College Saving with 529 Plans
For most parents, the rising cost of college education is always on their minds. Finding a way to help your children save for their education early is a key step in being prepared. Section 529 Plans or Qualified Tuition Plans, may be a way to do so.
There are two types of Section 529 plans, which are sponsored by states and educational institutions. Pre-Paid tuition plans enable taxpayers to purchase shares at colleges for future tuition. These shares are worth units, or percentages, of future tuition costs. The second type of 529 plan is a college savings plan. These plans are more like traditional investments and allow taxpayers to put money aside for a beneficiary and choose an investment option that fits their needs best.
Both types of plans have advantages and disadvantages. One undeniable advantage to a Pre-Paid tuition plan is that investors can lock in today’s tuition rates for future education. Some investors may be leery of investing in a Pre-Paid Tuition plan because their children may decide to go to a different college or university. If the student selects an in-state public college, this plan would cover the tuition and required fees associated. If the student chooses to attend an out-of-state or private school, the plans usually will pay the average in-state college tuition.
College savings plans, unlike the Pre-Paid tuition plan, do not lock in today’s rates for tomorrow. Most, like any investment, are subject to market risk. An advantage however is that withdrawals can be used at any college or university. Also, withdrawals can be used not only for tuition and mandatory fees (like Pre-Paid tuition plans) but they can also be used for room & board, books and required computers (which only some Pre-Paid tuition plans cover).
529 Plan earnings are not subject to federal income tax as long as the withdrawals are used for eligible college expenses. If these withdrawals are not used for college expenses, the earnings will be taxed and an additional 10% penalty will be added to the earnings.
As with any investment, be mindful of the fees that will be charged for your investment. Pre-paid tuition plans often charge participants enrollment and administrative fees while college savings plans can charge enrollment, maintenance, and asset management fees, among others. If you have found a plan that may be right for you, review its offering circular for more detailed information.
If you have any questions or would like more information, please contact:
Susan Marley, CPA