Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

08/22/2008
What is a 529 plan, and how does it relate to Upromise?
What is a 529 plan, and how does it relate to Upromise?
Gary Silverman, CFP®:
expert info »
The web site that contains a vast amount of information on 529 plans is: www.SavingForCollege.com. You should be able to find the answers to this and other questions about 529 plans there.
Tony C. Yang CFP®, ChFC®, CRPC®:
expert info »
A 529 plan is a college savings vehicle that has federal tax advantages. It was introduced by Congress in 1996 as a way to encourage individuals to begin saving for college tuition as early as possible. After all, a college education is expensive and price increases are expected to continue. There are many ways to help you accumulate college savings.

1. We already mentioned federal tax advantages but let me clarify. As long as savings are used to cover college related expenses (known under federal law as a qualified withdraw), the earnings are not subject to federal income tax.

2. A few states may provide the same income tax benefit offered by the federal government as well as an annual tax deduction for your contributions (limitations do apply).

3. Programs such as Upromise are a fun way to amass college funding as well. Upromise partners with leading organizations in America to help provide rewards in the form of college saving.

Therefore as you spend at retail stores, local restaurants, grocery and drugstores, a percentage of what you spend gets deposited into an account that you can use to help cover college costs. Enrollment is free and the website offers tons of helpful information. www.upromise.com.
Alyssa Rakovich:
expert info »
Upromise only works with specific state plans if you want to accumulate $$ for college. By using credit cards linked to Upromise or spending money on specific products and at various venues [which have been] set up with the Upromise program, Upromise works like travel and rewards points. If you want to use Upromise make sure you choose a 529 plan in the Upromise system and then make sure you register your accounts with Upromise.
Michael A. Masiello:
expert info »
529's are state sponsored college investment funds. Tax benefits for contributions may be offered by home state, tax deferred growth benefits. Upromise is a sort of affinity program that gives you a small credit/cash back for purchases. I'm not a big fan of the Upromise plans in general. Thanks, Mike
Wendy Weiss, Ph.D.:
expert info »
529 is wonderful if you want to offer a child, or grandchild (or other relative like a niece or nephew) the money to pay for the high costs of her/his college education. This type of investment account has some lovely benefits. Investments in a 529 grow, but the gains are NOT taxed if all of the money is used to pay for college expenses like tuition or room and board. There is a specific set of expenses, called qualified expenses, and they are defined very broadly. So, at present, you can use your investments to pay for a college year abroad, including airfare etc.

There is another nice advantage to a 529 plan, one that parents and grandparents like. The account is flexible so that grandparents or parents who want to set aside money for an infant, but have no idea if that child will want to go to college, can set their minds at ease. Since the account has to be owned by an adult, the future college student can be the beneficiary. If you, as a parent or grandparent, invest in a 529 for child #1, and he does not go to college, the money will not go to waste. You can change the beneficiary to child #2 or a niece or nephew.

This is an investment account, so please remember that the investments in each 529 Plan differ. Each plan works with a different mutual fund company. So the investments are only as good as the mutual funds offered in the plan. Make sure you do some research on these funds and find out:
1. If they are the strongest ones offered by the mutual fund company or the dogs.
2. What the fees and mutual fund expenses are, and decide if they are steep.

As for the funds that you will select, the fund companies usually make it easy for you to decide. You often pre-set asset allocations, based on the number of years until the child (beneficiary) goes to college. There are other methods, too. It depends on your preferences.

Two important points:
1. 529 Plans are a great way to save for college, but most people do not put in enough money every year.
2. There is a [tax] penalty (10%) if you use that money for something other than a Qualified Educational Expense. In addition, you pay taxes on the gains.

Upromise is a program that includes a 529 Plan, but is a bit more complex. The advertising and it seems the program focuses less on the contributions you make to investment. What it does is promise you that you will get some cash back from purchases you make for food etc. For instance, you will get a penny back (or maybe up to 5 cents) for each $1 you spend on Toll House Cookie morsels. You can also get a penny for each $1 you spend for online shopping.

There are some interesting ideas, however. You can ask family members to sign up and contribute their pennies from purchases of chocolate morsels, etc. and other things. So if Grandma and Uncle Steve also join, you can get some more money deposited into the Upromise accounts.

More important, if you also actively invested in the 529 Plan associated with UPromise, and made regular contributions, you are likely to build some money toward tuition. The important questions are, once again, how much are the original contributions and what mutual funds are you investing in?

Upromise appears to be free, although there are some strings attached. It seems that you have to set up an account, and deposit at least $50 per child before Upromise credits your accounts with the cash back. In addition, you have to join Upromise, and the member agreement is lengthy. It stipulates important things, such as:
• You cannot reverse engineer the site or use it for illegal activity agreement; the site does collect information about you and your purchasing behavior.
• There is a long paragraph about the ways in which your use of a participating Telecommunications company to share information about you, especially about credit card and debit card loyalty cards etc.
• It may be limited to purchases you make through them, but I did not want to join.

So there are choices out there. Decide what is the best way for you, and your family, to save for the college education of the ones you love.


Editor’s Note:
Information on the 529 Plan can also be found in Chapter 8 of the Wi$eUp curriculum: http://wiseupwomen.tamu.edu/02-learning-center/08-lc-achieving-financial-security.php?page=2
Savings Plans (529 Plan). Every state now has at least one 529 investment plan to help families save for future college costs. Investments grow tax-free as long as they stay in the plan. When used to pay for college costs, no federal income tax has to be paid on the distribution [the money you draw out]. The total amount that can be contributed is very large (over $200,000 in some states). Parents have the option of investing in a 529 plan outside of their own state, if permitted by the plan. A comparison of all plans may be found at http://www.savingforcollege.com.
Editor's Note:
The following information for 529 Plans can be found in Chapter 8 of the Wi$eUp curriculum: http://wiseupwomen.tamu.edu/02-learning-center/08-lc-achieving-financial-security.php?page=2

Savings Plans (529 Plan). Every state now has at least one 529 investment plan to help families save for future college costs. Investments grow tax-free as long as they stay in the plan. When used to pay for college costs, no federal income tax has to be paid on the distribution. The total amount that can be contributed is very large (over $200,000 in some states). Parents have the option of investing in a 529 plan outside of their own state, if permitted by the plan. A comparison of all plans may be found at http://www.savingforcollege.com.
Editor's Note:
There are Federal tax benefits and there may be state tax benefits as well for 529 plans. These tax benefits are described at www.savingforcollege.com/intro_to_529s/name-the-top-7-benefits-of-529-plans.php. For information on “Qualified Tuition Programs” (also known as 529 Plans), including whether distributions are taxable, see IRS publication 970 at www.irs.gov/publications/p970/ch08.html.