Financing College Through 529 Savings Plans
Looking ahead towards funding a college education for one child or more can feel overwhelming yet it is never too early, or too late to start saving. While there are numerous ways to save for college expenses, today we focus on the basic information about 529 savings plans.
The Securities and Exchange Commission website defines this sort of plan as “a tax-advantaged savings plan designed to encourage saving for future college costs”.” Sponsored by state agencies and institutions, there are two categories: pre-paid tuition plans and college savings plans. All fifty states sponsor at least one kind.
- What is Tax Advantage Savings? Basically, income invested with either of these plans will grow on a tax-deffered basis, and if used for its intended purposes, education,then the withdrawals are federally tax-free. If the money is used for other endeavors or savings are withdrawn prior to the allotted time, taxes and penalties will most likely be assessed. Plans will have different expectations and benefits for college expenses. Be sure to pay attention to all plan details.
- What’s the difference in the two types of plans? According to Finaid.org,, Prepaid tuition plans are designed to cover tuition costs at public instate colleges and universities that allow you to lock in tuition at current rates.”If a family purchases shares worth half a year’s tuition at a state college, these shares will always be worth half a year’s tuition—even 10 years later, when tuition rates may have doubled.” Whereas, College Savings Plans have no lock on tuition, and they are subject to market volatility. However, “with this added risk comes the opportunity for potentially earning greater returns.” Click here for a comparative chart of the two types of plans.
- What is the benefit of investing in a 529? Due to compounding interest, saving for college now is advantageous for those who are likely to pursue higher education. . In terms of the time value of money, it may be less expensive to invest now than to wait. Waiting even one year couldcost significantly more. See this Cost of Waiting chart for more information.
One of the most important things you can do for your children is to save for their future. Seeking expert advice from financial planners at Cary Stamp & Company, will help you understand the complexities of saving for college as well as set up and manage your 529 savings plan.
The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.