529 College Savings Account Plans
Advantages & Disadvantages of these State Financial Aid Investments
Nov 6, 2008
Worried about the rising costs of a college education? Many parents and grandparents are thinking ahead and investing in 529 college savings plan.
What is a 529 College Savings Plan?
529 savings plans are investment strategies which allow parents, grandparents, or others to invest money for a future student's educational expenses. The money in these plans can be used to pay for tuition, room and board, books, fees, and other educational expenses. Funds can be used at accredited U.S. institutions, and at many international schools as well. Money deducted from these accounts for educational expenses are exempt from federal and state income tax.
529 plans can be started by anyone, and others may contribute to these plans as a gift to the recipient.
These accounts are tax-advantaged investments. This means that although the income deposited into these accounts are subject to income tax, the accounts themselves are tax exempt. Moreover, many states offer tax deductions for money that is placed into a 529 savings account.
Types of 529 Plans
There are two types of 529 plans. The most common type is the savings plan, in which investors create accounts that are invested in mutual funds. These plans are administered by the state. Typically, these plans are designed so that riskier investments are made early on, and less conservative investments are made when a child approaches college age.
If the full sum of money is not needed to pay for a child's education, money that is not used can be transferred to another student. Alternately, leftover funds can be withdrawn for any use and subject only to a tax on the profit earned by that account (unless a child does not attend college, in which case the money will also be subject to a 10 percent fee).
The less common type of 529 plan is called the prepaid tuition plan. These programs allow parents to purchase tuition credits for a child's future education at today's market rates.
Starting a 529 College Savings Plan
529 plans can be created through state websites or by working with a bank or investment firm. Plans vary in terms of start-up fees, required initial investment, required monthly or annual investments, and maximum contributions.
Advantages of a 529 College Savings Plan
Many investors choose 529 savings plans because of the tax benefits. Investment income made from the account is not taxed and goes directly towards a student's education. Moreover, many states offer tax deductions for money placed into these accounts.
In addition, many investors like these plans because they are easy to work with. Money is typically deducted monthly into these accounts. It's also easy for grandparents and others to deposit funds.
Also, start up costs for 529 savings plan typically are low. These plans are designed to be accessible to people from all walks of life.
Disadvantages of a 529 College Savings Plan
Like all investment strategies that involve mutual funds, 529 college savings plans are potentially risky. The fact that these investment are relatively long term helps decrease the risk, but of course cannot eliminate the risk entirely. In addition, 529 plans affect financial aid eligibility.
To Find Out More
Because the terms of 529 college savings account vary, investigate what options are available. Talk to banks and investment plans about what they offer, and see what options are specifically available in your state.
