An Understanding of 529 College Savings Plans
If you have started to work toward saving for the college education of your child or children, you’ve probably heard of 529 plans. However, unless you are an accountant or other type of financial planning expert, you probably have, at best, a basic understanding of what a 529 plan is, and how it can help you in your college savings endeavors. This post will give you a more intimate understanding of how a 529 plan works, and how it may be used for your purposes.
A 529 college savings plan or program is a college funding vehicle that has federal tax advantages. There are two types of 529 plans; college funding/savings plans and prepaid tuition plans. Although college funding plans and prepaid tuition plans share the same federal tax advantages, there are important differences between them that you should understand.
Section 529 College Savings Plans let you save money for college in an individual investment account. These plans are run by the states, which typically designate an experienced financial institution to manage their plan. To open an account, you fill out an application, choose a beneficiary, and start contributing money. Typically, you choose one or more portfolios offered by the plan, the underlying investments of which are chosen and managed by the plan’s professional money manager. After this, you simply decide when, and how much, to contribute.
Section 529 Prepaid Tuition Plans, on the other hand, help you save differently. Prepaid tuition plans may be sponsored by states (on behalf of public universities) or by private colleges. A prepaid tuition plan lets you prepay tuition expenses now for use in the future. The plan’s money manager pools your contributions with those from other investors into one general fund. The fund assets are then invested to meet the plan’s future obligations. Many plans even guarantee a minimum rate of return. These plans have different criteria for determining how much they’ll pay out in the future. And if your beneficiary ends up choosing to attend a school that isn’t in the prepaid plan, you’ll typically receive a lesser amount according to a predetermined formula.
The Rise And Fall Of 529 Savings Plans
With tuition costs rising dramatically over the past 20 years, it’s no wonder that financially savvy parents have started saving more money more quickly, just to make sure there’s enough to put the kids through college when the time comes. And 529 college savings plans have been promoted as the number one way to set that money aside and watch it grow.
According to Financial Research Corporation, $15.5 billion when into 529 plans it 2006, and $15.2 billion in 2007. But when the market collapsed, many investors began to shy away from 529 plans, often at the recommendation of their financial advisors. In 2008, the contributions fell to $5.2 billion, and in 2009 so far, the number is just $4.8 billion.
That’s still a lot of money, but like what’s happening with the stock market in general, many Americans are looking for ways to grow their college funds more securely and with greater flexibility – even if that means losing the tax advantages the 529 plans provide. In order to get the tax benefit the 529 college savings plans provide, you have to use the funds for qualified higher education expenses. If your child doesn’t go to college, you’ll pay taxes and penalties on the gains.
If you’re reconsidering what to do with your college savings money, call (877) 972-3262 to speak with college savings specialist. There are many other investment choices that can help you to be prepared when your children head for higher education. As someone who truly believes in proper risk management and multiple uses of money, I recommend you take a look at these college savings option. They offer tremendous flexibility and guaranteed returns and might be just the solution you’re looking for.
Let me hear from you, parents. What are you doing with your college savings money these days?
