Saving For College: What is a 529 Plan?

For parents who hope to help with their child’s college tuition someday, the looming cost of an education can be intimidating. It may seem impossible, but starting early and saving right can go a long way. One strategy for saving up tuition money is the 529 Savings Plan. Here’s a quick introduction to the plan so you can decide if it’s the right choice for you.

What is the 529 Savings Plan?

The 529 Savings Plan is meant to encourage saving for a child’s future college tuition through a tax-deferred savings account operated by a state or educational institution, according to the IRS. Withdrawals from the plans that are used for qualified education-related expenses are exempt from federal income tax. Some states offer additional tax benefits as well.

Types of 529 Plans

There are two types of 529 plans: pre-paid tuition plans and college savings plans.  A pre-paid tuition plan is essentially purchasing units at a participating university, or even paying for room and board. The tuition credits are locked in at the price they are purchased, according to the SEC. Many pre-paid tuition plans have state residency requirements, and are sponsored by state governments.

A college savings plan allows the account holder to put away money for the tuition of his or her child or grandchild. There are a variety of savings plans available with various investment options, such as mutual funds, money market funds or age-based portfolios that shift toward more conservative investments as the child approaches college age.Independent mutual fund or other similar institutions handle the investments. These types of plans  can usually be used at any college or university.

Be sure to discuss your options and financial situation with an advisor, and consider the pros and cons of this investment. Remember, it is an investment and it is important to fully understand the plan before making a decision.

What does 529 Cover?

Originally, the 529 plan covered only the minimum – tuition. Now, the plan envelops many different aspects involved in obtaining a higher education. These include:

• Tuition
• Fees
• Books
• Supplies
• Equipment

Where do I start?

In order to find a plan, you can start by contacting the state that administers the program. The College Savings Plans Network offers comparisons by state and by plan, as well as links to websites and toll-free numbers for those interested in finding out more.

Plans differ from state to state, so it’s important to research any restrictions or benefits and tax breaks your state offers.

Conclusion

There are several ways to save for a higher education. Starting early and considering your options for saving for your child’s education is an important step in the process.The 529 plan can be beneficial, and it works for many families, but is not for everyone. The performance of your plan depends on the stock market, just like any other investment.

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