Wednesday, November 22, 2006

TIAA-CREF Independent 529 Plan

I was reading through a magazine article that was discussing how to pay for children's education expenses and it brought my attention to the TIAA-CREF Independent 529 Plan. Until the Pension Protection Act of 2006, I had been very reluctant to even look into 529 plans, because their tax benefits were set to sunset in 2010, but the act made them permanent. So, I will go over some highlights of this plan, and some general strategies.

Each state in the union offers a 529 plan that allows you to invest money tax-deferred, and withdrawal the money tax-free if it is spent on qualified education expenses. This is similar to how a Coverdell ESA works, but here are some differences:

Coverdell ESA

  • Contribution limit of $2000, annually, per child
  • Must be used by the time the beneficiary reaches the age of 30 years
  • There is an income limit that is based on the contributor, but it can be easily side-stepped by gifting the money to the beneficiary and having him/her contribute.


  • Annual contribution limit of $30000.
  • Funds can be saved indefinitely
  • No income limits for contributors

So, there are some nice advantages in 529 plans over Coverdell ESAs. If you plan on sending your child to a private institution, there is no way you can build enough of a nest-egg, with contribution limits of $2000 per year. Now, the Independent 529 Plan, offered by TIAA-CREF, if different from a standard investment, though. Instead of investing money, you pre-pay tuition with a 1% discount off of today's tuition rate. With the current trend of about a 6% annual increase in tuition expenses, the 1% discount, and the tax-deferred and tax-free benefits, the return on investment can be substantial. The plan currently boasts 250 private schools (but not Harvard or Yale, sorry). However, beyond tuition, a 529 plan can cover books, room and board. One strategy is to have an Independent 529 Plan for tuition and a state-sponsored plan for other expenses. This offers a bit of diversification, and a potential out if you child decides against going to any of the member institutions in the Independent 529 Plan. You can also transfer the funds out of the Independent 529 Plan into another 529, but you will lose a lot of gains.