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[#1]529 College Savings Plan

by John Kaighn, Joh

Saving money for college expenses is a goal I hear many young parents express, and one of the best ways to build tax-advantaged savings for college is the 529 plan. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. Changes in the tax code were made in 2006 making permanent the provision that earnings in a 529 plan are tax free upon withdrawal when used for education expenses. This has resulted in eliminating any change in status for earnings for the 529 plan and made it the premier savings vehicle for college savers.

There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan. There are differences between pre-paid tuition plans and college savings plans, and each individual family needs to determine which plan may be right for their needs. Pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Many state governments guarantee investments in pre-paid tuition plans that they sponsor.

College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary's eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured.

With the growing popularity of 529 College Savings Plans, also known as Qualified Tuition Programs, many parents are asking themselves whether they should go ahead with this investment program for their kids' college education or not. A 529 College Savings Plan is a provision in the United States of America, started in 1996, which allows parents to invest in a monthly basis for their children's future educational needs, especially when they are in college. It is advisable to start early with these investments. The earlier the investment is started, the smaller will be the sum of money required to be put into the fund each month.

The 529 College Savings Plan is applicable for as many as 8,000 US schools and colleges and 800 foreign institutions. That makes it one of the most wide-reaching plans for educational investment in the US. The advantage to parents here is that they can choose whichever school or college for their children - and also various foreign institutions - without worrying whether the plan will pay out for their expenses or not.

The 529 College Savings Plan is wonderfully designed to meet all the educational requirements of collegiate students, though the most intentional investment is of course for the college tuition fees. With college tuition fees touching a high of $20,000 per year, the plan is a boon to most parents, who can give their kids a better and longer college education. Also, the plan is adjusted for future inflation. This means, as the prices of the college fees will go up in future, the amount paid out by the plan will also increase. The plan can be bought at present rates, but when the student begins college education, it will pay out at the future inflated rates.

Apart from college tuition fees, 529 College Savings Plans can also be withdrawn to fund other college requirements such as food and lodging, books and education material and paying all kinds of utility bills. Though, there is a 10% tax levied for withdrawing this fund for non-educational purposes.

Speaking of taxes, the 529 College Savings Plans are free from all kinds of federal taxes, and even state taxes are not levied in most circumstances. If you are a grandparent making an investment for your grandchild through the 529 College Savings Plan, you are allowed to sign off this amount from your total estate. Also, generally, the amount paid for the 529 College Savings Plan is tax-deductible.

There are apparently no disadvantages of the 529 College Savings Plan, which has been carefully scrutinized by financial experts. Since it is a relatively recent plan, all the problems of the current economy are already taken into account, and the plan is almost error-free. As such, it is an exceedingly good idea to go ahead with such an investment for your child, as you cannot guarantee how you will be financially placed a decade later when your child's college education will probably begin. Also, the sooner you begin, the better.

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Both John Kaighn & Kip Goldhammer are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

John Kaighn has sinced written about articles on various topics from Finances, Finances and Life Insurance. . John Kaighn's top article generates over 33100 views. to your Favourites.

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