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Of Course They’re Going to College! So Learn All About the 529 College Plan

Posted on Posted in Blog, College Bound Tips, Parenting's Not Easy

Of Course They're Going to College! So Learn All About the 529 College Plan

When my oldest was born I thought about saving for college.  I went to see a financial advisor and she basically told me that saving for college with a regular savings account is about as savvy as using a can and string for communication.  Well, she didn't say that exactly, but she might as well when she let me know that a  529 college savings plan is ‘where it’s at’. 
What in the world is that? I asked her. Why can’t I just put my money every month in a nice little savings account?  The nice financial adviser lady explained that I could. 
But, with the 529 plan she explained that it would be like investing money.
I could deal with that.
That if I ever wanted the money I could have access to it.
I could deal with that too.
That I would have the same access to the money as I would a 401K.
Perfect. The enforced discipline I needed.
In essence the 529 plan would be like a credit card frozen in ice.  It would be a pain to frivolously get access to, and by the time I did it better be worth my time and aggravation.  That was it.  I was sold.  I knew that in a crunch ‘I may rob Peter to pay Paul’ and take money out of a savings account.  But the 529 plan would make it much harder.  That was 12 years ago and I am still content with the $50 squirreled away each month.  So much so that we have plans for the other two.  Our plans, as of right now, will not cover the entire costs of college, but at least it’s a way to put a dent in it.

What is a 529 plan?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 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. Withdrawals from college savings plans can generally be used at any college or university.

There are two types of 529 plans:

  1. Pre-paid tuition plans
  • Usually allow parents/grandparents/aunts/uncles (whomever) to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board
  • Most states don’t guarantee your returns. If you live in Florida, Massachusetts, Mississippi or Washington, which do offer guarantees, then this type of plan may be the best for your future college student. Otherwise, you have no commitment that your money will cover your child’s education if tuition growth outpaces your investments. States that don’t offer promises on their prepaid plans? Illinois, Kentucky, Maryland, Michigan, Nevada, Pennsylvania, South Carolina, Virginia and West Virginia.
  • Keep in mind that most have residency requirements
  1. College savings plans
  • Parent/grandparent/aunt/uncle (whomever) aka “account holder” establishes an account for child/ future college student the “beneficiary” and contributes regularly to the account.
  • Account holder may typically choose among several investment options for his or her contributions.Most 529 savings plans have no state residency requirements. You can open accounts in as many of these states as you want. 
    • 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.
    • Money in a 529 savings plan accumulates free of federal taxes, and as long as funds are used for qualified college expenses, the withdrawals from your account are also tax-free
    • With a 529 plan, you maintain control. This means that if the beneficiary decides not to go to college, you can choose another beneficiary or use the plan for your own educational funding needs.
  • Most 529 plans have contribution limits in excess of $200,000 per beneficiary

Word to the Wise about 529 plans

  • A 529 account owned by a parent for a dependent student is reported on the federal financial-aid application (FAFSA) as a parental asset and is assessed at a (maximum) 5.6% rate in determining the student’s expected family contribution (EFC).
  • The top-performing 529 plans as of September 2013
  • Not every college cost is a qualified expense that you can pay with a distribution from a 529 savings plan.
    • For example, u can’t use a 529 savings plan to pay for student loans or transportation costs. It’s also trickier to utilize funds from a 529 plan to cover room and board if you live off-campus.

What Type of 529 Plan is Right for You?

That’s something only you know. 

2 Ways to Save with 529 college savings plan:

  1. Credit cards, for example like the ones offered by Upromise and Fidelity, contribute cash from qualified purchases to certain 529 plans have a direct draft set up from your account every month to go to a 529 college savings plan of your choosing.
    • Upromise’s card, for example, pays up to 5% cash back, and it works with 30 different 529 plans administered by Upromise Investments in 16 states.
    • Fidelity’s card will turn 2% of your purchases into cash deposits through one of the four 529 plans that Fidelity manages



Got any other questions about the 529 College Savings Plan?

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