the Program Trust, subject to a maximum return of 2% per annum and a maximum loss of 2% per annum.
** While there is no up front tax deduction, you will not need to pay federal taxes when making a qualified withdrawal. The law allowing for federal income tax-free qualified withdrawals is set to expire on December 31, 2010. Congress may or may not extend this law beyond this date. Future changes in the law may create adverse tax consequences, or lead to termination of the Plan.
With mutual funds and other college savings options, you invest your money in stocks or other securities in the hope that your returns, minus any taxes you might have to pay, will enable you to meet your goals. You may worry that the market will turn, just when you need the funds for college. Because Independent 529 Plan guarantees a distinct tuition benefit at each member college when you buy, you don't have to risk your money in volatile investment markets to keep up with rising college costs. And the plan charges no sales, application or maintenance fees. Because the plan's goal is to make private college education more accessible, it offers guaranteed value to every family that participates.
You can use Independent 529 Plan certificates to pay for undergraduate tuition and mandatory fees. (Room and board and graduate school tuition are not covered at this time.)
In addition to protection from tuition inflation, Independent 529 Plan provides a certificate discount that enables you to purchase future tuition at less than current prices. The certificate discount varies by institution but is never less than 0.5% per year.
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