For the past three years, the financial firm Edward Jones has commissioned a survey to gauge what Americans know about 529 plans. In 2012, 37 percent of respondents correctly identified a 529 plan from among four potential options. Some thought it was a retirement account, a form of life insurance or a low-cost health-care plan. And the awareness is dropping.
This year's survey found that only 30 percent of survey participants could correctly identify what a 529 plan is about. Among those with a household income between $50,000 and $75,000, awareness was only marginally better at 32 percent.
Awareness levels increased when income increased, but it still wasn't as high as it should be. Forty-two percent of households with income between $75,000 and $100,000 could identify a 529 plan, and only 48 percent of Americans making more than $100,000 answered the question right.
Here's how a 529 plan works. There are two types: prepaid and savings plans. The advantage to the plans is that earnings are not taxed if the funds are used to pay for qualified college expenses. In most cases, earnings are also free from state and local taxes. There are no income limitations on who can contribute to an account. And I particularly like this feature: The account owner maintains control over the money.
A prepaid tuition plan allows you to pay a child's tuition in advance. The point is to lock in for tomorrow at today's rate. However, be careful about funding a prepaid plan and thinking you are done. It covers only tuition and fees. What if your child wants or needs to live on campus? Room and board alone can be as much as tuition.
The 529 savings plan is the most popular. With this plan, you invest much as you would in a workplace 401(k). This means your returns are based on how your portfolio performs over the years. Most 529 savings plans offer age-based investment options in which the investments become more conservative as the beneficiary gets closer to college age. This is what we have selected for our children.
All states offer at least one type of 529 plan. Although the 529s are state-sponsored, you can invest in any of them regardless of where you live. Many states offer a tax deduction for residents who use their state's plan.
Start your research by going to the one run by your state. But here are two other websites that provide a lot of good information - collegesavings.org, run by the College Savings Plans Network, and savingforcollege.com.
On savingforcollege.com, you'll find a quarterly analysis of the best and worst 529 plans based on short-term and long-term investment performance. If you have questions about 529 plans, register for a live one-hour webcast at 1 p.m. today hosted by savingforcollege.com.
Many state 529 plans are promoting their offerings holding contests. On savingforcollege.com, you can find a list of 529 promotions.
"The issue gets more notice when there are a bunch of promotions, contests and other hoopla focused on one single day," said Joseph Hurley, founder of savingforcollege.com.
When it came time to pay for my daughter's tuition, fees, and room and board each semester this school year, I simply made a telephone call. It took less than 10 minutes to process the payments to her school.
Each time, the customer representative ended the call by asking, "Is there anything else I can do for you?"
"Nope," I said, breathing a big sigh of relief.