| A 529 College Savings Plan is the common name for what is legally identified as a qualified savings plan. These plans, authorized under Section 529 of the Internal Revenue Code, provide an attractive savings vehicle for future college expenses. You should be aware that 529 education plans can have an impact on financial aid eligibility.
Parents (usually the account holders) and children (potential student beneficiaries) can choose from two types of 529 education plans. These are pre-paid tuition plans and college savings plans. There are pros and cons with both so families should review their long and short term financial and educational goals before making a decision. Following are a few tips to consider:
Every state offers one or both types of college 529 plan. If you are considering a pre-paid plan, you should know that:
- Some plans require that the account holder and/or beneficiary be a resident of that state.
- There may also be limitations regarding the age of the beneficiary and contributions toward anticipated expenses outside of tuition and mandatory fees.
- Given the skyrocketing costs of college, pre-paid plans are particularly attractive because they allow educational investors to lock in current tuition rates to be used for future college education.
- Unlike with college savings plans, in most cases, pre-paid plans are guaranteed by the sponsoring state against loss.
College Savings Plans have fewer limitations than Pre-paid plans, but they also carry more risk.
- 529 College Savings Plans are not guaranteed by the state and are vulnerable to market forces that may lead to a decline in value.
- These plans are also more flexible in terms of enrollment. Unlike pre-paid 529 plan participants, investors in college savings plans may enroll in a program at any time.
- 529 College Savings Plans can also be used without regard to age limitations; a plus for older students. Additionally, contributions may be used for all qualified educational expenses, not just tuition and mandatory fees. For students who have agonized over the costs of chemistry books, this has to be good news.
- There is also some flexibility with 529 College Savings Plans for investors that may not reside in the state with the plan they find most appealing. These investors can make out of state purchases of many college savings plans through qualified brokers.
- Finally, 529 college savings plan investors can contribute more to their educational fund. In the end they may need more. This plan does not allow users to lock in tuition rates.
Potential college 529 plan investors should be aware that unqualified withdrawals will incur hefty penalties. It is important to include financial goals, such as retirement planning, and unexpected expenses, such as medical emergencies or a new roof in your 529 plan comparisons. Once funds have been invested in your 529 education plan, they are withdrawn, ideally, for educational expenses only. Qualified expenses, i.e. tuition and fees, protect account earnings from federal, and often state, income taxes.
Final 529 Plan Tips:
- Read the 529 college savings plan brochure or circular very carefully.
- Take care to work only with reputable brokers.
- Understand the associated fees and tax implications before you invest the best 529 plans.
- Talk with your child about his/her educational plans.
- Consider if the money might be better invested for retirement.
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