There are few investment alternatives that garner accolades like 529 College Savings Plans ("529 Plans"). They will arguably become the single most popular investment and estate-planning vehicle over the next decade.

What are 529 Plans? Written into federal law in 1996, 529 Plans are college savings plans that are funded with after tax dollars (net pay) which grow tax-deferred and which allow tax-free withdrawals for the express purpose of paying qualified education expenses (tuition, room & board) for secondary education purposes (i.e. post-high school education) such as college, graduate school, trade schools or vocational schools.

Typically, one parent will establish a 529 Plan for their child (or for each child) by completing a simple application and funding the Plan with some small lump sum amount ($250 in New Jersey for the Franklin Templeton Plan) followed by monthly automatic withdrawals from the parent’s checking account. You can even have your employer withhold the monthly contribution from your net pay. If you are a parent and are not impoverished you need to set up a 529 Plan now!

With the average college inflation rate at 7% the cost of a college education will be unaffordable to most parents in 18 years. For example, the 2004-2005 cost of an annual $31,500 college education today will be $62,000 in just five years alone. Who could afford that? Certainly wages will not increase by that amount in five years. Your options will be severely limited unless you act now. If you contribute just $300 per month, in 16 years you will be able to fund nearly two-thirds of your child’s college education through a 529 Plan. In New Jersey, $300 is not even a month’s worth of dining costs. So maybe you can’t afford $300 per month, how about anything; $100 per month, $50 per month. The point is putting something away, anything, is better than nothing. Even $100 per month means you will be able to pay some of the college tuition. It is the responsible thing for any parent to do and every parent should be doing it. You cannot rationalize not doing it.

In New Jersey, the primary 529 Plan offered by financial advisors is the Franklin Templeton 529 College Savings Plan. Currently, this Plan sets the maximum, cumulative contribution limit at $305,000, and New Jersey does not offer any tax deductions for contributions (as New York does, for example), but still the savings grow tax deferred at the federal and state level (meaning no tax on investment earnings and appreciation). This allows your 529 Plan investment to grow without any burden of taxation. Think about your gross wages. What if your gross wages were not subject to any taxes? Wouldn’t you have more money? Certainly you would. So the tax advantages of 529 Plans give you more money to use to pay for college costs for your children. It’s a slam-dunk in the world of finance.

Each 529 Plan has one owner (i.e. parent) and one beneficiary (i.e. son or daughter). An owner and beneficiary may be the same person. If your college-bound child (the beneficiary) decides to join the Marines, you can change the beneficiary to your other son or daughter or any other "family member" (but when you change beneficiaries, the successor beneficiary may not be one generation lower than the current beneficiary). Thus, flexibility is key to the allure of 529 Plans. The other allure is the amount you are permitted to contribute to the Plan, irrespective of your level of income. The maximum you can contribute to a 529 Plan is generally limited to $12,000 per year (Gift Tax exclusion amount).

However, there is an exception called the "Five Year Rule" (listen grandparents), which allows lump sum funding of $60,000. This rule permits the owner to use their next five years of the $12,000 Gift Tax exclusion amount to fund the 529 Plan. Withdrawals from the 529 Plan are tax free if used for qualified higher education expenses (tuition, room & board, fees, books, supplies, equipment) at an accredited school, generally, any secondary school which participates in the federal student aid program, which is most. Withdrawals may be used for an Associates degree, Bachelor’s degree, Graduate degree, vocational or trade credential. 529 Plans funds are managed by professional investment management firms selected by the state. In New Jersey this is Franklin Templeton Investments.

Another allure is that 529 Plans are considered assets of the owner-parent not the college-bound beneficiary. Anyone who has kids in college now understands this benefit when filing out the FAFSA forms for financial aid. The FAFSA form asks you to list all of the parents’ assets and all of the college bound student’s assets to determine how much financial aid a student will get. Approximately 5-6% of the parents’ assets will be considered as available to pay for college costs, while 50-80% of the college-bound student’s assets will be considered as available for college costs. Thus, currently, only 5-6% of the 529 Plan assets will be considered available for the payment of college costs. Under existing rules, this means 529 Plans allow you can maximize the amount of financial aid your college-bound child can obtain.

Your child can have more than one 529 Plan. This is where the grandparents come in. A grandparent can fund a 529 Plan for their grandchild; separate from the one you, the parent, set up. This provides grandparents with the ability to pass along some of their assets (and their taxable estates) to their grandchildren without worrying about a troubling part of the estate tax law called Generation Skipping Tax, a penalty imposed upon anyone trying to give away part of their taxable estates to their grandchildren. There are some disadvantages, such as giving up control of your assets to a professional management company, finding the right state plan (each state has its own unique 529 Plan) and the potential taxation and penalty on non-qualified withdrawals, but the advantages far and away outweigh the disadvantages.

529 Plans offer a tax advantaged approach to funding your child’s college education needs and the money is professionally managed. Your ability to do this over time, with very little money required to fund the Plan, makes the 529 Plan a must have for any parent with college-bound children. It’s an affordable investment that will pay big dividends down the road and avoid the anxiety of finding a way to fund your child’s college costs. Set up a 529 Plan today, your child’s future depends on it.