State sponsored 529 plans are another way to save money for your child’s college education. All US states have at least one of the two types of plans, although the rules and benefits may not be the same in all states.
What is a 529 Plan – A 529 plan is a savings plan created by individual states and some colleges to offer participants a way to save for their child’s college expenses.
What are the Types of Plans – The two types of plans are the Prepaid Tuition plan and the College Savings plan. In general, the prepaid tuition plan is more limiting because there are age limits, you usually have to be a resident of the state, and it may only cover tuition and fees. However, it does put a cap on the amount of tuition your student will have to pay.
What are the Benefits – The greatest benefit of this plan is that you do not pay federal income taxes on the money you put into the account, nor do you pay federal taxes when you take it out to use for college expenses. State tax benefits vary according to the state. Another benefit that some donors may appreciate is that you control the money and how it is dispersed. It is not signed over to your child. It’s also easy in that you put the money in on a regular basis, and someone else manages it. In addition, anyone can contribute to the plan, whether it be parents, grandparents, or friends.
What About Out-of-State Colleges – The College Savings plan allows you to use the money at any qualified college even if it’s not in the state in which you purchased the plan.
What are the Drawbacks -If you’re good at investing, you may be able to do better yourself. If you’ve set up a plan and your child decides that college isn’t for him or her, you will have to pay taxes on the money in the account plus a withdrawal fee of up to 10%.
Other Considerations – As noted above, you may pay some fees and taxes if your child doesn’t go to college. However, the plan also lets you transfer the account to another child. The College Savings Plan doesn’t have an age limit, so you can use it yourself if you desire.
Do Your Research – All state college savings plans are not the same, and you are not limited to investing in one from your state. Spend some time determining which state offers you the best benefits.
How Do You Get One? – Banks and financial planners can assist you in starting a 529 plan. However, there will be fees. Your best best is to start with the state plans. If you feel comfortable choosing one on your own, it can all be done online. Check this website to find out more information about which ones are available in your state, as well as enrollment instructions: http://www.savingforcollege.com/529_plan_details/