4 Facts About 529 College Savings Plans

If you’re planning on sending your children to college, you may be concerned about the ever-rising cost of tuition.

It can be distressing when you pause to consider that, by the time your children are ready to leave for school, tuition may be more than you can afford.

529 plans aren’t new but many parents aren’t aware that they exist. These plans can make your dreams for your child’s college education a reality. Here are common questions and answers about 529 plans:

1. What kind of 529 plans are there?

There are two general types of 529 plans, though many states have multiple options within these types. The first kind of 529 plan is the pre-paid tuition plan. This plan allows you to purchase credits at some colleges and universities for use in the future. Your investment in the pre-paid tuition plan is guaranteed by your state, though you will be required to attend a college in your state of residence.

There are age and grade limits when it comes to this option; the plan is not open to adults. The benefit of this plan is that you are pre-paying for credits, thus locking in the current rate of tuition.

Alternatively, you can choose to invest in the college savings plan. The account holder makes deposits into the account for use by the beneficiary. There are several investment options available: money market funds, stock mutual funds and bond mutual funds. The money in a college savings plan can be used at any college or university. These investments are not backed by the state nor are they federally insured.

2. Are my taxes affected by investing in a 529 plan?

Funds that are withdrawn and used for eligible college expenses are not subject to federal or state taxes. Additionally, and monies earned in your 529 plan are not taxable. If you choose to withdraw funds from your 529 plan and use the money for anything other than eligible college expenses, the monies will be subject to a 10 percent federal penalty along with income tax.

You may be eligible to for matching contributions, tax deductions and other benefits from your state of residence when you participate in a 529 plan. You will need to discuss any available benefits with your financial institution.

3. Are there fees involved in participating in a 529 plan?

Depending on the plan option that you choose and the financial institution or firm that handles your account, you may be subject to expenses and fees. To reduce the amount of money that you will be charged to open and maintain a 529 plan, you may want to consider a direct-sold college savings plan or a broker-sold college savings plan. Both of these options tend to have lower sales fees and, many times, front end loads are reduced.

4. Will a 529 plan affect financial aid eligibility?

Typically, participation in a 529 plan will affect a student’s financial aid eligibility. Savings held in a 529 plan are treated as parental assets and are considered when factoring the estimated family contribution to college costs.

Each family must decide if 529 plans are their best way of ensuring that their children are able to attend college. For more information on 529 plans parents should contact their financial adviser or 529 plan adviser.

Alex Stanton is an intern enrolled in an online mba university to earn his degree.

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