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State College Savings Plan
The appeal of this plan is that you don’t have to decide
which college your child will attend while he or she is still
in diapers. So far, only about 25 states have these new plans
up and running.
The college savings plan differs from prepaid tuition plans
in that it does not lock in your future tuition at today’s
rate, and it is not guaranteed. However, these plans don’t
restrict students to in-state colleges only.
The college savings plan differs from the prepaid plan in
much the same way that a self-directed 401(k) plan compares
to a defined benefit pension. It allows more flexibility and
potentially--over the long-term--higher growth opportunities.
Advantages:
- State tax deductions on contributions if you live in the
state issuing your plan.
- State tax-exempt earnings.
- Federal tax deferral on earnings.
- Earnings taxed at the beneficiary’s income tax rate
when distributed.
- Maximum annual contribution of $50,000 ($100,000 lifetime
maximum).
- Low administrative and investment fees, generally 1% or
less.
- No age restrictions.
- No income phase-out restrictions.
- No residency requirements--you can purchase a plan from
any state.
- Asset allocation automatically adjusts to more conservative
investments as beneficiary approaches college age.
Disadvantages:
- Plan proceeds are not guaranteed, and you can lose principal.
- You may not lock in current tuition rates.
- Opening an account in no way guarantees admission to any
particular college.
- Relative inability to control where your money is invested
and who manages it, as most states have very few options
from which to choose.
- Since most plans are only 18 months to 3 years old, there’s
not much in the way of long-term performance track records.
- Account owner will be subject to a 10% tax penalty for
withdrawals made for any reason other than college expenses,
with the exception of death or disability of the beneficiary.
Should your child be offered a full scholarship, congratulations!
You may then name a new beneficiary or withdraw the money
penalty-free. Any unused earnings refunded to the account
owner will be taxed at the owner’s income rate.
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