Planning for College: 529 Savings Plans

We all know that college costs already are sky high and that they will continue to climb in the future, but do you know just how much tuition may cost your family when it is time for your children to attend college?

If you have a young child, then you can expect to pay at least $100k for four years of college when the time comes. Fortunately, there are financial actions that you can take now to plan for this expense, and investing in a 529 savings plan is among the best of options.

Named for the IRS tax code section under which they are described, 529 plans are relatively simple methods to save money for a child’s (or anyone else’s) college education. These plans come in two main forms (1) those in which you prepay tuition, and (2) those in which you save money in an account for the future.

Prepaid Tuition Plans

The less popular of the 529 plans, prepaid tuition plans provide individuals with the opportunity to pay the present-day costs for college by pre-paying for future students. A parent, grandparent, family friend, or anyone else (including the student herself) may lock in today’s college costs by paying today.

When the time comes for the student to attend college, the student’s qualifying educational costs at any of a state’s eligible public colleges already will be paid. Should the student choose to attend a private or out-of-state institution instead, then the equivalent amount will be deducted from one’s costs at that institution.

Prepaid tuition plans probably are not more popular because they require payment in larger quantities and sooner than do other plans. However, they are a great option for individuals who want to invest in someone’s future, and certainly will save the student and his or her family much money in the long-run.


Account Plans

Depositing money in a 529 account is the more popular option. Just as is the case with the prepaid tuition plans, anyone may start a 529 account for anyone else. The individual who owns the account is the owner, while the future student is the beneficiary. Only one beneficiary may be named to a single 529 account, so if a parent wishes to invest for multiple children then multiple accounts will need to be formed.

Unlike some college savings accounts, in most states 529 accounts do not become the property of the beneficiary once he or she reaches a certain age. The owner of the account controls the account and has sole access to it. However, anyone who wishes to do so may contribute cash to the account, a great tool for family members or friends.

There are no time or age limits by which the beneficiary has to use the money in the account. If the prospective student decides not to attend college after all, then the account owner may roll the account over for a different family member instead, or for oneself.

So long as the money included in the account is used for educational costs that qualify (tuition, books, room & board, transportation and computers in most states), then the money is non-taxable. If the money is withdrawn for other purposes, however, then it will be taxed at the account owner’s rate.

The Ins and Outs of 529s

No matter which type, 529 plans are state-sponsored investment programs. In general, individuals set up their plans with a state agency, but after the fact will deal directly with an asset management company. Each state works with their companies of choice, but usually large, well-known companies are used.

While 529s are similar in all states, each states’ plans will vary slightly and might have either more limitations or more opinions from which to choose, and fees also will vary. For this reason, you might wish to compare 529s from various states before deciding on a plan, because most states will allow you to obtain a 529 without being a resident.

Like anything, there are both pros and cons to 529 savings plans:


Pros:

• Untaxed money.

• Anyone can contribute to a 529 account.

• There are no limitations based on income about who can start a 529 plan.

• The account owner retains ownership of the money.

• A 529 account can be rolled into an account for a family member if the prospective student does not use it.

• Any remainders left on a 529 account can be rolled into an account for a family member.

• For individuals who are a bit investment-weary, there is not much room for variation in state plans.

• Money that is not used can be withdrawn, though it will be taxed.

• You can make very small monthly contributions to a 529 account if you wish.

Cons:

• Money cannot be used as collateral.

• For individuals who want to have large control over their investments, you do not have many options with 529 plans unless you own multiple plans in different states (which you may do, by the way).

• Students’ financial aid eligibility may be affected by a 529 plan, especially if it is a prepaid plan.

• You cannot contribute anything other than cash to a 529 account.

• Money in 529s is not considered a personal asset.