As parents, we constantly strive to provide the best for our children.
The mounting cost of pursing a college degree, prompts many parents to start saving for their children’s education.
The 529 plan is a popular saving program.
It has many advantages that help to build a corpus for meeting the college expenses of your children.
So if you are also keen on using the 529 plan for building a college fund for your child, the below article will provide the necessary help to make your decision.
The 529 plan gets its name from the section 529 of the Internal Revenue Code that set up these kinds of saving plans in 1996.
It is an education saving plan which is run by the state or an education institution. It encourages families to dedicate funds systematically for meeting the costs their children’s college degree.
Most of the 529 plan is not dependent on the place of residency. This means that you may be a resident of CA, choose to invest in 529 college savings plan NY and send your child to a college in NC.
Choosing a 529 plan that is most appropriate for your family can be a complex process. However there are 5 points that you must consider before arriving at any decision.
Below is a brief summary of the points outlined that will provide a better understanding of the topic.
The 529 plan comes in two flavors.
It permits families to purchase “credits” at a price that is close to the present rate. The credits will be cashed when the student joins college.
It permits families to allocate funds to an investment portfolio that they have to choose in advance. The portfolio can grow or shrink subject to market risks.
The below table provides a brief comparison between the two 529 plans.
|Prepaid Plan||College Saving Plan|
|Fixes the tuition fees of any eligible education institution||There is no option of fixing the tuition fees|
|The plan takes care of only the tuition and mandatory fees.||Apart from tuition and mandatory fees, it encompasses all “qualified higher education expenses” such as room, board, books and computers.|
|Most of the plans have the backing of the State||It does not have any guarantee offered the State|
|Most plans have a age limit for the beneficiary||There are no age limits.|
|There is specific enrollment period for most plans||Enrollment is open throughout the year|
|Most plans may require that the owner or beneficiary of the plan should be a state resident||There is no residency requirement|
Many plans under the 529 college savings plan are tied to mutual funds. This means that your investments may either see a profit or face a decline due to the market fluctuations.
Therefore families should invest in a 529 plan that is well diversified. This will help the investment cope with any kind of turbulence in the market.
It is in your best interest to evaluate the performance of each of the funds tied to your portfolio. You can also opt to invest in a number of zero risks 529 plans that are offered by many states like Wisconsin, Virginia and Montana.
They offer certificates of deposit that are insured by the Federal Deposit Insurance Corp. This offers the tax benefits of the 529 plan and cuts the risks of market uncertainties.
The best 529 college savings plans are those that evolve as per your needs. Therefore it is advisable to opt for time based and target date funds that shift from aggressive to conservative investments depending on the age of the child.
Periodic evaluation of your age based portfolio is required to ensure that your plan is keeping up with your saving requirements.
It is possible that your state may not offer you the best plan for your needs. All 529 plans offer federal tax advantages but there are few states that offer state income tax deductions too.
The eligibility requirements for the tax advantages vary by state and hence families must evaluate the various options before settling for their home state’s plan.
While prepaid plans are not subject to market risks, there are very few States that offer this. Therefore you must carefully read the fine print and understand the level of guarantee that the plan offers. This varies from State to state.
Families must do adequate research about the state backed guarantee plans and analyze the plan’s performance over the years.
There are many advantages of investing in the 529 plan. Below are the top 5 benefits you can derive out of this plan.
Other saving options such as mutual funds have to cough up annual income tax and capital gain tax at the time of withdrawal.
But if you opt for the 529 plan, any withdrawal that is used to pay for the education expenses of the beneficiary is exempted from income tax at the federal level.
Apart from the federal tax savings, 33 states offer full/partial tax deductions or credit towards 529 plan contributions.
You are eligible to claim tax benefits every time you make contributions to your plan. If your home state does not offer you additional benefits, you can choose a plan offered by other states.
The 529 plan allows the donor to stay in control of the account. This ensures that the money will be used for its intended purpose.
Most plans offer the option of automatic investments that will pair your bank account and deduction plans.
The 529 plans offer simplified tax reporting. Any contribution towards the plan need not be reported on your federal tax return until the year you make withdrawals.
You are permitted to make changes in your 529 plan twice in every calendar year. You are also allowed to roll over the funds to any other 529 plan once within a 12 month window.
As there is no minimum income limit, no age limit and no annual contribution limit, the 529 plan is open to all.
The plan also offers gift and estate planning benefits. Grandparents and other family member who wish to contribute towards the education expenses of the child are also eligible to open a 529 plan account.
Despite the many benefits of the 529 plan, there are a few drawbacks too.
In order to cover the investment expenses and the cost of maintaining your account, the 529 plans charge different types of fees.
Broker fees are one of the sources of additional costs that add up over the term of the investment. Therefore you must give due importance to this point as high fees can erase your account’s growth.
The benefits enlisted under the 529 plan can be availed only if the funds are utilized for the approved educational expenses.
If the amount is utilized for purposes other than tuition, room, board, equipments and supplies then the funds will be subject to income tax deductions and penalties.
A ten percent penalty is awarded for any withdrawal that is outside the scope of educational expenses.
If you opt for a college savings plan, then your investment options are limited to the pre-set investment portfolios that are offered under the plan.
Another point to consider is the market associated risks. Your investment may either grow or dip. The prepaid plan further clips your wings as it offers no choice of investments.
This can be a constraining factor if the intended child fails to pursue a college degree and there is no other child to use the amount set aside in the 529 plan.
As the amount cannot be used for any other purpose, you will have to pay a 10% penalty to get the money out.
For many families investing in an educational saving plan and a retirement fund may be a tough ask. But more often than not, parents tend to save for their children’s education more.
As there is no guarantee that the education secured will lead to a secure income, the future maybe tense.
Many parents choose a 529 plan as part of a bigger plan to meet the college expenses. But there is no doubt that investing in the plan has an impact on the student’s chances of securing any need based financial aid.
As per the revised guideline any assets held under the pre paid tuition plans and college saving plans will be treated as parental assets for calculating the expected family contribution (EFC) towards funding the college expenses.
At present parental assets are valued at a maximum rate of 5.64% for determining the student’s expected family contribution.
The general rule of the thumb is lower the EFC, higher the need based federal aid you may receive.
Families, who open the 529 plan with the grandparents as the owner, do not have to report it as an asset while seeking the free application for federal student aid (FAFSA). Many families are tempted to exploit this loophole without weighing in other factors.
The most important factor to consider before deciding the owner of the account is that if the grandparents open the 529 plan then you will have to report each 529 allocation as student income. The federal government charges 20% of that as EFC.
Therefore it is in your best interest to open the 529 plan account under parent’s name to mitigate any side effects on your child’s financial aid.
The Fidelity 529 college savings plan and the Vanguard 529 college savings plan are the two most popular saving plans.
The fidelity 529 college savings are flexible and offer many tax free advantages. They are specifically designed for college savings. You can invest in any state’s plan and utilize the amount to fund the educational expenses of any eligible college nationwide.
You can opt for building your own investment portfolio or allow them to manage your asset allocation. There are many options available that is sure to suit all types of investors.
The Vanguard 529 college savings plan offer low cost and easy to operate saving options that allow you to reach your goal with the help of their experienced staff.
They offer many age based and individual portfolio options to help you decide on the ideal investment mix. The Vanguard 529 college savings plan has earned a gold rating for its performance.
The education specialists and top investment professionals offer their experience and expertise to guide you through the process of opening the best possible 529 plan for you.
It’s no secret that college education is going to get more expensive and hence opening and contributing towards a 529 college saving plan is a good start. There are many 529 college savings plan comparison tools available online that help you to customize your search based on factors that are of priority to you.
You can choose the plan features that are important to you and the tool will show how the different plans perform under the selected criteria. If you know the names of the plan you want to analyze, then you can choose the different plan names and the tool will compare the features of the different plans.
A thorough understanding of the ins and outs of any 529 college saving plan is will help you unlock the many potential benefits of this plan.