529 Plans Investing in Education
It's never too early to start saving for your children’s education.
529 College Plans are ways for parents to start saving now to help ease
the financial burden that can come with a college education.
Each state sponsors its own 529 College Plan. Parents open an account with investment options. The earnings are tax-free and can be withdrawn tax-free when your child is ready to attend college. The money can be used to pay for tuition, books, and room and board. There are two general types of plans, Prepaid and Savings.
A 529 Prepaid Plan allows you to lock in the rates of today. Your investment will grow at the same rate as tuition increases. This means that you pay the cost of a year of school at today's price and when your child goes to college in the future your money will equal a year of school for that year. This is a good plan if you are worried that the increasing rise in tuition will prevent you from helping fund your child’s education. Prepaid Plans work best if your child is planning on attending an in-state college. If they choose a private or out of state school you may have to cover the difference of cost.
A 529 Savings Plan contains a little more risk than a Prepaid Plan. A Savings Plan is based on market investments. So depending on the strength of your investments you can either hit big returns or be left short of your needs for college tuition. Many plans start with aggressive investing while the child is at a younger age and as the child gets closer to attending college the investments will be more conservative. Some people may not want to risk their child’s future on investments. It’s important to be comfortable with your investment options and to back out if you feel that they are too high-risk.
If your child decides that they are not going to attend college then you do have some options for the money you have already invested. You can hang on to the plan incase your child changes their mind and decides to attend college. You may also transfer it to another member of the family. Some fees may apply depending on your individual circumstances though.
You can also cash out the earnings for a fee. The earnings will be penalized twice though, once by the state (usually 10%) and again federally (an additional 10%). There are exceptions to the penalties if the beneficiary has died or become disabled, or if the beneficiary has received scholarships for school.
You can choose a 529 Plan in any state but it may pay to explore your own state’s options. You may be saving yourself from fees and allowing yourself certain benefits if you choose an in-state 529 Plan.
There are some disadvantages when it comes to a 529 Plan. If you are in a lower income and can expect to receive financial aid, then a 529 Plan is probably not a good choice for you. A 529 Plan will reduce the amount of financial aid that you will qualify for. There is a lot of financial aid available that has better financial benefits than a 529 Plan.
You will also want to consider fees that are associated with maintenance of your investment accounts. Unless you know your way around investments, you will have to hire a professional to take care of everything for you, and obviously they will charge you a fee. Sometimes fees can eat up all of your earnings, which make it obsolete to invest in the first place. It is best to look for a 529 Plan that has annual expenses of less than 1%
It is important that you research 529 Plans thoroughly as each state has different obligations. There are also many details involved with investing that you need to consult a professional for. You may find that you have the ability and resources to use a 529 College Plan to help secure an educational future for your child.
Here are some websites that have more information on 529 Plans.
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