For the past few weeks we covered inheritance problems and how our choice of state residence affects these issues. Another subject affected by our state residency concerns Section 529 educational investment plans. The 529 program is designed to help parents finance educational expenses, and anyone can contribute regardless of their income level. Mostly, this investment program includes a portfolio of stocks, bonds, or mutual funds, and management is provided by investment companies; however, prepaid tuition plans also are available.

If we're interested in our child(ren)'s education and we want to plan ahead financially, how do we know what our state offers? Which investment approach is best for us, and when do we begin? I was curious, as I'm in a constant state of residential flux with my own student career. Even if you're a fifth-generation state resident who plans to die where you live, various state regulations might interest you and might affect your plans.

There are a few 529 guidelines that work across the board. In other words, the list below is currently the same for each state:

1. Earnings in a 529 grow on a federal tax-deferred basis, so you don't pay federal taxes on your current portfolio or if you withdraw for educational purposes; however, this exemption expires December 31, 2010, unless action is taken by the President and Congress to extend the provisions.
   
   
2. State tax exemptions vary from state to state. For example, "Colorado currently allows residents to deduct the entire amount of their contribution to their in-state plan for each beneficiary, up to the maximum contribution limit. Rhode Island, on the other hand, allows only a $1000 deduction in total for joint filers and $500 for single filers. Many states also follow the federal tax lead of allowing earnings to grow tax-free and imposing no state tax on qualified withdrawals from in-state and out-of-state plans."*
   
   
3. Investment companies will charge an ongoing fee for servicing your 529 portfolio. This is across the board.
   
   
4. Assets from a 529 may or may not be exempt from creditors. Federal legislation is pending on this issue, and this may affect your state's current regulations.
   
   
5. You can choose to invest in another state's investment program, but you might run into tax problems or other barriers.
   
   
6. Some plans are more expensive than others, even within the same state.

* I'll address this quote up front, it was found at a website suggested by BUYandHOLD's contributing author Nancy Dunnan in her response to a woman who asked about how to save for her children's education. The NASD site (National Association of Securities Dealers) concerns itself with a variety of investment issues, and their 529 Guru, Joe Hurley, provides plenty of fodder for discussion, thought, and practice. In fact, he provides so much information that it's a little difficult to digest.

I wondered about the wisdom of pushing his book, The Best Way to Save for College - A Complete Guide to 529 Plans 2005 Edition, on the site, but Hurley appears to be a top-notch and unbiased authority on 529 issues. While I haven't purchased his book, the reviews state that this book gives all the guidelines and state-by-state comparisons. My opinion? Perhaps the book would help me understand this issue, and a bookmark to his opinions and information on the NASD site could help me stay on top of current 529 changes.

In the meantime, I have to further question the wisdom of 529 investments, because they sound so complicated (tricky) and volatile (subject to too many changes). So, I plugged the words, "Illinois 529" into my search engine, and found the following bits of information at College Illinois! about prepaid tuition programs:

For a comparison, I plugged in "New Mexico 529" and came up with another plan that is offered in all states:

Both programs offered a wide variety of fee-based programs, but the major difference that caught my eye was in investment security (#4). I had to dig for that information on the second site, and the only reason I went after it was because the Illinois site was very upfront about their backing on my investment.

I have more questions about this issue: What happens if I'm a resident in one state, and my daughter is a resident of another state? What issues does custody raise in this matter? Isn't it just easier to continue to invest in my BUYandHOLD portfolio? The answers to these questions and more next week!

Until then,
Linda Goin