A college education is a valuable experience in more ways than one. Not only does it provide practical knowledge, it also offers a means to grow and mature and numerous studies show the value that a college degree can provide. Paying for this experience is often, however, very challenging and many parents rightfully worry that in spite of their best efforts and numerous sacrifices, they will still be unable to foot the bill. One good option that all parents should consider is the 529 College Savings Plan.
How does a 529 Plan Work:
The 529 college savings plan was invented in 1996 and was named after the IRS Tax Code 529, which created this type of plan. These savings plans are operated by the state or by an educational institution. Every state offers at least one plan, with slight differences from one plan to the next.
What Types of Plans Exist:
There are two types of 529 College Savings Plans:
- Regular Savings Plans- These plans operate in a similar way to an individual investment plan with tax advantages, such as a Roth IRA. With this type of plan, you select which mutual funds or other investments in which to place the money. The success of the plan then ultimately depends on the return on the investments and the regularity of money invested.
- Prepaid Plan- This type of plan allows you, the concerned parent, a means to prepay for college expenses. It allows you a way to lock in costs at present levels with the comfort of knowing that the cost will be covered in the future.
Advantages of a 529 College Savings Plan:
A 529 College Savings Plan offers many advantages. Among them are:
- Federal and State Tax Breaks- You cannot deduct contributions from your taxes today, but the investment growth will never be taxed by federal or state authorities when withdrawn, provided the money is used for higher education.
- Simple Plan Management- Because a 529 plan is administered by an outside company, they take care of the work for you. All you do is send in the money in a lump- sum, or setup an automatic investment plan, and let the professional managers do the rest.
- Parental Control- Unlike a Uniform Gift to Minors Account (UGMA), ownership and control doesn’t transfer at age 18. You retain control over the funds, how they are invested, how they are disbursed, and when.
- High limits- With a 529 College Savings Plans, parents can stash away a large amount of money. And it doesn’t matter how high your income, how old or young you are, or the age of your child. Most everyone is eligible and they can invest huge sums of money.
- Flexible Usage- Money saved under a College 529 Savings Plan can be used for more than just tuition. It can also be used for room and board, fees, books, and other expenses.
Any Disadvantages of a 529 Savings Plan?
529 College Savings Plans have much to offer, but there are a few potential disadvantages to consider. One is the effect of such a plan on financial aid packages. If you have a large amount of money invested, it can have some impact on financial aid. Another possible problem is with withdraws. If money is removed from a 529 College Savings Plan and spent on something other than qualifying education expenses, it becomes taxable and is subject to a ten percent penalty.
Saving for college can get very expensive and it can inflict undue levels of stress and anxiety on concerned parents who want to provide for their future college graduates but are unsure where to start. A 529 College Savings Plan is a good place to turn for many reasons, but chief among them is the tax advantages. A wise investor can build up a large sum of money for his/her child and, no matter how large the investment grows, it will never be subject to tax as long as the money is used for educational expenses.
529 College Savings Plans are an excellent college savings option and they can pave the way to a more successful and less stressful future for your child. Attending a university is already stressful enough- no parent or student needs to be burdened with the added problem of financial insecurity. Do yourself and your child a favor by starting a 529 College Savings Plan today. Even if you start small, the money available for college will still come in handy and should add some semblance of victory- however small- in the college expense savings battle.
Copyright 2011, Bryan Carey