Got a College-Bound Kid? Making Sense of 529 College Savings Plans
If you’re a parent, you’ve likely conducted at least some cursory research into what it takes to go to college these days. And you’ve probably seen a lot of references to 529 college savings plans. Confused? Got questions? You’re not alone. Read on to learn more about what these plans entail and how to find the right one for your child.
The Basics of 529 College Savings Plans
Also known as “qualified tuition plans,” 529 savings plans are state-, state agency- or education institution-sponsored plans authorized by Internal Revenue Service Section 529.
Although sponsored by educational or state institutions, financial institutions manage 529 plans. Banks provide investors with the tools to save.
The IRS authorizes two types of 529 plans: education savings and prepaid tuition plans. All 50 states sponsor at least one. Each state-sponsored plan has specific requirements, including what it covers and residency obligations.
The appeal of 529 college savings plans is tax-free earnings over time. The sooner you begin to invest, the longer your money has time to grow, and the greater your earnings and tax benefits.
What You Need to Know About 529 Plans
Before investing, take the time to research the advantages and impact a 529 college savings plan delivers. Begin with your state requirements to make sure the plan you’re looking at complies.
Education savings plans typically have preset investment options. Most plans give you the option to switch twice a year or when you change your beneficiary.
Withdrawals from a 529 plan must pay for qualified educational expenses at participating universities or colleges. Penalties apply if money is not used for education or withdrawn early.
Does a 529 College Savings Plan Impact Financial Aid?
Typically, a 529 plan will have an impact on financial aid eligibility. But that’s not necessarily a bad thing. The more you save for your child’s tuition and related costs, the fewer loans your student requires. Student loan debt is a staggering problem for millions. Reducing the need for student loans is a smart way to keep your child from incurring long-standing debt.
Look Before You Leap
A 529 college savings plan offers clear tax savings. That doesn’t mean 529s are without risk.
Before you sign up, follow these tips to make the right decision about whether a 529 plan is the best option for you and your child.
- Carefully read the plan’s information circular. Ask the plan manager about anything you don’t understand.
- Consider the associated fees. Fees vary widely from plan-to-plan and manager-to-manager. Fees reduce the return on your investment. College Savings Bank acquired by NexBank is one institution that does not charge fees.
- Examine withdrawal penalties. Of course, you have no intention of withdrawing money early or using it for anything other than your child’s education. But, you don’t know what the future holds. You might find yourself in a situation where you have to withdraw money for an emergency. Find out before you sign up what an early withdrawal costs.
Investing in a 529 college savings plan is an affordable way to grow your money and pay for your child’s future education. The sooner you start, the better the return.