Navigating Donations to 529 Plans - Your Money

The following is an excerpt from an article in 

The New York Times
Saturday, September 01, 2012

Navigating Donations to 529 Plans - Your Money

By RON LIEBER

The best gift any of us can give to newborn babies is to point their sleep-deprived parents in the direction of a good 529 or other college savings plan and then seed the account with a little bit of money.

It was hard to avoid this conclusion in the midst of a recent baby boom among money writers at The New York Times. Tara Siegel Bernard, a personal finance reporter, recently delivered her first child, and Paul Sullivan, the “Wealth Matters” columnist, welcomed his second.

I wanted to get both babies a little something, but knowing what I know about how much four years of college will cost, I couldn’t in good conscience send a stuffed animal or a security blanket.

You would think that the state-sponsored 529 plans around the country would be welcoming givers like me who want to take this sort of initiative. But the process of tossing some money into an account is not as easy as it could, or should, be.

The hassles have given rise to several registry services that let you use credit cards to pay for a 529 gift and spare you the need to contact the plans or the parents. Recently, however, the industry group that represents 529 plans and the companies that serve them raised questions about whether the start-ups were violating securities laws.

Why would they do such a thing, when the services seek only to collect assets to deliver to the 529 funds on a silver platter? To figure out the answer, it helps to start with a bit of refresher on how the 529 plans work.

Anyone can open an account, for themselves or someone else. States run the plans, and you can set up an investment account that allows you to choose among various mutual funds.

Money in these accounts grows tax-free, and you can withdraw it without paying any capital gains taxes as long as it’s used for educational expenses. Moreover, a majority of states offer income tax deductions or credits when people deposit money.

This is all nice and will become more so if our tax rates rise in the next decade or two. And the earlier you start, the more the money has time to grow (and the more you save on taxes).

For more, visit www.nytimes.com.