{"id":9934,"date":"2023-08-07T22:18:01","date_gmt":"2023-08-07T22:18:01","guid":{"rendered":"https:\/\/isafespend.com\/personal-finance\/savings\/college-planning-basics-saving-for-higher-education-with-529-plans\/"},"modified":"2023-08-07T22:18:04","modified_gmt":"2023-08-07T22:18:04","slug":"college-planning-basics-saving-for-higher-education-with-529-plans","status":"publish","type":"post","link":"https:\/\/isafespend.com\/?p=9934","title":{"rendered":"College Planning Basics: Saving for Higher Education with 529 Plans"},"content":{"rendered":"
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Anticipating the day your child leaves for college likely brings a wave of mixed emotions\u2014perhaps pride in his or her achievements, sadness at him or her leaving the nest, excitement about a cleaner house and smaller grocery list, and concern at the thought of paying for college expenses. For the final point, at least, 529 plans, also known as qualified tuition programs, may be able to help you turn some of that anxiety into peace of mind.<\/span><\/p>\n

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What is a 529 Plan?<\/strong><\/span><\/p>\n

Though \u201cqualified tuition program\u201d is the legal name of the plan, it is commonly referred to as a 529 plan because QTPs derive from section 529 of the Internal Revenue Code. 529 plans provide a tax-advantaged method of saving for future college expenses, either through prepaying tuition or through investing.<\/span><\/p>\n

There are two types of 529 plans: college savings\u00a0plans, which are operated by the state, and prepaid\u00a0tuition plans, which may be operated by either the\u00a0state or a qualified educational institution.<\/span><\/p>\n

Prepaid tuition plans are much less common, but\u00a0allow account owners to guarantee (provided the\u00a0state guarantees the plan) that their funds will\u00a0increase in value at the same rate as college tuition.\u00a0In a prepaid tuition plan, account owners\u2019 funds are\u00a0pooled and put into long-range investments that will\u00a0likely meet or exceed college tuition increases over\u00a0the years.<\/span><\/p>\n

College savings plans, on the other hand, give you the option to invest your money, and while you will want to choose investments that have the potential to stay ahead of the college inflation rate, there is no guarantee, as with prepaid plans, that the money you put in now will be enough to cover college costs in the future. However, college savings plans also offer the opportunity for greater returns. While most prepaid tuition plans require you to be a resident of the state offering the plan, college savings plans are generally open to both residents and non-residents.<\/span><\/p>\n

College Savings Plans<\/strong><\/span>
Contributions<\/em><\/span><\/p>\n

Any legal resident over the age of 18 may open a college savings plan at any time and may list any person of his or her choice as the beneficiary, including him or herself. In addition, the plan owner may change the beneficiary to another member of the original beneficiary\u2019s family at any time, for any reason. The plan is controlled by the plan owner (not the beneficiary), but anyone may contribute to the plan on behalf of the beneficiary. Contribution limits are based not on income, but on a set amount determined by each state as \u201cthe amount necessary to provide for the qualified education expenses of the beneficiary.\u201d Keep in mind that if you contribute more than $14,000 per year to one beneficiary\u2019s account, your funds will be subject to the gift tax.<\/span><\/p>\n

Investing Options and\u00a0Concerns<\/strong><\/span><\/p>\n

The plan owner may choose to invest in a variety of options, including stock mutual funds, bond mutual funds, and money market funds. Alternatively, the owner of the plan may opt for an automatic age-based investment, which gradually becomes more conservative as the beneficiary gets closer to college age.<\/span><\/p>\n

While investment in a college\u00a0savings plan offers the\u00a0potential for a higher return\u00a0than a prepaid tuition plan, it\u00a0is important to note that\u00a0growth at a rate of college\u00a0inflation is not necessarily guaranteed, as\u00a0investments are still subject to market risk.<\/span><\/p>\n

As with any investment account, investors should examine their savings objectives and a 529 plan\u2019s risks, charges, and expenses before deciding to use it. Account issuers must provide official statements detailing features of their 529 plan; check these statements for further information.<\/span><\/p>\n

Tax Benefits<\/strong><\/span><\/p>\n

There are several tax benefits that come with opening a 529 plan. Funds in 529 plans grow on a tax-deferred basis, and the disbursement of funds are exempt from tax if they are used for qualified education expenses such as tuition, room and board, fees, books, supplies, and, added in 2010, the purchase of necessary computer technology and services, such as a required laptop or Internet access. If the funds are used for something that is not deemed a qualified education expense, however, the plan holder is subject to a 10 percent federal tax penalty on earnings, in addition to general income tax.<\/span><\/p>\n

Many states offer their own incentives for opening a 529 plan through the plan owner\u2019s home state. For <\/span>example, according to www.finaid.org, 41 states and\u00a0the District of Columbia offer some sort of income\u00a0tax deduction or credit or have no income tax at all:\u00a0four states offer a full income tax deduction, 30 states\u00a0and the District of Columbia offer a partial\u00a0deduction or credit and seven have no income tax.<\/span><\/p>\n

Effects on Financial Aid<\/strong><\/span><\/p>\n

Assuming the owner of the 529 plan is someone other than the beneficiary, a 529 plan is recorded as a parental asset on the Free Application for Federal Student Aid (FAFSA), which may be assessed at a maximum of a 5.64 percent rate when calculating the Expected Family Contribution, or EFC. If a beneficiary is also the owner of the 529 plan, however, his or her financial aid eligibility becomes much more complicated because assets held by the beneficiary can be assessed up to a maximum of 20 percent when calculating financial aid. In any case, 529 plans will have an effect on the financial aid you are eligible for, so it\u2019s important to understand the specifics of your aid situation before opening a 529 plan.<\/span><\/p>\n

Prepaid Tuition Plans<\/strong><\/span><\/p>\n

Prepaid tuition plans are far less common than college savings plans; just 12 states have savings plans that are open to new investors. In addition, Tuition Plan Consortium, LLC, a not-for-profit <\/span>institution, offers a guaranteed prepaid tuition plan\u00a0to a consortium of private colleges across the\u00a0country, provided your savings are used at one of its member colleges.<\/span><\/p>\n

As their name implies, prepaid tuition plans allow\u00a0you to make early payments toward the\u00a0beneficiary\u2019s qualified education expenses with the\u00a0benefit of contributing to tomorrow\u2019s education at\u00a0today\u2019s costs.<\/span><\/p>\n

There are two main ways to purchase prepaid tuition plans: through prepaid units or contracts.\u00a0<\/span>With a prepaid unit plan, you buy units that represent a fixed percentage of tuition, and the price is the same for everyone. So, if you buy one unit and it corresponds to 1 percent of tuition, that one unit is <\/span>guaranteed to be worth 1 percent of tuition in the\u00a0future, even as the cost of tuition rises.<\/span><\/p>\n

With a contract plan, you buy a contract that\u00a0corresponds to a specific number of years of tuition.\u00a0The purchase price varies, depending on the age of\u00a0your child and whether you pay in a lump sum or\u00a0several installments. Contract plans generally offer\u00a0lower prices for younger children. Setting up a\u00a0prepaid tuition plan allows the owner to lock in the\u00a0current price of tuition, which can provide huge\u00a0savings down the road when the beneficiary is ready\u00a0for college and the cost of college is likely to be\u00a0significantly higher.<\/span><\/p>\n

The tuition guarantee for prepaid tuition plans offered by states is based on an average of in-state public college tuition rates, so if a student decides to attend an out-of-state or private school, he or she will have to find a way to pay for any difference in price. However, keep in mind that only six states currently offer a full guarantee for their prepaid tuition plans; this means that if the market performs worse than expected or tuition rises more quickly than expected, your full college costs may not be guaranteed even with a prepaid tuition plan (if you use a plan in one of the states that don\u2019t offer a full guarantee).<\/span><\/p>\n

\u00a0<\/p>\n

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\u2019s 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.\u00a0<\/span><\/em><\/p>\n

This article was written by Advicent Solutions, an entity unrelated to AFS 401(k) Retirement Services, LLC. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. AFS 401(k) Retirement Services, LLC does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. \u00a9 2013, 2015 Advicent Solutions. All rights reserved.<\/span><\/p>\n<\/div>\n