Saving for College? Here’s Why You Should Consider a 529 Plan
Summer is almost over, and many a parent is already preparing for the back-to-school rush. If college is in your children’s future, you may also be wondering about the best way to save for this ever-increasing expense. One option is the 529 plan.
What is a 529 plan?
A 529 plan is a tax-advantaged investment vehicle sponsored by a state or educational institution that is designed to help families put aside funds to pay for future college costs. It’s named after Section 529 of the Internal Revenue Code (IRC).
Because there are so many 529 plan options available, it’s important to do your research before investing. You should also be aware of the differences between prepaid tuition plans and college savings plans.
- A prepaid tuition plan is what it sounds like—a plan that allows you to pre-pay all or part of the costs of a college education. Operated by a state government, the plan is guaranteed to increase in value at the same rate as college tuition.
- A college savings plan differs from a prepaid plan in that the plan is managed by a mutual fund company, which determines the investment choices available. Contributions are made to a portfolio of mutual funds or other selected investments, and the account owner bears the risk of investment returns. In other words, there are no guarantees.
Despite the risks, there are advantages to the college savings plan option. While funds in prepaid tuition plans typically must be used at public colleges in a particular state, funds in college savings plans can be used at any college accredited by the U.S. Department of Education—at home or abroad. Also, there is generally no time limit on taking distributions from college savings plans; most prepaid tuition plans, on the other hand, require tuition credits to be used by the time the beneficiary reaches age 30.
Heritage Financial Services can help you assess which plan type is the best fit for your financial goals.
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’s 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.