If you’ve looked at the costs of higher education lately you most certainly noticed that it’s extremely expensive and costs are steadily increasing.
The average cost of tuition and fees for the 2017–2018 school year was $34,740 at private colleges, $9,970 for state residents at public colleges, and $25,620 for out-of-state residents attending public universities, according to The College Board.
A 529 plan, named for Section 529 of the federal tax code and also referred to as a Qualified Tuition Program, is a tax-advantaged savings plan designed to help fund future education expenses. Earnings to a 529 plan are not subject to taxes from the federal and most state governments.
In 1996, Congress created the 529 plan to help make it easier to save for education expenses for a designated beneficiary – typically a child or grandchild. Any U.S. citizen or resident alien 18 years old or older can open a 529 account. There are no income restrictions on who can own or contribute to a 529 plan. There is a contribution maximum, determined by each state differently, that limits the total amount of money you can contribute to one beneficiary.
Each state and the District of Columbia, determine their own rules and regulations for a variety of plans. Rules and restrictions can vary by state so you must do your research by comparing plans.
There are two types of 529 plans: prepaid tuition plans and education savings plans.
A prepaid tuition plan allows you to pay for future college tuition and required fees at current rates by purchasing units or credits. Most plans require that either the account owner or the beneficiary be a state resident when the account is opened. However, anyone, including grandparents and friends of the family, can contribute to a prepaid tuition plan.
A major drawback to prepaid tuition plans is that the funds can only be applied to in-state public institutions.
Some states may be allow you to apply units or credits to out-of-state schools at a decreased value. Most prepaid tuition plans are operated by state government and not guaranteed by the federal government. It is important to verify that your state’s 529 plan is guaranteed or you may lose money if the plan’s sponsor has a budget shortfall. As of this article, only Florida, Maryland, Massachusetts, Mississippi, South Carolina, Texas, Virginia and Washington provide a guarantee.
Savings plans allow you to invest in a mix of mutual funds. The final savings plan balance is determined by the rate of return on the investments. Program managers manage plans that allows you to customize your investment strategy. Investing can result have a higher risk but yield higher returns. A strategic savings plan takes into account the beneficiary’s age – investing in high percentage of stocks while the beneficiary is younger and a more conservative approach as the child nears college age. Contributions to a savings plan can be used for additional qualified educational expenses including tuition, books, room and board, and technology equipment.
This article was originally posted on Wealthidian, a holistic wealth building agency dedicated to generating long-term wealth.