529 Plans: The Tax Break for the Next Generation
By now, almost the entire nation is aware of the economic advantages of a college education. It has been targeted as the single greatest deterrent to a person's wage advancement and the administration has focused on schools at the primary and secondary level to help create the opportunity for more kids to attend a school of higher education.

Back in the early nineties, the first 529 plans were rolled out to consumers who were looking to save for the ever-increasing cost of that education. In August of 2006, Congress made the tax breaks offered by these plans permanent, giving an increased advantage for parents and grandparents to help with rising tuition costs.

Named after the section in the IRS tax code, investors are able to deposit after tax income in an account. That money can be directed in numerous ways, usually through mutual funds although not exclusively, and allowed to grow.

The money can be withdrawn free of Federal tax by the student to use for almost all school expenses (tuition, books, and board). Some states even offer a locked in tuition ratemaking the target number less elusive.

As with many underused programs such as 529 plans, the companies offering them sought to profit from them with exorbitant fees. Minimum initial investment charges were often prohibitive to younger parents. Some companies also charged annual fees as high as $20 regardless of the account balance.

529 plans received an additional bad rap when brokers were accused, many rightly so, of directing their clients to funds that offered them incentives driving the cost for the consumer higher yet.

But that has changed. Now that the tax breaks are permanent ­ they were set to expire in 2010 and fees on the accounts have come down to more reasonable level ­ most are now in the 0.3% to 0.6% range.

On the state level, additional tax breaks on deposits have increased. And often, consumers can save additional money by buying the plans directly from the state.

Is this plan good for everyone? Not necessarily. Even with tuition rates soaring, in some place over 35% in the last five years (adjusted for inflation), there is still a wage limit that justifies alternatives.

A household earning less that $80,000 might find the money better spent growing their kids. The cost of raising children and giving them all of the academic and extracurricular advantages might very well be money better spent that saving, no matter what the tax break might be.

Sacrificing your retirement plan for the sake of a 529 plan would not be wise either. Often, at that income cut-off, families find themselves in a paycheck-to-paycheck world where underfunding daily life might lead to increased debt.

Beginning a plan too late is something to consider as well. Because of the contribution limits and the short amount of time to allow the money to grow, parents might want to tap into mutual funds held outside of retirement plans or take a one time withdrawal from their IRA.

In a Roth IRA, the principal has already been taxed and is available for withdrawal after five years.

Like all investments, the math is the most important consideration. Your savings should not increase your debt burden. The fees should be reasonable and the performance of the fund should be better than the S&P dating back ten years.