A 529 plan is a way to save for college expenses that offers tax advantages. There are actually two types of plans available. They are pre-paid tuition plans and college savings plans. Each of these has advantages and disadvantages that you’ll want to consider before making a decision.
Pre-Paid Tuition Plans
Pre-paid tuition plans are a type of 529 plan that allow you to purchase credits at eligible public and private colleges and universities for your or any child’s future education. This can be great if you start early because you can effectively lock the tuition rates and potentially save a lot of money.
Another great perk with these plans is that often the investments are guaranteed or backed by the state in which they are purchased. This can offer peace of mind knowing your investment is protected.
Unlike college savings plans however, these plans have state residency requirements. Usually either the owner or beneficiary of the plan have to be a resident of the state in which the plan is purchased. These plans also have an age or grade limit for the beneficiary. Therefore, they are closed to adults who want to save for continuing education.
Pre-paid tuition plans also very structured. They usually require a lump sum payment as well as installment payments which are calculated based on the age of the beneficiary and how many years of education are purchased.
Also, most of these types of 529 plans only cover tuition and mandatory fees. However some plans will allow you to use excess credits toward qualified expenses or even purchase room and board options. Just be sure to review all inclusions and exclusions before you invest in a plan so there are no surprises.
Another thing to remember is that these plans aren’t transferable. Therefore the college or university you choose to invest in is where your child will need to attend. In a perfect world this wouldn’t be an issue but college-age students tend to have a mind of their own. If you see this as a problem you may want to look at a college savings plan instead.
College Savings Plans
A college savings plan is a type of 529 plan that allows you to save for college expenses. However, unlike pre-paid tuition plans, these allow you more freedom to choose from a larger variety of colleges and universities. So you’re not lock into just one.
The money in these plans can also be used to cover a wider variety of expenses including tuition, mandatory fees, room and board as well books and computers if required. There is also more flexibility in the amount you contribute. You basically set the amount although there are usually upper limits.
Most of these plans have open enrollment all year so you’re not limited to a small window of opportunity like some of the pre-paid plans. There are also no age limits with these 529 plans. They are open to children as well as adults who want a tax friendly way to save for further education.
When you invest in these plans, you can typically choose from several different investment options for your contributions. These include stock mutual funds, bond mutual funds and money market funds. You may also opt for age-based portfolios. These actually switch to more conservative investments automatically as the beneficiary gets closer to college age thus preserving capital.
There are also no residency requirements. Although you may receive more favorable tax conditions if you invest in a plan in your own state. This is not always the case though. Based on your situation, other states may offer far more favorable plans so be sure to research thoroughly before choosing.
One thing this plan doesn’t offer is state guarantees. And since they are market investments, they are subject to the same risks as other investments.
With any 529 plan it’s important to be well aware of the fees and expenses associated with it. When choosing some out of state plans, you may only be able to acquire these through a financial adviser or broker. This will almost always raise the fees and expenses involved.
Direct-sold college savings plan can save you from paying some of these fees. And they may not be limited to your own state so check for them.
One of the tax benefits offered by 529 plans is that the earnings are not subject to federal tax, and in most cases, state tax as long as the money is used for eligible college expenses.
However, it you withdraw and use the money on other expenses, not only will you be taxed but fined heavily as well.
Another thing to check for is that some states offer other benefits such as matching grants for investing in 529 plans. This can really add up, so check to see if your state offers this or if you’re eligible to participate in another state’s program.
Every state offers at least one type of plan. Some states offer many. 529 plans are a great way to ensure the further education of yourself or a loved one. However, as with any type of investment, find out all you can about the plan you’re interested in as well as other options. This will ensure you choose the best plan for you or your child to build a bright future.From 529 Plan to Investing Money