529 Savings Plan
I seem to be at that age where baby fever is in the air. Every time I turn around another one of my friends is either pregnant or having a baby. Some of the guys wish that their protruding stomach was an indication of a child-to-come, but nonetheless, it is never too early for parents to start thinking about their children’s college savings plans.
What is a 529 Plan?
A 529 Plan is an educational savings plan which is implemented and operated by the state or an educational institution. It was created to help parents have the money to send their children to college when they come of age. The name came from the Internal Revenue Service’s Section 529 Code which created these tax-exempt plans in 1996. With the ever-increasing costs of a college education, plans like this have become more and more important.
How Does the 529 Plan Work?
The 529 Plan is a tax-advantage investment plan that is designed to encourage saving for a specific beneficiary (That’s your kid…). Each state that offers a 529 plan can determine how they want to structure it and which options are offered for the person to invest in. While many plans allow an investor from out-of-state, there are usually large benefits and state tax advantages when using the plan in the state where it originated. Some of these benefits include:
- Protection from Creditors
- Scholarship Opportunities
- Exemption from a state financial aid calculator
- State tax deductions
- Matching grants
I found a great site that will allow you to Compare 529 Plans by State.
Types of 529 Plans
There are mainly 2 different types of 529 plans to choose from: A Savings Plan or a Prepaid Tuition Plan. Savings Plans are typically invested into mutual funds and are subject to market fluctuation. They must be administered by the state and currently 49 states and Washington, DC offer savings plans. Many 529 plans offer a wide variety of age-based investment options to choose from. They can be structured to become more conservative as your child gets closer to attending college so that you do not take a dip at the wrong time. In addition, Saving Plans offer different risk-based options for the investment so the underlying fund will be one or more of the respective investment. Some of these plans offer guaranteed options or stable value to protect the investor’s principal while still allowing for some growth. Some other investments might be in treasuries or Certificates of Deposits.
The Prepaid Tuition Plan (also called a Guaranteed Savings Plan) is currently available in only 12 states. With these plans, the investor pre-purchases tuition at the institution’s current rate and then pays out the future cost when your child is in college. The performance of this program is basically a reflection of the college’s cost inflation during that period.
Tax Benefits of a 529 Plan
One of the main beauties of the 529 Plan is that all withdrawals that qualify as educational expenses are considered tax free from federal taxes! Many states will mirror this federal tax exemption by offering a tax-deferred growth period and tax-free withdrawals for educational purposes.
If you feel that a 529 Plan is right for you and your child, you should contact your financial advisor to see what products your particular state offers.