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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 The earnings are tax-free and can be withdrawn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.
RESOURCES:
Here are some websites that have more information on 529 Plans.
www.savingforcollege.com
www.finaid.org/prepaid.phtml
www.theeducationplan.com/learn/529about.shtml
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