529 plans are qualified tuition plans that helps people save money for college or other qualifying second education at an eligible educational institution. The two types of 529 plans include prepaid tuition plans and college savings plans. Plans are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
Most people look to 529 plans because the earnings accumulated from plans are not taxed as long as they are used for qualified educational expenses detailed in the plan. Common beneficiaries of plans include children, grandchildren, a friend, or even yourself.
Prepaid Tuition Plans
Prepaid tuition plans lock in the tuition prices at participating college and universities. Depending on the type of plan, what is considered a “qualified expense” varies between plans. Most prepaid tuition plans only cover tuition and mandatory fees, while some plans will allow room and board to be included along with other expenses. Most state plans are guaranteed or backed by the state and most state plans require either the owner or beneficiary of the plan to be a state resident.
College Savings Plans
College savings plans are generally more flexible than the prepaid tuition plans. Qualified education expenses normally include tuition, room and board, mandatory fees, books, computers, and other expenses listed on the specific plan. College savings plans offer several investments options such as mutual funds, money market funds, age-based portfolios, and many other options that fits the investor’s needs.
What to Look For
It is very important to look at the details of the 529 plans when picking out the right plan for you. Most plans require an enrollment fee along with maintenance fees and there can be penalties if the beneficiary withdraws from the account early or if they use their funds on expenses not allowed in their plan. With college savings plans, it is also important to focus on the level of risk is associated to the plan. All plans are different and the growth of your investment can be limited by the riskiness of the plan chosen.
Is a 529 Plan right for you?
Maybe. Everyone feels differently about how they want to invest their money. Investing in education always seems like the smart financial decision, but it is not for everyone. Allocating your finances to other investments is always available and does not restrict your investment on strictly educational expenses. 529 plans can be a smart investment if used correctly and if you’re on the fence about setting up a 529 plan or want to know what other options you have to invest your money, give us a call. We have an excellent finance department that would gladly help you.