Collegebound Network

Since 1987, America's Trusted Resource on Higher Education

529 College Savings Plan Basics

If you're like the majority of parents preparing your kids for college, you've watched the unbelievable rise in tuition rates (5.4 percent!) over the past decade. Obviously, cash for college is more critical than ever. Instead of panicking, get prepared by investing in a 529 college savings plan.

Overview of 529 College Savings Plans
529 plans are education savings plans designed to help you set aside funds for future college costs, and the assets in your 529 account may be used to cover expenses at any eligible educational institution. 529 plans exist in every state and are either operated by the state or by an educational institution. The best part? If you choose one of your state's 529 plans, your contributions may be tax-deductible.

529 investment options are often age-based, with the most risky investments made for younger children. But even if you didn't start a 529 account when your kids were young, these plans still provide the maximum tax savings in the shortest amount of time. Any gains within the account accumulate tax-exempt, and distributions for education-related expenses are also untaxed.

Benefits of 529 College Savings Plans
No matter what line of work you're in, you can open a 529 plan account, since there are no income eligibility limitations for these accounts. And when your child is ready to go to college, only a small portion of the assets in the 529 account will be considered in your child's financial aid calculation. If your child is fortunate enough to get a scholarship, you can withdraw unused money without paying a penalty. And if your child doesn't go to college, you can use the 529 account for another family member's college expenses.

Drawbacks of 529 College Savings Plans
If you want to make a major deposit to your 529 account, you might be frustrated by the fact that contributions cannot exceed the annual limits set by the individual state. And if you prefer a hands-on approach to investing, be aware that many 529 plans limit investments to just a few choices. Plus, you are the one who bears the risks of the investments - a high rate of return is not guaranteed. And if your child doesn't go to college and you withdraw the money, you'll be taxed on it and you'll also be charged a 10 percent penalty.

529 Advisor Plans vs. 529 Direct Plans
When you choose a 529 advisor plan, a financial professional can match you with the best plan for your investment goals and risk preferences. You may also have access to mutual funds that are only available through 529 advisor plans. But these services come with a price. Brokers generally receive a commission on the amount you invest, and fee-only planners bill on an hourly basis or charge a certain percentage of the value of your portfolio.

529 direct plans feature lower expenses, as you'll avoid sales charges of anywhere from 1 percent to 5.75 percent of your contributions. Plus, your state may offer a 529 direct plan with incentives like state income-tax deduction, a scholarship or other financial aid boost, a matching contribution, or special protection of your account from creditors. On the flipside, it takes time and effort to research 529 plans and get educated about quirky tax laws, which could be a drawback when time is of the essence.

Investing in a 529 college savings plan can give you the boost you need to foot the bill for your child's education expenses. The sooner you get started, the more time your assets will have to multiply!