529 College Savings Plans Explained – College Financial Aid Advice
One great way to prepare your children or grandchildren for college financially is to buy into a 529 college savings plan. There are 2 basic kinds and each one has its advantages – depending on your needs – and theirs. Here are some details about the 529 college savings plan that will show you why it may be the option you want to consider for your future college student.
Two Types of 529 Plans Available
529 college savings plans, which are simply managed mutual funds, are available in two different forms in most states. All colleges may not have their own plan but many of them do. Each 529 plan, however, will be either a prepaid college plan or a college savings plan.
A prepaid college plan gives you the advantage of locking in the price of tuition for the year of purchase. It does this by allowing you to buy segments of tuition at the current rate. These plans only cover tuition and other fees, but you often can buy room and board separately. The amount that can be contributed may be limited according to the age of the beneficiary, and state residency is usually required. Prepaid savings plans have an advantage because they are guaranteed by the state. There is usually a limited time during the year when you can enroll in the plan.
The other form of 529 plan is the college savings plan. These do not lock in the price of tuition, and may not be guaranteed by the state. The funds in a 529 college savings plan are available for all college expenses, and you do not need to be a resident in that state to be eligible. More than $200,000 can be put into this plan, and enrollment is open to any time of year.
Excellent Tax Benefits
There are very good tax benefits for those who contribute to a 529 college savings plan. This makes it an ideal way to direct some of your assets into a tax shelter and still be able to make the money available to loved ones who will need it later. Here are some of the benefits:
-Interest is tax free until withdrawn
-Withdrawals made for educational purposes are tax free
-Account holder controls assets
-Beneficiary can be changed at any time
-Amounts of $60,000 per person can be contributed without gift penalty once for a 5-year period
-Money can be used at all accredited colleges in the US (even some overseas)
-Assets are protected from bankruptcy
-Most 529 plans have very low minimum deposits, which make them affordable to most people.
Although the money in a 529 plan remains yours, it cannot be withdrawn and used for
purposes other than education without a penalty. It becomes taxable and a 10% penalty is applied to any earnings.
529 Plans Are Available in All States
All states have some form of 529 plans, and so does Washington, DC. This makes it very convenient to get one when you are ready. It is to your advantage to look at purchasing one in the state where the young person is most likely to go to school.
Each state can make some aspects of the plan peculiar to that state. This means you will need to find out what the differences are before you buy into a 529 plan. Most states do not have an age limit before which the money must be used.
Advantages of 529 Savings Plans
Other college savings plans may only permit annual deposits of up to $2,000 per year. The larger amount permitted by a 529 allows you better tax reductions and estate planning.
Some pre-paid plans may have a few benefits that the more general state college savings plan offers does not include. This would be the fact that some colleges may offer matching dollars if you take their prepaid 529 plan and if the student actually does attend college there.
Things To Watch for In A 529 Plan
When you look at the various 529 college savings plans available, it is important that you compare the fees. Some plans have fees (brokerage and maintenance) that may actually leave you with less at the end of the year than when the year started – because of higher interest rates. Plans that are offered by brokers are usually a little higher than state offered plans.
Finally, it is a better idea to keep the 529 college savings plan in the name of the plan creator rather than the student. This way, the money in the plan will not prevent the student from getting other financial aid for which he or she may be eligible.
Paying for four-years of college is no easy task. College costs have escalated in leaps and bounds from year to year! Taking advantage of 529 college savings plans is a good idea for a number of reasons — including tax benefits. The less money one needs to take out in student loans the better, because loans need to be repaid. Learn about college student loans and all types of financial aid from Mark Allen, who writes for the free website: FinancialAidFinder — a one stop resource for parents and students.
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